Are Your ASX Continuous Disclosure Practices Up to Scratch? Lessons from Newcrest.

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Newcrest Mining Ltd (Newcrest) is the largest gold company listed on the ASX and one of the world’s largest gold mining companies. Its breaches of its continuous disclosure obligations have attracted a lot of recent media attention and unfortunately for Newcrest, its executives and board of directors, the company now presents as a case study in how defective policies – based on out-dated and under-thought approaches to continuous disclosure – will be punished by the regulator and the market.

Facts

It is important to give some context and narrative to this case.  In the lead-up to a round of analyst and investor briefings in May and June 2013 the CEO of Newcrest Mr Greg Robinson made notes revising previously publicised forecasted FY14:

  • total gold production figures; and
  • capital expenditure figures.

The revisions were a reduction to previously publicised capital expenditure amounts and information was also provided on FY14 production – which had not been previously announced.  At that time, these figures were still subject to approval by the Newcrest Board and confidential, and as such were not legally required to be disclosed.

These notes were given to the Manager of Investment Relations Mr Spencer Cole, just before he was due to give the analyst and investor briefings. Mr Cole, in this case wrongly – and some could say unreasonably – believed that this information had been made public.

Between 28 May 2013 and 5 June 2013 Mr Cole proceeded to give briefings to analysts and investors in which the revised figures were presented. The revised figures thus ceased to be confidential, meaning Newcrest was obliged to disclose them under its continuous disclosure obligations.

In addition to not disclosing the information to the ASX prior to briefing the analysts, Newcrest also engaged in behaviour which sought to manipulate the analysts’ forecasts for the company in order to bring their expectations more in line with the – as yet undisclosed – Newcrest figures. The Agreed Statement of Facts and Admissions between the Australian Securities and Investments Commission (ASIC) and Newcrest (Agreed Facts) submitted to the Federal Court of Australia (Court) included a damning transcript of an email conversation between Mr Cole and other Newcrest executives, where Mr Cole spoke of ‘nudging’ down the expectations of analysts and discussing ‘topics/levers’ to guide them towards getting ‘much lower’ in their gold production forecasts.

Newcrest did not make disclosures to the ASX until 7 June 2013. This delay amounted to a breach of s 647 of the Corporations Act 2001 (Cth) (Corporations Act) and of ASX Listing Rule 3.1 (Listing Rule).

Key failures of policy and procedure

Newcrest admitted in the parties’ Agreed Facts that its failure to publicly disclose to the ASX (and Newcrest shareholders) the new material information on its gold production and capital expenditure expectations amounted to breaches of its own Investor Relations Policy, in addition to contravening the Corporations Act and the Listing Rule.

The fact that no party to the Newcrest email conversation raised continuous disclosure concerns showed either that the Newcrest executives were ignorant of their legal obligations or more worryingly, reckless in respecting them. Although the Agreed Facts note that the Newcrest senior management was put on notice that Mr Cole was intending to, or had, disclosed the information to analysts, ASIC has stated that it will not take any action against individual officers or employees of Newcrest.

Ultimately, Newcrest breached its Investor Relations Policy because it failed to:

  • only refer to publically available information in analyst briefings;
  • maintain a sole point of contact with analysts;
  • have an additional person present in briefings; and
  • keep a record of all substantive discussions, meetings and briefings.

Analyst briefings – an irresistible temptation?

Analyst briefings by their nature have the potential to run foul of the Act and Listing Rules as they are ostensibly designed to allow analysts and investors to supplement formal market announcements and improve their understanding of the information released by a listed entity. There is therefore an inherent tension between the level of information companies can disclose and the motives for the analysts and investors being there.

After all, why would an investor or analyst attend a briefing if not to gain an edge over other investors relying only on publically available information?

In a recent report on the handling of confidential information (see our earlier blog) ASIC emphasised the importance of listed entities not being complacent in how they handle confidential and price-sensitive information during analyst briefings.

How do you control these risks?

Whilst there will always be risks associated with conducting analyst briefings, ASX listed entities can take some basic steps to protect themselves and the analysts.

These steps include:

  • disclosing materials used in analyst and investor briefings through proper channels (an ASX market release and through the company’s public website) before such meetings take place;
  • broadcasting your briefings and enabling them to be accessed after the event; and
  • controlling the contact that your investor relations managers have with analysts and investors.

At the conclusion of a briefing a review should be undertaken of the information provided to ensure that no price sensitive information was disclosed inadvertently.  In the event that market sensitive information was disclosed, for example in relation to an analyst’s question, the information should be given to the ASX immediately in a form suitable for release to the market.

If followed, these measures will avoid an incident of non-disclosure to the ASX and any consequential breaches of the Corporations Act and Listing Rules.

Key lessons:

So what can the Newcrest case teach us? Put very simply, the failure to have in place systematic procedures for disclosure, in an era where internet communication is almost instant, is inexcusable.

Some of the changes which Newcrest has since made to its disclosure policies and procedures are:

  • the establishment of a ‘Disclosure Committee’ which has the authority to make and execute disclosure decisions and oversee investor relations functions; and
  • requiring all external presentation materials to be provided as a market release to ASX.

These changes reveal the extent of the deficiencies of its previous Investor Relations Policy which arguably allowed the contraventions to occur.

Above all, Boards should return to first principles. Keeping in mind their obligations under the Act and Listing Rules, they should take note of the following:

  • disclose through the ASX. This is the only way of ensuring that you have covered your bases;
  • remove the risks – design your investor relations policies to ensure that proper disclosure is a starting point, not an afterthought; and
  • don’t assume that policy will protect you. The policy is a tool – it is the job of a board and executive management to make sure that the policy is being followed in practice.

Post-Script

On 18 June 2014 ASIC announced that it had reached a settlement with Newcrest and had begun proceedings in Court for it to determine a financial penalty. In this case, the parties have agreed on a suggested penalty of $1.2 million dollars, but this still needs to be approved as an appropriate penalty by the Court.

It is also worth noting that Newcrest’s disclosure practices exposed analysts and investors to the risk of being complicit in insider trading. Analysts and investors should be having discussions about how they interact with listed entities that are exposing them and the entity itself to serious penalties.

There are also reports of class-action law firms taking advantage of the facts admitted by Newcrest. A possible class action would bring yet another level of condemnation for the Newcrest Board and the company’s disclosure failures.

When was the last time you reviewed your continuous disclosure practices?

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