Practical tips from NZX’s continuous disclosure review

On 20 October 2017 NZX released its thematic review of continuous disclosure practices by issuers in New Zealand.  The purpose of the review was for NZX to gain an understanding of how issuers practically manage their continuous disclosure obligations and provide guidance on best practice to issuers.  NZX’s review can be found here.

In our view the review paper is worthy reading by directors, CEO’s, General Counsel’s and others who have responsibilities for managing an issuer’s compliance with continuous disclosure.

In the review NZX notes that:

  • the systems and processes adopted by issuers to manage their continuous disclosure will likely vary depending on the size and available resources of the issuer;
  • NZX expects all issuers to have adequate arrangements in place to enable the release of Material Information as soon as they become aware of it;
  • evidence of appropriate processes, training and policies will be considered a mitigating factor in the event of any enforcement action by NZX.

Key takeouts

From our reading of the report, here are our practical takeouts that we believe issuers should adopt (if they are not already in place):

  • have a written continuous disclosure policy;
  • publish this on your website;
  • provide “refresher” training on continuous disclosure once a year for directors and relevant executives involved in managing the issuer’s continuous disclosure compliance;
  • take external legal advice on continuous disclosure. This is not an entirely self serving comment.  NZX notes that while the responsibility for getting continuous disclosure right is for the issuer and directors, taking external legal advice will be a mitigating factor where the issuer and its directors get it wrong;
  • often it is necessary to make urgent announcements to comply – in response to unexpected events. So have an arrangement in place where the Board chair or CEO have authority to approve and release urgent market announcements;
  • identify possible sources of information which might give rise to a need for an urgent announcement taking into account the particular nature of the issuer’s business, eg. responding to a regulator’s decision in respect of an issuer’s business. Seek to pro-actively manage this by building relationships with regulators, analysts, credit rating agencies and index providers;
  • identify information that has the potential to develop into Material Information and stress test scenarios as they develop to ensure that Material Information is released promptly and without delay;
  • manage approval of key contracts/matters that will be Material Information (eg. approval of acquisitions, dividends etc) so that decisions are made after the market has closed, eg. subcommittees to approve transactions or dividends (triggering the need to disclose);
  • regularly assess your financial performance against market expectations. If an issuer elects to provide its own forecasts or guidance, assessment against these is key.  Material deviations from guidance will require disclosure;
  • recognise that it may be necessary to make announcements earlier than planned if there is a risk that your actual results will differ materially from those previously advised;
  • remember that information may be material to an issuer regardless of where it originates from. This includes information published by a credible source.  Monitor analyst and third party reports and publications about your company.  Typically you will not need to respond to these.  However, on occasion you may need to do so to avoid a false market being created in respect of your securities;
  • be careful when giving media interviews that you do not say anything which is untruthful as a means of avoiding disclosing material information;
  • monitor trading in your securities;
  • when working on confidential transactions have draft releases ready should a leak occur or for when the transaction is approved so that disclosure can be timely;
  • have processes in place so that anyone in the organisation (including contractors) who receive information which may be Material Information know who to escalate it to;
  • ensure that the agenda for weekly senior management team meetings includes a discussion on whether any disclosure matters have arisen;
  • have a nominated disclosure officer who should be the point of escalation for notification of potential Material Information. In larger issuers this person is often the General Counsel/Company Secretary and in smaller issuers, the CEO;
  • have specified persons who are authorised to communicate with analysts. Have two representatives at such meetings.  Review what is presented at these meetings in advance by your General Counsel/Company Secretary;
  • have a contingency plan in place if a person(s) responsible for undertaking a disclosure role is absent;
  • identify all the persons in your organisation who are an “executive officer”. As the obligation to disclose Material Information arises as soon as any “executive officer” or director receives Material Information.  Typically an executive officer will be the CEO and his/her direct reports;
  • have continuous disclosure as a standing agenda item on the agenda for all Board meetings. Make this a meaningful agenda item.  If an issuer has issued guidance, then include trackers to demonstrate actual progress against the information disclosed;
  • include reasons in the minutes for a decision to disclose or not when a question of “Material Information” arises;
  • the Board should periodically stress test management’s view of what is Material Information;
  • when relying on the “safe harbours” to withhold Material Information bear in mind that all three limbs must constantly be met and assessed;
  • trading halts can be used to manage compliance with continuous disclosure. NZX has not experienced issuers requesting inappropriate trading halts.  However, it has made enquiries where no trading halt was sought in circumstances where NZX considered it would have been appropriate to seek one;
  • engage with NZX in advance where practical around the potential need for a trading halt;
  • NZX expects issuers to seek to make announcements before the market opens as opposed to during trading hours, ie. organise Board meetings where Material Information may be considered after the market has closed. NZX will make enquiries if announcements are made during the day to see if the timing of disclosure was within the issuer’s control, ie. that you should have managed the situation better;
  • for issuers also listed on ASX, endeavour to release information before NZX opens.

We commend NZX for its thematic review.  We recommend every issuer review its practices against the recommendations made by NZX for issuers managing their compliance with continuous disclosure.  We recommend Boards add “refresher training” into their annual calendar to keep abreast of developments in market practice in this area as opposed to relying on training providing on induction of directors.

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