Revised Disclosure Regime To Multiply Directors' Dilemmas
The Age
Wednesday May 18, 1994
THE recent reversal in Foster's Brewing's share price, Brash Holdings' path to voluntary administration and CRA's decision to announce its proposed sale of Pasminco shares the instant it decided to sell are examples of the dilemmas directors will face with the introduction of the statutory continuous disclosure regime in September.
A recent note by Clayton Utz's Rod Lyle on the new enhanced disclosure regime refers to the wide acceptance that there will be some material events that do not have to be disclosed as soon as they occur.
There is an expectation that there will be ``carve-outs" for commercially sensitive events either in the Stock Exchange listing rules that form the basis of the regime or in separate regulations.
Mr Lyle's note was largely about the need to establish continuous disclosure systems for, in a sense, routine disclosures, but that reference to the carve-out issue goes to the heart of the difficulty directors will face when confronted by the obligation to disclose and liabilities for non-disclosure.
While there has been lots of discussion about the need for carve-outs, there has not been as much about how they will be used in practice. If the experience with prospectus liabilities is any indication, the statutory liabilities of the new disclosure regime will probably breed a safety-first-and-last attitude.
That is likely to be even more the case if the carve-out provisions are formalised in Corporations Law regulations rather than administered as rules by the Australian Stock Exchange. It has not yet been decided where those provisions will reside.
The positions of the companies mentioned earlier are illustrations of quite common and intensely difficult types of decisions directors could be called on to make when weighing up the disclosure obligation against commercial interests.
The Foster's Brewing position is fairly routine. Last week, for no apparent reason, a series of broking firms, including Foster's own broker, Potter Warburg, abruptly and quite substantially downgraded their earnings forecasts for the company. Essentially the market lopped about $50 million off its expectations of Foster's earnings.
There are at least two issues for Foster's directors and management and those confronted with similar situations to grapple with.
FIRST, if there had been a change in the company's own expectations of its performance as the year has developed related to some particular development, should that have been communicated voluntarily and formally to the market at some point outside the normal reporting timetable? Second, having seen the brokers' downgradings and the share price fall, should the company now respond to provide some context for the brokers' changed attitudes and the market activity? If there has been a material change in the near-term prospects of a core activity, the answer to both those questions is ``yes".
This isn't, incidentally, a criticism of what Foster's has or has not done to inform the market but rather an example of a situation where, after September, the pressure and consciousness of the liabilities are likely to result in quite a different approach. There will be an ``if in doubt, disclose everything" attitude.
The Foster's situation is relatively straightforward because it relates to questions of when a change in circumstances should be disclosed or when a company should respond to changed perceptions of its performance or condition. Post-September, the answer will probably be ``always and as soon as possible".
At the other end of the spectrum was CRA's decision to disclose its proposed sale of its Pasminco shareholding before it had even appointed an adviser, let alone made any attempt to sell the shares.
At one level, that was and is an admirable attitude. The decision was made and the market learnt of it immediately. At another, by disclosing the decision instantly, CRA risked the market response.
Logically, the market should have sold Pasminco down aggressively in the expectation that it would be offered those Pasminco shares at market-related prices. As it happened, CRA has been fortunate with the timing of the sudden optimism about commodity prices and resource stocks generally.
It is the kind of situation that the concept of a carve-out for commercially sensitive information was tailored for.
IN THE middle of those fairly straightforward, albeit still awkward, positions is that of Brash. Should Brash directors have told the market last October that their banks had demanded their loans be moved from non-current status to ``at call"? Should they have told the market in February that the banks had sought and were granted another change in the status of the loans from unsecured to secured? It is a fine-line judgment. Some would argue that the directors should have disclosed the symptoms of mounting crisis regardless of the consequences and given shareholders and non-bank creditors the ability to act.
Others would say that the act of disclosure would by itself have guaranteed irrevocable and avoidable damage because the non-bank creditors would have fled and, given the nature of retailing, ensured a meltdown in the Brash's business.
As Brash directors appear to have believed until the banks made their demand for repayment that they had the banks' support, the balance of the obligation to inform the market and the overriding obligation to act in the best interests of the company probably lay in avoiding alarm bells. In any event, it was an unenviable position and one where no easy judgment can be made.
If, however, the directors faced criminal liabilities for intentionally or recklessly breaching the disclosure provisions, as well as civil liabilities for any investor or creditor losses, one wonders whether they would put the interests of the company ahead of their own security.
Directors should be given the unequivocal benefit of the doubt when they genuinely choose not to disclose in order to protect the interests of the company, but it is equally necessary to preserve the integrity of the continuous disclosure concept by emphasising disclosure whenever there is a doubt.
Someone will have an interesting and delicate task framing the carve- out provisions that are so central to creating a continuous disclosure regime that gets the balance of interests right.
© 1994 The Age
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