The COVID-19 pandemic has resulted in considerable market volatility and heightened investor interest in information about entities listed on the Australian Securities Exchange (ASX). In the context of this environment, directors may decide to buy or subscribe for shares to indicate positive support for their company and to reassure their existing shareholders. Depending on necessary changes to the organisational structure of the company or to the financial circumstances of individual directors, decisions to sell securities may also be up for consideration. On 7 May 2020, in response to recent increased fundraising activity by listed entities and the associated “heightened disclosure environment", the Australian Securities and Investments Commission (ASIC) updated their guidance in relation to the trading of securities by directors and key management personnel (KMP). Partner, Nino Odorisio provides a summary of the key points below.
Trading policies
ASIC reiterates that all listed entities should have a trading policy to regulate trading by its KMP and directors in listed securities. The purpose of this policy is to minimise the potential for trading to occur while KMP, including directors, are in possession of price-sensitive information that is not generally known to the public. Entities are reminded by ASIC that KMP should only be trading during the periods permitted by their entity’s trading policy, and that any granting of requests to trade outside these permitted periods should only be made in exceptional circumstances.
Perceptions
Even if a proposed trade is not restricted by the listed entity’s trading policy, a director or other “insider” should still consider whether they are in the possession of information which may give rise to perceptions that the entity is “looking after its own”, or may mean that they should not be trading in the entity’s securities. Directors and KMP are likely to be frequently coming into possession of information that may be of greater materiality in the present environment than they otherwise might normally be, considering the advent of increased uncertainty and continuously changing business and trading environments brought about by the COVID-19 pandemic.
When assessing whether or not information is material, directors and KMP should factor in:
- the current uncertain and volatile trading environment;
- the impact of fast-changing events and market conditions on the currency and reliability of previous disclosure made to the market; and
- any reliance on disclosure exemptions or carve-outs by the entity (particularly where this represents a change in historical disclosure practices by the entity).
Notify the market
The past few weeks have seen an increase in capital raising activities, including rights issues and share placements. There will often be a “heightened disclosure environment” during capital raisings as the fundraising provisions may require additional information to be provided to the market. Disclosure obligations for directors to keep front of mind include:
- any changes to their relevant interests in securities of the listed entity; and
- any contracts to which they are a party or entitled to benefit and that confer a right to deliver securities of the listed entity.
Under ASX Listing Rule 3.19A, this notification must be made by the listed entity within five business days of the relevant change.
Directors who have, or will have, a substantial holding in a company (i.e. 5 % shareholding or more) may also need to comply with a separate obligation to file a substantial holders notice. This will be the case if, as a result of the trade, a director’s “voting power” in the company increases above or below 5%, or changes by more than 1% from that previously notified to the market.
Conflicts of interest – margin calls
In 2019, an ASIC review of the trading policies of 21 large ASX-listed companies found the majority of those trading policies did not prohibit the outright use of margin loans over the entity’s shares. While some did impose conditions, a number of trading policies contained no restrictions at all. In its recent guidance, ASIC has stated that it does not consider it to be good practice for directors, officers and executives to enter into margin call arrangements over their own entities listed securities or other financial products. This is due to the potential conflict between a directors’ interest and those of a company’s investors, and due to the risk of adverse market perceptions and the potential to create an incentive for the director to seek to ensure security prices remain at a level that avoids a margin call. Some material margin loan (and similar) arrangements may also trigger a company’s continuous disclosure obligations under ASX Listing Rule 3.1.
If you have any queries as regards to director disclosure obligations or require assistance to review your entity’s trading policy, please contact our Corporate Governance and Advisory team.