Key Points:
Newcrest's experience serves as a timely reminder to all listed companies that written policies and procedures are of little benefit if not properly implemented in practice.
Newcrest's record $1.2 million fine for continuous disclosure breaches has focused attention on listed company dealings with analysts and serves as a timely reminder of how challenging it can be for listed companies to correctly manage these communications in practice.
At first blush, it might appear that Newcrest was simply doing what ASX and ASIC want companies to do – correcting mistakes in analysts' research reports.
However, the regulators want companies to engage with analysts on information that is already in the public domain. Newcrest wanted to nudge analysts in the "right direction" by providing them with previously unreleased information.
Even then, problems might have been avoided if the same information had immediately been posted for the world to see on ASX. Instead, Newcrest waited for over a week before releasing the information to ASX.
What did Newcrest do?
During the course of Newcrest's annual budgeting process, it emerged that its future gold production and capital expenditure could differ materially from what analysts had been predicting. At this point, the budgeting information was still not finalised and was still subject to board approval.
Despite the "draft" nature of the budgeting information, a decision was made to convey the draft information to analysts so that the analysts would revise their predictions in the market at that time (or, in Newcrest's own words, "to get them in the ball park"). In the (mistaken) belief that at least some of this information had been previously disclosed by Newcrest at a conference in Barcelona (but perhaps without regard to whether the information had been disclosed to the ASX), meetings were then held with analysts at which the relevant budget information was provided.
Although the budget information was price sensitive, Newcrest did not have a disclosure obligation before the information was provided to the analysts, as the information was confidential, draft management figures able to be withheld in reliance on the carve-out to Listing Rule 3.1. However, by providing the information to the analysts, Newcrest compromised the confidentiality of that information, meaning it was no longer able to rely on the disclosure carve-out. At this point, Newcrest was obliged to immediately disclose the information to the market.
What do ASX and ASIC want?
In its recent report on analysts' briefings, ASIC reiterated some key points:
- confine comments on individual market analysts' financial projections to errors in factual information and underlying assumptions;
- when taking questions from analysts, seek to avoid any response that may suggest that the company's, or the overall market's, current projections are incorrect; and
- if a question can only be answered by disclosing price sensitive information, decline to answer or take it on notice. Announce the information through an ASX announcement before responding.
For its part, ASX's recently revised Guidance Note 8 on continuous disclosure endorses ASIC's policy, but puts a more business-oriented slant on the interplay between companies, analysts and the continuous disclosure rules:
"ASX does not believe that a listed entity has any obligation, whether under the Listing Rules or otherwise, to correct the earnings forecast of any individual analyst or the consensus estimate of any individual information vendor to bring them into alignment with its own internal earnings forecast. Its only obligation in this area is to give to ASX an appropriate announcement immediately if and when it becomes aware of a market sensitive earnings surprise.
Having said this, where an entity becomes aware that an analyst's forecast for its earnings differs materially from its internal forecast, it is in the entity's interests for it to explore with the analyst why that might be so and, if it becomes apparent that the analyst may have made a factual or computational error or may have missed a particular announcement the entity has made to ASX, to point that out to the analyst. This may help to set market expectations about the entity's earnings at an appropriate level and avoid any later earnings surprises that could raise potential disclosure issues under Listing Rule 3.1."
Although the revised Guidance Note was released after Newcrest's selective briefing of analysts, it appears that Newcrest was trying to do precisely what ASX suggests – avoiding earnings surprises (albeit by selectively revealing previously confidential price sensitive information).
What happened in the end was that so many analysts were briefed that the effect was not dissimilar to an earnings surprise announced on the market: Newcrest's share price plummeted.
Can you avoid an earnings surprise?
It is difficult not to feel some sympathy for Newcrest in this situation – it was in possession of draft, confidential information that contradicted analyst expectation, which, once released to the market, would almost certainly have an adverse effect on its share price.
In managing this difficult situation, Newcrest appears to have had three main options:
- take no action until the budget had been finalised and approved, at which point a market announcement would be made (noting that the market price would be out of kilter with the underlying reality in the interim);
- make an immediate announcement on ASX, which would provide its own challenges given the figures had not yet been finalised or approved by the Board;
- take the first option above but try to minimise the potential fall-out by managing the expectations of analysts in the meantime.
Unfortunately for Newcrest, each option has its issues. In terms of the first approach, not making an announcement until the budget had been approved could result in scrutiny as to the (delayed) timing of the disclosure, perhaps leading to a class action from disgruntled shareholders. Perhaps a trading halt pending an urgent board meeting to consider the updated figures and approve an announcement of the information would make this option more viable.
The second option of immediately announcing the draft budget figures to the market would be equally problematic. In that case, Newcrest would have been releasing figures without board confirmation, there would invariably be debate about whether the figures should have been released even earlier. Conversely, there could be arguments that absence of board approval meant that the release was premature.
Finally, the third option (the one which Newcrest followed) could give rise to a breach of the continuous disclosure rules if it involved the selective disclosure of price sensitive confidential information.
In this case, that breach was fairly easily established, because Newcrest explicitly provided the confidential information which was clearly price sensitive. But it is not difficult to see that price sensitive information can be conveyed without handing over a set of figures. ASIC's suggestion that questions should not be answered if the answer would disclose confidential information ignores the fact that refusing to answer a question is often as revealing as answering it.
Newcrest's policies and procedures
Perhaps unsurprisingly, Newcrest commissioned an independent review of its disclosure and investor relations policies and procedures shortly after the events in question. Following the review (the results of which were released on ASX), Newcrest has implemented a number of changes, including establishing a Disclosure Committee and revising its relevant policies to more tightly regulate investor communications.
There is no doubt that Newcrest has made worthwhile improvements to its policies and procedures following the incident in question. However, it is important to emphasise that Newcrest's continuous disclosure breaches were primarily a result of non-compliance with policies then in place, not because its policies were particularly deficient.
Newcrest's experience serves as a timely reminder to all listed companies that written policies and procedures are of little benefit if not properly implemented in practice.
Key lessons
- While there is a role for analyst briefings, companies must be very careful to avoid disclosure of price sensitive, confidential information.
- Continuous disclosure breaches are often not a result of a deficiency in the company's continuous disclosure policy – they arise because the policy is not followed in practice.
- ASIC has clearly signalled that any breaches in this area will be treated very seriously.
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.