- ASX Corporate Governance Council recommends best practice
- ASIC gets tough on defective disclosure of financials
- ASIC discusses socially responsible investment
ASX Corporate Governance Council recommends best practice
The release of the Principles of Good Corporate Governance and Best Practice Recommendations on 31 March 2003 has caused quite a stir among sections of the corporate community.
According to the Principles, the Council's overriding mission was to: 'develop and deliver an industry-wide, supportable and supported framework for corporate governance which could provide a practical guide for listed companies, their investors, the wider market and the Australian community'.
Whether this mission will be accomplished remains to be seen but we have provided extensive analysis of the recommendations in our corporate governance section.
ASIC gets tough on defective disclosure of financials
The announcement by ASIC that it has issued 51 interim stop orders and 8 final stop orders on prospectuses or Offer Information Statements since 1 July 2002 sends a strong message to the capital markets industry on levels of disclosure in fundraising documents.
Defective disclosure
A particular focus of regulatory action concerned the disclosure of prospective financial information. ASIC drew attention to the following types of defects:
- unsubstantiated, stand-alone statements, such as the 'the directors expect that the company will become profitable by the end of the 2004 financial year';
- inadequate distinction between hypothetical assumptions and assumptions as to future matters which management expects to take place;
- absence of reasonable grounds for predictions beyond 2 years.
An example of this type of inadequate disclosure is illustrated by TeeBook Global Limited which was issued with a stop order on 6 January 2003 due to the lack of reasonable grounds for several forward-looking statements regarding the company's revenues and cash flows.
Effect of the stop order
A stop order means that the company cannot proceed with its proposed fundraising. If an interim order is imposed, the company will generally be required to amend its disclosure document to provide a satisfactory level of disclosure before ASIC will consent to removal of the order. If, however, a final order is imposed, the company's fundraising offer cannot proceed and the company must begin the process again.
Best approach to disclosure
Ensuring that the disclosure document contains all the information required by the Corporations Act generally involve a systematic approach undertaken with the assistance of professional advisers, including lawyers and accountants. The process may entail:
- steps to ensure all mandatory content under the Corporations Act is disclosed;
- ASIC policies on disclosure being considered and the recommended practice observed;
- undertaking all necessary inquiries, including queries addressed to management of the company, to satisfy those involved in its preparation, that the disclosure statement does not omit any material which ought reasonably to be included; and
- each statement, including any assumption or sensitivity, contained in the prospectus being verified as not being misleading or deceptive, and reasonable in the circumstances.
A systematic due diligence process minimises the prospects of adverse regulatory action or plaintiff litigation as occurred in Reiffel v ACN 075 839 226 Ltd. In the worst case scenario of a prospectus being held misleading and deceptive by a court, the steps outlined above will support a defence under section 731 of the Corporations Act based on due diligence.
As there is no statutory equivalent of section 731 applying to Product Disclosure Statements, the best strategy is to get the disclosure right in the first place.
ASIC discusses socially responsible investment
Of relevance to many issuers of financial products is the discussion paper released by ASIC on Socially Responsible Investment Disclosure Guidelines.
At this stage, the discussion paper is only a broad outline of the stance ASIC may adopt if it develops guidelines on socially responsible investment (commonly known as SRI) under section 1013DA of the Corporations Act. If developed, the guidelines will address disclosure requirements for financial products with an investment component that claim to take into account labour standards or environmental, social or ethical considerations in the selection, retention or realisation of the investment.
ASIC's key proposals on disclosure
All investment products will need to address SRI issues in their Product Disclosure Statements (PDS), even if it is just to state that no SRI criteria is taken into account. ASIC is of the view that a materiality threshold should encompass a sliding scale, or continuum, so that the more a product promotes itself as taking into account SRI issues, the more detailed the PDS should be.
Guidelines will not prescribe what SRI methodology should be taken into account.
Where a financial product contains an SRI focus, disclosure should cover the product's approach to monitoring the ongoing compatibility of its investments with its stated policy and what action it will take if a particular investment no longer complies with its policy.
Provided a product issuer meets the minimum acceptable standards of disclosure in the PDS, ASIC considers it to be acceptable to refer consumers to a secondary information source.
Enforceability of the Guidelines
ASIC has stated that a breach of any guidelines could result in a court finding that a PDS is defective and may give rise to criminal penalties under Part 7.9 of the Corporations Act. This could include criminal penalties of more than $20,000 or 5 years imprisonment or both.
Transition
ASIC has also flagged a transitional period for compliance if guidelines are officially released. If a product issuer has issued a PDS prior to the release of the guidelines, it would be given until the earlier of either the next printing of the PDS, or 12 months from the date the guidelines are released, to comply.
Watch this space
Following further submissions from stakeholders, ASIC will reach a decision on whether or not to proceed with guidelines. If guidelines are developed, industry can expect the opportunity to make submissions on a consultation draft. The public comment period closed at the end of February and ITM will be monitoring developments.
