Continuous disclosure – after Wynyard and before the new Listing Rules

The last 10 days has seen the publication of several important updates on the topic of continuous disclosure.

These updates came in the form of the FMA’s report on the findings of its investigation into Wynyard Group Limited’s compliance with continuous disclosure obligations and then a new case study and updated guidance note from NZX.

FMA report on Wynyard investigation

Following the collapse of Wynyard in October 2016, the FMA and NZX undertook an investigation into the conduct of Wynyard and its directors.

On 30 September, the FMA reported that based on its investigation:

• the FMA does not consider that any individuals contravened the FMC Act;

• the FMA has concerns regarding the quality of some of Wynyard’s announcements, but it is not clear to us that we could establish a breach of the fair dealing provisions in the FMC Act; and

• the FMA does continue to have concerns that Wynyard may have contravened its continuous disclosure obligation in late September 2016.

Despite the FMA’s views on the potential contravention of disclosure obligations, the FMA has decided not to pursue enforcement action against Wynyard. Wynyard is now in liquidation and its shares no longer trade therefore there is no reasonable prospect of recovery for investors.

In the press statement that accompanied the release of the FMA report, it was noted that:

• the FMA is not confident the Wynyard board rigorously tested whether they were in possession of material information that required disclosure; and

• disclosure is a priority area for the FMA – which is why we supported the extension of the continuous disclosure obligation [in the new NZX Listing Rules which come into effect on 1 January 2019 – subject to a 6-month transition period] to cover information that a director or manager ought to have known.

Whilst the FMA report contains specific findings about the materiality of Wynyard’s worsening cash position, the report also makes a number of key points that are of wider application. These include:

• Board minutes should reflect discussion of the issuer’s continuous disclosure obligations in an “upfront, detailed and considered way” – and not just observance of routine / formal process. In short, the Board must (and must be shown to have) turned its mind as to whether a particularly piece of information is price sensitive.

• Individual directors (and senior managers) face the risk of personal liability for a breach of an issuer’s continuous disclosure obligations – if they had actual knowledge the information was material (price sensitive) information.

The FMA also made some recommendations for early stage issuers and their advisers. These are:

• The Board must remain conscious at all times of the need to apply an enquiring mind to information received from management. The FMA expect the Boards of all issuers to seek both appropriate breadth of management views and independent advice. This is particularly relevant for early stage issuers, who often have limited track records and high-growth aspirations. The Board may not have had time to establish a cohesive culture or the opportunity to observe the issuer through multiple reporting cycles.

• The Board should ensure that the Board minutes accurately and adequately reflect the discussion and debate that has occurred.

• Early stage issuers should provide appropriate context around any guidance they release. There are typically a range of potential scenarios that sit behind any guidance – and it is important to ensure proper emphasis is given to this range of outcomes (see also NZX guidance on this issue).

• Loss-making issuers need to manage their cash resources proactively (not reactively) – and last minute decisions to raise capital or change strategy add material risk. If an early-stage issuer’s cash resources narrow – the information needs of the market are likely to change. This heightens the need to engage with the views of investors and proactively manage expectations – to avoid market surprises.

NZX case study

NZX published a continuous disclosure case study to coincide with the release of the Wynyard report. The case study makes the following key points:

• Where issuers select non-financial metrics for their forecasts (such as sales of particular product lines), the obligations relating to disclosure of material deviations from those forecasts will still apply, where that information is material information.

• Issuers must keep sufficient internal documentation in relation to continuous disclosure discussions and decisions made by the issuer’s Board and executive team.

• Issuers should not attempt to highlight positive information in market announcements as a means to redirect or lessen attention from negative information which is relevant to investors.

NZX updated guidance on continuous disclosure

Finally, NZX has published an updated guidance note on continuous disclosure – to address the introduction of constructive knowledge element to the obligation in the updated NZX Listing Rules. As noted above, the new threshold test will focus on the disclosure of price sensitive information to the market when a director or senior manager

“has, or ought reasonably to have, come into possession of the information in the course of performance of their duties”.

The updated guidance underlines the need for issuers to have processes in place to identify and escalate material information in order to meet the new deemed awareness test.

Further information

If you would like more information about any of the matters discussed in this note, please contact me.