This is a service specifically targeted at the needs of busy non-executive directors. We aim to give you a “heads up” on the things that matter for NEDs in the week ahead – all in two minutes or less.
In this Edition, we consider ASX’s updated guidance on CHESS and continuous disclosure, the Takeovers Panel’s steadfast approach in relation to Cardinal Resources Limited and an industry report on company culture. We also consider some cases providing important reminders to companies with respect to continuous disclosure obligations and the careful drafting of contract terms for business or asset purchases. As our final Boardroom Brief for the year, we then look ahead to what we can expect in 2021.
YOUR KEY BOARDROOM BRIEF
ASX releases updated guidance on CHESS and continuous disclosure. ASX has announced updates to its Guidance Note 5 on CHESS Depositary Interests and Guidance Note 8 on Continuous Disclosure. Importantly, the update to Guidance Note 8 included substantial enhancements to the materials on earnings guidance and earnings surprises. The Guidance Note now provides that where an entity does not have published earnings guidance on foot for the current reporting period and it is covered by sell-side analysts, ASX would recommend that the entity carefully consider notifying the market of a potential earnings surprise if and when it expects there to be a 15% or greater difference between actual or projected earnings. The Guidance Note also specifies that ASX expects entities in these circumstances to provide their best estimate of the market’s expectations for its earnings. See ASX’s announcement.
Takeovers Panel reinforces Cardinal decision. As previously reported in the Boardroom Brief, the Takeovers Panel declined to conduct proceedings in Cardinal Resources Limited 03 & 04 in relation to Cardinal’s claim that two equal $1.00 bids by Shandong Gold Mining and Nord Gold (each last and final in the absence of a higher competing offer) led to the auction for control of Cardinal being deadlocked. These decision demonstrated the Panel’s desire to hold bidders to their last and final statements. In the review decision, the review Panel upheld the initial Panel’s reasons and conclusions, reinforcing support for a stricter interpretation of ASIC’s “Truth in Takeovers” policy as an adjunct to the policy objective of an “efficient, competitive and informed market”. Directors of companies engaged in takeover activity will need to carefully craft the terms of their “last and final statements” to capture all possible circumstances in which they may wish to make a further offer or otherwise depart from their prior statement, for example where there is an “equal or higher” competing offer, rather than just a higher competing offer. See the Takeover Panel’s media release.
ASIC continues to commence proceedings for alleged breaches of continuous disclosure obligations. ASIC has commenced civil penalty proceedings in the Federal Court against iSignthis Ltd and its managing director. The proceedings allege breaches by iSignthis of its continuous disclosure obligations and allege false and misleading representations under the Corporations Act. They also relate to the managing director’s involvement in those alleged breaches. As we have seen in recent months, ASIC has had some success in proceedings for breaches of continuous disclosure obligations. As always, Directors should carefully consider the accuracy of information provided to ASX in compliance with the entity’s continuous disclosure obligations and should satisfy themselves that there has been no omission of relevant information. See ASIC’s media release.
Court case reminds of the importance of carefully drafted contract terms. In the Victorian Supreme Court case of LEA Child Care Services v Development Learning Centre Rainbow Pty Ltd  VSC 787, the contract for the sale of a childcare business contained various clauses designed to protect the purchasers from a reduction in enrolments prior to purchase, such as a material adverse change, vendor warranties, indemnities and restraint of trade clauses. However, none of these clauses assisted the purchaser when, after settlement, it discovered that more than 20% of enrolments had given the business notices of ceasing enrolment – and there was little the Court could do to assist the purchasers in these circumstances. This is because the relevant clauses were drafted by reference to defined dates which were determined by various events occurring weeks before settlement occurred. As a result, there was a significant gap between those dates and the settlement dates where the purchasers were left unprotected by these mechanisms. Purchasers of entities, business or assets should carefully consider the terms of sale, particularly in relation to the timing of relevant warranties, obligations and restrictions to ensure they are appropriately protected.
AICD and ACSI report on company culture. The AICD and Australian Council of Superannuation Investors have released a joint report on company culture. Unsurprisingly, the report concludes that culture is the responsibility of directors, not just senior management, and that company culture is an increasingly high priority. More interestingly, the insight from investors and directors in the joint report reveals the perception that – despite increasing focus on this area - there is still limited public disclosure on company culture. We expect the focus on company culture will continue to grow in the new year and will be facilitated not only by the findings of AICD and the like, but also by greater scrutiny from regulators and activist shareholders. See AICD’s media release and the joint report.
OVER THE HORIZON
What can we expect in 2021? As we are all aware, the past year has been unprecedented on many fronts. The task of regulators and the market more generally to address this will likely continue well into 2021 and beyond. There are countless items for boards to continue (or start) to think about for the new year – we consider the key items for the year ahead will include:
- de-globalisation trend: the logistical barriers imposed by COVID-19, paired with Brexit and resistance to China hegemony will likely lead to further de-globalisation. Although Australia has gained greatly from globalisation in the 21st century, we may find pockets of opportunity emerging from the reversal of this trend, in sectors such as defence, life sciences, technology and manufacturing;
- labour and expertise: the above de-globalisation drivers (amongst many other factors) may lead to labour and expertise shortages, which will become critical across many industries;
- approach to fiscal policy: we expect that Government fiscal policy will shift away from cash injections, and instead move towards initiatives which will promote job creation and the “return to work” and drive further investment;
- addressing the shift to virtual life: virtual platforms will be more important than ever in 2021, and regulators and the market will need to respond accordingly. As we have already started to see over the past year, regulatory platforms will be reshaped, and this will be largely informed by digital platform laws;
- market sentiment and activity: vaccine roll-out and success or setbacks will drive market sentiment. Despite a low volume of M&A activity in 2020, future success in the national and global approaches in addressing COVID-19 will drive risk-on mentality and M&A activity; and
- reforms galore: while there have been various reforms introduced with respect to FIRB, ASIC and ASX guidance over the past year, we expect the Government and regulators are still taking some time to process the lasting impacts of COVID-19. Therefore, changes to regulation will continue – if not increase – in 2021.