Proposed Changes to ASX Guidance Note 8 on Continuous Disclosure

In brief

The ASX has released a consultation paper on proposed changes to Guidance Note 8 related to analysts and investor briefings, analysts forecasts, consensus estimates and earnings surprises. The proposed changes are mostly clarification to existing policy, but there are some interesting refinements. Partner Guy Alexander and Managing Associate Emin Altiparmak report.

Earnings surprises – entities that have not given guidance

To take a step back:

• When the ASX rewrote Guidance Note 8 in 2013, it abandoned the previous guidance that a listed entity should update the market where projected earnings were more than 10 per cent (up or down) on any of the following: earnings guidance the entity had given to the market; analyst consensus earnings estimates for the entity; or prior corresponding period earnings.
• In the rewrite, the ASX drew a distinction between those entities that have given earnings guidance to the market (and have therefore made a positive representation to the market that their current period earnings would be in a certain range), and those that have not.
• For those that have given earnings guidance, the ASX's view is that the entity should update the market if actual earnings are likely to be 5 per cent to 10 per cent¹ more or less than the represented earnings (ie the earnings guidance), so as to avoid the entity being liable under the misleading and deceptive conduct provisions (section 1041H of the Corporations Act 2001 (Cth)) to investors who buy or sell on the basis of that representation.
• For those that have not given earnings guidance, there is no representation to the market, so the test is the Listing Rule 3.1 test, namely, whether the difference between the actual or projected earnings and what the market expects the earnings to be is of such a magnitude that a reasonable person would expect that information to have a material effect on the price or value of the entity's securities.
• In the ASX's view, the best indicator of what the market is expecting an entity's earnings to be, in circumstances where the entity has not given any earnings guidance itself to the market, is the analyst consensus estimate of those earnings.
• In determining whether the difference between actual and expected earnings is of such a magnitude that it is price sensitive, the ASX does not give any general rule of thumb or percentage guidelines. Rather, it says that this requires consideration of a range of factors, including whether near term earnings is a material driver of the entity's share price; whether the difference is attributable to a cash or non-cash item; whether the difference is a permanent one or temporary; and whether the difference is recurring or one-off.

Despite the guidance, it seems that since the rewrite was published, a number of listed entities that have not given any earnings guidance but are covered by sell side analysts have taken the view that if their internal earnings projections differ by 5 to 10 per cent from analyst forecasts, they have an obligation to disclose the difference to the market under Listing Rule 3.1. This, in turn, may have spurred some of those listed entities to try to 'manoeuvre' analyst forecasts in a non-public or selective manner to align them with the entities' internal projections, so as to avoid a disclosure obligation.

The changes the ASX is now proposing to Guidance Note 8 make it clear that a 5-10 per cent difference between internal projections and analyst consensus estimates does not necessarily require disclosure. It is only if the difference between internal projections and analyst forecasts is 'so significant'² that a reasonable person would expect the difference to have a material effect on price or value that the listed entity needs to disclose.

One basis for this is that an analyst consensus estimate is a less reliable indicator of market expectations of an entity's earnings than an entity's own guidance – meaning that the difference will need to be more significant before disclosure is required under Listing Rule 3.1. In determining whether the difference would have this effect, it is still necessary to consider all of the other factors referred to above, like whether the difference is cash or non-cash or recurring or one-off.

While the proposed changes/clarifications may reduce the temptation for listed entities to try to manoeuvre analyst forecasts to avoid a disclosure obligation, they won't remove it altogether. Given that analyst consensus is still regarded as the best proxy for market expectations (all other things being equal), companies that don't give guidance will continue to keep a sharp watch on analysts' forecasts.

Correcting analyst forecasts and consensus estimates

The consultation paper (and the proposed changes) also makes it clear that, other than in the circumstances referred to above (where the difference between internal projections and analyst forecasts is so significant as to have a material effect on price or value), there is generally no obligation on an entity to publish internal projections, nor is there any obligation to correct the earnings forecast of any individual analyst, or consensus estimates published by a market data vendor.

While generally true, the ASX goes on to say that if a significant difference does emerge between the entity’s internal earnings projections and analyst earnings forecasts, the entity should be asking itself why that might be so. If it is because analysts don't have access to information that has legitimately been withheld from disclosure under the carve out in Listing Rule 3.1A, or because internal projections are simply more up to date or reflect a more complete data set, then there shouldn't be any need to correct. But if the difference is due to the fact that there is a piece of information known to the company that should have been disclosed under continuous disclosure, then the entity will need to announce that information.

Another situation that can be more difficult in practice is where the entity has announced the relevant information, but the analysts may not have fully appreciated the importance of the information and have therefore not reflected it in their estimates. In this situation, the entity needs to look closely at its previous disclosure of that information to make sure that it is clear.

Publishing analyst forecasts and consensus estimates

This is an issue that has been kicking around for a while, with some investor relations bodies advocating that entities should publish analyst forecasts and consensus estimates on their websites. We have advised clients against that course. The main issue is that if an entity which has deliberately not given earnings guidance then turns around and publishes analyst consensus estimates on its website, it risks the market taking this as de facto earnings guidance (a representation that the entity expects earnings to be close to those consensus estimates). The situation is exacerbated if the entity responds to questions by analysts or investors about earnings by referring to the published analyst consensus estimates.

In the consultation paper, the ASX has also come out strongly on the risks for an entity of publishing analyst forecast earnings on the entity's website, for the reasons given above.

Further information and next steps

The proposed changes in the consultation paper reflect input from ASIC. The ASX is now looking for market submissions by Friday, 24 April 2015, and aims to publish a revised version of Guidance Note 8 by 1 July 2015. If you have an interest in making a submission or wish to discuss the above, please contact any of the people listed below.