In this edition:
- Changes in Continuous Disclosure Obligations
- Extension of Flexibility on Credit Hardship Arrangements
Changes in Continuous Disclosure Obligations [sta_anchor id="section1" unsan="Section1" /]
GetSwift is a software as a service company that provides “last mile” software to enable streamlining for delivery and logistics channels for businesses. It listed on the ASX on 9 December 2016.
However, its continuous disclosure obligations to the market were challenged by an Australian Financial Review Article, released in January 2018, which questioned the veracity of statements made to the market about losing material contracts.
This has prompted the ASX to release changes to Guidance Note 8 on 15 March 2018, specifically addressing continuous disclosure obligations for material customer contracts.
Changes by the ASX
Continuous disclosure is based on the principle that all investors should have equal and timely access to information about a listed entity. The continuous disclosure obligations for listed entities are set out in Listing Rule 3.1, with exceptions set out in Listing Rule 3.1A. Section 674(2) of the Corporations Act also imposes statutory liability for breaches.
According to ASX Listing Rule 3.1, listed entities must disclose information which may have an effect on its market price or value, including:
- a transaction that will lead to a significant change in the nature or scale of the entity's activities;
- a material acquisition or disposal;
- the granting or withdrawal of a material license;
- becoming a plaintiff or defendant in a material law suit; and
- the appointment of a liquidator, administrator or receiver.
The ASX has reissued Guidance Note 8, providing additional information in Section 4.15 which includes ASX's disclosure expectations in relation to material contracts, significantly expanding the expectations for all material contracts and calling out the expectations for material customer contracts to include:
- the name of the customer;
- the term of the contract;
- the nature of the products or services to be supplied to the customer;
- the significance of the contract to the entity;
- any material conditions that need to be satisfied before the customer becomes legally bound to proceed with the contract; and
- any other material information relevant to assessing the impact of the contract on the price or value of the entity’s securities.
Practical examples are provided in Example D in Annexure A of Guidance Note 8 and this too has been amended to reflect the ASX's updated disclosure expectations in Section 4.15.
The ASX has also removed the example reference in section 4.20 (Commercially sensitive information) of Guidance Note 8 about disclosing the impact of material contracts on revenue, costs or profits, and also clarified in Section 5.10 (Entities in financial difficulties) the insolvent trading safe harbour for directors provisions in Section 588GA of the Corporations Act. Each updated section has several specific deletions and insertions, making a clean read and review of the changes essential.
Compliance with Continuous Disclosure Obligations
The ASX, in their Compliance Update, has been frank about the number of incidents where disclosures by listed entities about their contractual arrangements with customers have fallen short of the required standards. They list examples where entities have:
- announced a contract with a major global customer without providing any details of the nature or substance of the contract or its significance to the entity (ie seeking to benefit from the association with the customer without providing proper disclosure);
- announced what appears to be a material customer contract without disclosing that it is subject to a trial period or other conditions and therefore may not proceed;
- disclosed revenue projections for customer contracts that do not have a proper basis or that do not state the material assumptions or qualifications underpinning them;
- not disclosed when a previously announced material customer contract is terminated or does not proceed (ie disclosing good news but not bad); and
- misrepresented customer contracts as being “material” or with other superlatives when plainly they are not (one of the more notable examples being a listed entity that disclosed a “material commercial agreement with a leading financial entity” under which it was to receive less than $1000 in revenue).
As a matter of good governance, listed entities should develop a publicly available written disclosure and communications policy which sets out how the listed entity will comply with its continuous disclosure obligations and ensure that markets remain properly informed, otherwise the ASX has stated, "it will not hesitate to suspend the entity, query it and require it to correct any inadequate or misleading disclosures. It will also refer the entity to ASIC for consideration of regulatory action." All entities should review the latest updates to Guidance Note 8 to ensure their policies and procedures are up to date with the ASX's expectations.
Extension of Flexibility on Credit Hardship Arrangements [sta_anchor id="section2" /]
On 13 March 2018, ASIC announced it had issued Credit (Amendment) Instrument 2018/114, which amends Class Order 14/41 as it applies to providers of consumer credit and consumer leases. The newly made instrument extends the exemptions granted under transitional regulations (set out in ss 69A and 69B of the National Consumer Credit Protection Regulations 2010) that relieve credit providers and lessors from the obligation to provide a written response to a hardship notice in certain circumstances.
The current exemption was due to expire on 1 March 2018 and now extends until 1 March 2020. For industry and consumers, this extends the arrangements for credit hardship that are currently in place. It allows flexibility for both sides in dealing with a simple hardship arrangement.
The exemption for simple arrangements was introduced in 2013 following changes to the hardship provisions of the National Credit Act, and an ASIC Media Release has stated that "the procedures for processing hardship variation applications require credit providers and lessors to record any changes to the contract and provide written notice to the debtor or lessee. This is the case even where the parties come to an agreement for a simple arrangement, which means an agreement that defers or reduces the obligations of a debtor or lessee for a period of no more than 90 days."