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Note to Treasury
31 March 2020
Background
The AICD proposes that the continuous disclosure laws should be temporarily amended so that no
action may be brought against a listed disclosing entity or their directors or officers in relation to
earnings guidance or forward‐looking statements made in the context of the COVID‐19 pandemic.
The AICD submits that the pace of change and uncertainty makes it difficult for companies to
forecast the impact of the pandemic on the entity itself and the wider economy and that this
uncertainty creates a material securities class action risk. This paper sets out factual material relating
to the Australian financial market, its participants and capital raising practices, all of which rely on
the efficient and effective functioning of Australia’s continuous disclosure regime. It also provides an
overview of size and number of securities class actions in Australia along with early observations of
market disclosure practices and fundraising in response to COVID‐19.
Executive Summary
The continuous disclosure regime is a fundamental tenet of our markets and is particularly important
during times of market uncertainty and volatility (e.g. the GFC, COVID‐19 pandemic). In Australia,
there are a large number of investors that rely on market information to make their investment
decisions. Trading volumes are extremely high and it is paramount that these trades occur on the
basis of an informed market. It is anticipated that the number of low document secondary capital
raisings will increase as a result of the COVID‐19 pandemic, as it did during the GFC. Whilst the low
document fund raising regime allows issuers to raise capital efficiently, it is predicated on the market
being kept fully informed through continuous disclosure. ASIC legislative instruments facilitating such
equity raising without a disclosure document are predicated on this principle.
The ASX will soon be releasing guidance to the market to assist companies in complying with their
continuous disclosure obligations in the current environment. Issuers can continue to utilise trading
halts where necessary with the ASX proposing to allow back to back trading halts in certain
circumstances. Companies have already demonstrated their ability to comply with their continuous
disclosure obligations in the current environment with many having made a number of
announcements, including to withdraw earnings guidance, in response to the COVID‐19 pandemic.
ASIC has pursued enforcement action relating to egregious breaches of the continuous disclosure
regime in the past and which have resulted in high losses for investors. Whilst there may well be an
increase in shareholder class actions should a safe harbour not be provided, the number of
shareholder class actions in Australia has historically been relatively low with only 82 filed in Australia
over the last 16 years. This is compared to the United States which had 441 securities class actions
filed in 2018 alone. In addition, the value of these shareholder claims is small when compared to the
value of the fund raising and trading activity that occurs in the Australian market.
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Australian investors
The domestic equity market capitilisation at the end of February 2020 was $2.0 trillion.1
Retail investors
Source: Deloitte Report ‐ ASX Australian Investor Study 2017
Institutional investors
Australian investors accounted for approximately 70 per cent of issued capital in the ASX 200 in July
2019, with institutional and retail investors accounting for 42 and 28 per cent respectively. North
America represented the second largest source of ownership in the ASX 200 at 14.5 per cent, a 21
per cent increase from 2014 (12%). Almost all of these gains have come through US‐based index
funds, which now account for more than 60 per cent of US investment in the ASX 200, and of which
more than 90 per cent is managed by three firms – Vanguard, BlackRock and State Street Global
Advisors.
Norway’s Norges Bank and the Government Pension Investment Fund of Japan (GPIF), the two
largest sovereign wealth funds in the world, have greatly increased their direct investment in the ASX
200 over the last five years. Norges and GPIF have increased their investments in the ASX 200 by 71
and 73 per cent over the last five years to $20.7 billion and $11.4 billion respectively.2
1
https://www.asx.com.au/about/historical‐market‐statistics.htm#No. of Companies and securities listed on ASX
2
Ownership Trends in Australia, Orient Capital 2019
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As at the end of December quarter 2019, 22% ($418 billion) of the $1.9 trillion superannuation funds
under management were invested in Australian listed equities, 25.3% ($106 billion) in international
listed equities and 4.1% ($17 billion) in unlisted equities.3
Direct super fund investments in ASX 200 companies have more than doubled to $78.3 billion in the
past five years, according to Orient Capital analysis. In 2008, that figure was $16 billion. If the growth
rate continues, direct investment by super funds in ASX 200 companies is estimated to reach $157
billion by 2023.
Trading volumes
The average daily value of equity trades across ASX and CHI‐X in March has been $25,881,177,982
versus January at $11,123,635,097. The table below sets out a comparison of the trading statistics
over the months of January 2020 to March 2020.
January average daily volume 2,120,123,901.04
January average daily value $11,123,635,096.71
January average daily number of trades 1,826,629.09
February average daily volume 3,130,996,125.30
February average daily value $17,475,564,242.78
February average daily number of trades 2,543,493.60
March average daily volume 4,073,377,471.68
March average daily value $25,881,177,981.54
March average daily number of trades 3,877,616.27
ASIC Policy
The existing continuous disclosure regime underpins the regulatory policy supporting a number of
ASIC legislative instruments relieving listed companies and/or listed schemes from the requirement
to prepare and lodge a disclosure document or product disclosure statement (as the case requires)
for the offer of securities or units for issue. These include relief for share purchase plans and certain
rights issues, which are likely to be heavily utilised by listed companies in the current environment.
ASIC’s policy is set out in its public regulatory guides. For example, and of particular relevance in the
current circumstances, ASIC Regulatory Guide 125: Share and Interest purchase plans states at [RG
125.9] to [RG 125.12] that removing the requirement for listed issuers and schemes to lodge a
prospectus or PDS for a share or interest purchase plan is appropriate because:
3
https://www.superannuation.asn.au/resources/superannuation‐statistics
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RG 125.9 We consider that the benefits of this conditional relief for investors (such as savings on
brokerage) and issuers (such as savings on the costs of preparing, printing and distributing disclosure
documents) outweigh the disadvantages and risks of not having a prospectus or a PDS.
RG 125.10 We also consider that the risks of not having a prospectus or a PDS are limited because:
(a) the amount that may be invested by each holder in a 12‐month period under the offer is
restricted;
(b) the offer price must be at a discount to the market price during a specified period; and
(c) the issuer must comply with its continuous disclosure obligations and other conditions that
apply to our relief.
RG 125.11 Similar to the rights issues disclosure regime in s708AA, our relief for purchase plans is
conditional on an issuer complying with its continuous disclosure obligations and notifying the market
of certain excluded information by lodging a cleansing notice with ASX.
RG 125.12 The conditions of our relief are designed to ensure that while offerees under a purchase
plan will not receive a prospectus or a PDS:
(a) they will have access to information through continuous disclosure and market pricing
due to quotation of the issuer
(b) the offer will be at a discount to the market price during a given period before the offer or
issue; and
(c) there is a limit to the amount that can be offered to investors without a prospectus or a
PDS.
ASIC’s policies in this area were developed, publicly consulted on and settled on the basis of the
current continuous disclosure regime. Were that regime, or aspects of it, to be modified, ASIC would
likely be required to consider the implications for its existing regulatory policy framework.
GFC capital raising facts and statistics
In the ASX’s Information Paper analysing the capital raising in Australia during and after the GFC, it is
stated that:
“… disclosure‐based frameworks are generally more flexible and are particularly appropriate
for well‐developed markets where innovation and improving standards are driven by market
disciplines. While there may be some limits placed on a company’s activities to achieve
objectives of fairness and efficiency, these are delivered predominately through a system of
disclosure‐based rules which enable investors to form judgements about how a company is
being managed. This in turn affects investment decisions and the value of the company, and
allows investors to exercise their voting rights to influence management.”4
Secondary capital raisings were strong during the GFC, over half of all ASX listed companies raised
some additional equity with 80% of the ASX 200 raising capital accounting for 90% of total amount
raised.5
4
ASX Information Paper ‐ Capital Raising in Australia: Experiences and Lessons from the Global Financial Crisis – 29 January 2010, page 16
5
ASX Information Paper ‐ Capital Raising in Australia: Experiences and Lessons from the Global Financial Crisis – 29 January 2010, page 18
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Placements were most utilised form of secondary capital raising during GFC (41%). The other
methods: rights and accelerated issues (31%); dividend reinvestment plans (18%); share purchase
plans (5%); and other (5%)6
A total of 790 companies made placements during 2009, raising a record $38.3bn. This is compared
to 546 companies raising $27.4bn in 2008 and 797 companies raising $24.9bn in 2007.7
The largest amounts were raised by financial institutions.
Smaller companies accounted for around 75% of the total number of companies making
placements.8
The median percentage of issued capital raised through placements by smaller companies in
2009 was only slightly below the 15% limited, while for larger companies the median was 12‐
13%.9
In 2007 around 100 companies conducted both a placement and a SPP (within close proximity).
This number fell to around 70 in 2008 before rising again to around 200 companies in 2009.10
A total of 412 companies made rights issues during 2009, raising around $38.3bn. This is compared to
260 companies raising $12.8bn in 2008 and 315 companies raising $18.4bn in 2007.11
A total of 267 companies made SPP issues during 2009, raising around $8.1bn. This compared to 110
companies raising $1.0bn in 2008 and 165 companies raising $1.6bn in 2007.12
The amount of capital raised via SPPs rose over 800% between 2008 and 2009, to be around
500% above the previous annual high in 2007. It rose particularly strongly in early 2009 and
spiked again when ASIC formally increased the maximum issue amount in mid‐2009.13
A total of 230 companies made use of DRPs during 2009, raising around $11.4bn. This compared to
269 companies raising $15.6bn in 2008 and 271 companies raising $11.9bn in 2007.14 The largest
amounts raided by the financial institutions.
In conclusion, the ASX Information Paper states:
“The heightened volatility and sharp declines in asset values at the peak of the crisis saw a
shift of approach by companies away from renounceable rights issues and towards a reliance
on placements, and to a lesser extent accelerated non‐renounceable rights issues.”
By way of comparison, $2.0 billion was raised via secondary capital during the month of February
2020.
Continuous disclosure relating to COVID‐19 – evidence to date
As at 10 March 2020, 326 different ASX listed entities made announcements regarding COVID‐19.15
From 1 December 2019 to 29 March 2020, 334 market sensitive announcements included the
words “coronavirus or covid” and “guidance”
6
ASX Information Paper ‐ Capital Raising in Australia: Experiences and Lessons from the Global Financial Crisis – 29 January 2010, page 18
7
ASX Information Paper ‐ Capital Raising in Australia: Experiences and Lessons from the Global Financial Crisis – 29 January 2010, page 21
8
ASX Information Paper ‐ Capital Raising in Australia: Experiences and Lessons from the Global Financial Crisis – 29 January 2010, page 22
9
ASX Information Paper ‐ Capital Raising in Australia: Experiences and Lessons from the Global Financial Crisis – 29 January 2010, page 23
10
ASX Information Paper ‐ Capital Raising in Australia: Experiences and Lessons from the Global Financial Crisis – 29 January 2010, page 24
11
ASX Information Paper ‐ Capital Raising in Australia: Experiences and Lessons from the Global Financial Crisis – 29 January 2010, page 27
12
ASX Information Paper ‐ Capital Raising in Australia: Experiences and Lessons from the Global Financial Crisis – 29 January 2010, page 30
13
ASX Information Paper ‐ Capital Raising in Australia: Experiences and Lessons from the Global Financial Crisis – 29 January 2010, page 30
14
ASX Information Paper ‐ Capital Raising in Australia: Experiences and Lessons from the Global Financial Crisis – 29 January 2010, page 32
15
https://www.allens.com.au/insights‐news/insights/2020/03/covid19‐and‐continuous‐disclosure‐how‐you‐get‐ready/
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From 1 December 2019 to 29 March 2020, 167 market sensitive announcements included the
words “coronavirus or covid” and “withdraw*”
While no examples of companies having provided updated guidance were found, they have
provided updates to past guidance (including withdrawal where necessary) as well as updates on
the financial position of the company.
Some companies released updated guidance when COVID‐19 was impacting on Australia less
than it is now, e.g.
o Corporate Travel Management updated its guidance on 19 February 2020
(http://www.aspecthuntley.com.au/asxdata/20200219/pdf/02203757.pdf#search=%22c
oronavirus%20covid%20guidance%22)
o Fisher & Paykel Healthcare Corporation Limited updated its guidance on 21 February
2020 (revised guidance up due to increased demand)
(http://www.aspecthuntley.com.au/asxdata/20200221/pdf/02204903.pdf#search=%22c
oronavirus%20covid%20guidance%22)
o Serko Limited provided an update that it expected the forecast revenue growth to be at
or about the low end of guidance on 25 February 2020
(http://www.aspecthuntley.com.au/asxdata/20200225/pdf/02206051.pdf#search=%22c
oronavirus%20covid%20guidance%22)
Low‐doc fundraising related to COVID‐19 – evidence to date
Equity capital markets are still functioning and a number of capital raisings have been able to be
completed. Investors are expecting larger than usual discounts to recent secondary market prices to
support issues given the uncertainty around revenue forecasts.
Over $1.3 billion has been raised or announced in recent equity capital raisings including:
Amount Discount
Issuer ASX code Date Issue type
Raised
21.0%
The Reject Shop TRS Mar‐20 Entitlement offer $25m
40.2%
Carbon Revolution CBR Mar‐20 Placement and SPP $33m
36.9%
Ohh!Media OML Mar‐20 Placement and entitlement Offer $167m
53.4%
Somnomed SOM Mar‐20 ANREO $15.5m
27.8%
Red5 RED Mar‐20 Placement $125m
Market cleanliness
Report 623 Review of Australian equity market cleanliness: 1 November 2015 to 31 October 2018
examines market cleanliness for the period, with a focus on insider trading and information leaks
ahead of material market announcements. It extends our work in Report 487 Review of Australian
equity market cleanliness, which found an overall improvement in market cleanliness over the 10
years to 31 October 2015.
The overall cleanliness of the market fluctuated between 2015 and 2018—despite a deterioration in
2016, market cleanliness improved in 2017 and 2018 to settle around 2015 levels. During the period
we found that:
on average, 0.6% of accounts that traded before material price‐sensitive announcements
were deemed suspicious
suspicious accounts profitably traded on average 5.1% of the volume before each
announcement
while the percentage of suspicious trading accounts remained stable, the volume traded by
these accounts increased
there was more suspicious trading before merger and acquisition announcements than other
announcements
there was more suspicious trading and abnormal price movements before unscheduled
announcements than scheduled announcements
announcements by smaller companies were more likely to be unclean. Many of these smaller
companies were in the materials sector.
Past enforcement matters concerning CD breaches and capital raisings
Vocation Limited ‐ $75 million raised pursuant to an underwritten placement to institutional and
sophisticated investors. The Company failed to update the market regarding the outcome of a review
undertaken by the Victorian Department of Education and Early Childhood Development. As a result
of the review, government funding was withdrawn and two RTO funding contracts terminated –
reducing the share price, earnings and market value. Last year, the Federal Court found
contraventions of s1041H(1) and importantly s674(2) (the continuous disclosure obligation for listed
companies) in relation to the failure to update the market. This case illustrates the detriment to
investors and market integrity when placements are undertaken in circumstances where the
continuous disclosure provisions have been contravened. The full judgment is here.
Commonwealth Bank of Australia (2009) ‐ $2 billion capital raising was ultimately abandoned after
the Commonwealth Bank failed to update the market (while updating some potential institutional
investors) about an increase to its impairment expenses. Infringement notice of $100,000 paid.
Adairs Limited ‐ ASX‐listed company Adairs Limited (Adairs) paid a penalty of $66,000 after ASIC
issued an infringement notice alleging it had not complied with the continuous disclosure obligations.
ASIC has found there are reasonable grounds to believe that Adairs was in breach of its continuous
disclosure obligations between 23 September and 2 November 2016 by failing to inform the ASX that
its forecast figures for the 2017 full financial year would be materially lower than the market
consensus. (https://asic.gov.au/about‐asic/news‐centre/find‐a‐media‐release/2017‐releases/17‐
352mr‐adairs‐pays‐penalty‐for‐alleged‐continuous‐disclosure‐breach/)
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Bellamy’s Australia Limited ‐ ASX‐listed company Bellamy's Australia Limited (Bellamy's) paid a
penalty of $66,000 after ASIC issued an infringement notice for an alleged failure by Bellamy's to
comply with its continuous disclosure obligations. ASIC alleges that by failing to inform the ASX by 18
October 2016 that it was unlikely to achieve market consensus forecasts for the 2017 financial year,
Bellamy's was in breach of its continuous disclosure obligations between 18 October 2016 and 2
December 2016. (https://asic.gov.au/about‐asic/news‐centre/find‐a‐media‐release/2017‐
releases/17‐342mr‐bellamys‐pays‐penalty‐for‐alleged‐continuous‐disclosure‐breach/)
MG Responsible Entity Limited ‐ The Federal Court ordered MG Responsible Entity Limited (MGRE) to
pay a penalty of $650,000 for contravening its continuous disclosure obligations, and also pay ASIC's
legal costs. The court found that MGRE contravened its disclosure obligations under section 674(2) of
the Corporations Acton and from 22 March 2016, continuing until 27 April 2016 by failing to notify
the ASX that circumstances had arisen a consequence of which was that, Murray Goulburn Co‐
operative Co. Limited (MG) was unlikely to achieve the forecast:
Available Weighted Average Southern Milk Region Farmgate Milk Price for the financial year
ending 30 June 2016 of $5.60 per kilogram of milk solids; and
Full‐year net profit after tax for the financial year ending 30 June 2016 of approximately $63
million,
as stated by MG and MGRE in their ASX announcements dated 29 February 2016 entitled 'Murray
Goulburn – Half Year Financial Results News Release' and 'Murray Goulburn – Half Year Financial
Results Presentation.' (https://asic.gov.au/about‐asic/news‐centre/find‐a‐media‐release/2017‐
releases/17‐441mr‐mg‐responsible‐entity‐fined‐650‐000‐for‐breaching‐continuous‐disclosure‐laws/)
Class action statistics
Shareholder claims are the most commonly filed class actions in the Federal Court, representing
34% (37) of all class actions filed in the last five years (2013‐2018).16
Since the introduction of the continuous disclosure and misleading and deceptive conduct
provisions in 2002, 82 shareholder class actions have been filed (up to 2018).17
Majority of class action proceedings are finalised through judicial approval of settlement, with
settlements ranging from $3million to $250million (median: $29million).18
o The median settlement amount for shareholder class actions was $36million (range
$3million to $132.5million)19
Third‐party funded class actions are growing.20 (52% of class action foundered by litigation
funders were in relation to shareholder claims)21
16
ALRC Paper – Inquiring into Class Action Proceedings and Third‐Party Litigation Funders, page 23
17
ALRC Paper – Inquiring into Class Action Proceedings and Third‐Party Litigation Funders, page 23
18
ALRC Paper – Inquiring into Class Action Proceedings and Third‐Party Litigation Funders, page 70
19
ALRC Paper – Inquiring into Class Action Proceedings and Third‐Party Litigation Funders, page 85
20
ALRC Paper – Inquiring into Class Action Proceedings and Third‐Party Litigation Funders, pages 74‐75
21
ALRC Paper – Inquiring into Class Action Proceedings and Third‐Party Litigation Funders, page 76
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In comparison, 441 securities class actions were filed in the United States in 2018.22 The median
settlement amount was US $13million.23
ASIC’s public submission to the Australian Law Reform Committee
ASIC publicly articulated its views on the interaction of Australia’s continuous disclosure regime and
shareholder class actions in a (public) submission to the 2018 Australian Law Reform Commission
inquiry into class action proceedings and third‐party litigation funders. That public submission is
available here. At that time, ASIC took the view that:
Shareholder class actions can play an important and complementary role in improving
shareholder access to justice and fostering accountability
The Corporations Act provides clear avenues for shareholders and consumers to take legal
action to enforce their rights. It was clearly not intended that the regulator should have a
monopoly on legal action. Where private action can achieve a similar outcome to that which
action by ASIC could achieve, it allows ASIC to allocate its regulatory resources to other
priorities.
The continuous disclosure provisions exist to protect shareholders, market integrity and the
good reputation of Australia’s financial markets. In ASIC’s experience the provisions are
working well and operate to increase the attractiveness of Australian markets for investors.
The economic significance of fair and efficient capital markets dwarfs any exposure to class
action damages. Continuous disclosure and misleading or deceptive provisions anchor many
other elements of the regulatory regime for financial markets, including low document
capital raisings.
22
Recent Trends in Securities Class Action Litigation: 2018 Full‐Year Review – Nera Economic Consulting, 29 January 2019, page 2.
https://www.nera.com/content/dam/nera/publications/2019/PUB_Year_End_Trends_012819_Final.pdf
23
Recent Trends in Securities Class Action Litigation: 2018 Full‐Year Review – Nera Economic Consulting, 29 January 2019, page 30.
https://www.nera.com/content/dam/nera/publications/2019/PUB_Year_End_Trends_012819_Final.pdf