Listed/disclosing entities need to disclose ‘safe harbour’ issues, but not necessarily ‘safe harbour’ itself
Since the launch in September 2017, there has been considerable debate among professional advisors about the availability of Safe Harbour to Listed and disclosing entities, that is, those with obligations to keep markets informed of information about their securities (shares, units etc.) that a reasonable person would think likely to be material to the price.
Some considered these entities would need to disclose its Safe Harbour status pursuant to continuous disclosure obligations under ASX Listing Rules, and that doing so would effectively put paid to any restructure plan, because it would lead to a fall in both the price of securities and perceptions of credit-worthiness. The logic was that investors would treat news that Directors were operating in the Safe Harbour as a prompt to sell lest the Company enter into Voluntary Administration. Further, any restructuring plan requiring a capital raising would be doomed to failure when the market learnt of the listed entity’s Safe Harbour status.
To settle the debate around the position of listed entities, the ASX has now provided guidance on Safe Harbour reporting requirements, issuing Guidance Note 8 Continuous Disclosure: Listing Rules 3.1 – 3.1B.
The key elements of the Guidance Note are:
- ASX has been asked whether the fact that the entity’s directors are relying on insolvent trading safe harbour in Section 588GA of the Corporations Act requires disclosure to the Market. Section 588GA is a conditional carve out form a directors potential liability for insolvent trading that does not affect an entities continuous obligations or reduce the entities obligation to disclose the extent of its financial difficulties. The fact that that an entity’s directors are relying on the insolvent trading Safe Harbour to develop a course of action that may lead to a better outcome for an entity than an insolvent administration, in and of itself, is not something that ASX would generally require an entity to disclose under Listing Rule 3.1.Most investors would expect that directors of an entity in financial difficulty to be considering whether there is a better alternative for the entity and its stakeholders than an insolvent administration. The fact that they are doing so is not likely to require disclosure unless it ceases to be confidential or a definitive course of action has been determined. [our emphasis]
- ASX recognises that for an entity in financial difficulties, the requirement to disclose materially negative market sensitive information immediately can be a significant impediment to completing a financial restructure or reorganisation necessary for its survival. However, the proper course for the entity in such a situation is not to disregard its continuous disclosure obligations while it completes the transaction in question.
- …ASX may agree to suspend quotation of an entity’s securities (or continue an existing suspension) where ASX is satisfied that the entity is in genuine financial difficulties and continued trading in its securities is likely to be materially prejudicial to its ability to complete a transaction critical to its continued financial viability.
In short, the ASX has made it plain that:
- A listed entity’s most important obligation is to disclose accurate information about financial position, not the fact that Directors have invoked Safe Harbour.
- Information relating to that the course of action (restructure plan) settled on by an entity’s Board will be subject to continuous disclosure obligations.
Case Study: Bellamy’s Australia Limited (Bellamy’s)
As many are aware, in late 2016 Bellamy’s endured severe financial distress due to:
- Revenues from exports to the China market dropping sharply after the Chinese Government changed its regulations of baby milk products.
- Stockpiling of inventory after Chinese sales ceased.
- Supply chain agreements requiring amendment in the wake of changed market conditions.
At the time, there were serious questions around Bellamy’s ability to continue as a going concern.
Recently, Bellamy’s has reported a remarkable turnaround with the business out performing market expectations.
Whilst Safe Harbour Reforms had not been enacted at the time, it is more than likely that the board of Bellamy’s would have availed themselves of the Safe Harbour in prosecuting their course of action to restore value to Bellamy’s.
In meeting its continuous disclosure obligations, the Board’s course of action and the expected financial outcomes were announced while the Bellamy’s was under a voluntary suspension from trading on the ASX. Bellamy’s sought to realign its supply chain and key customer channels to target more sustainable growth across its home market and the important Chinese market by:
- Appointing a new CEO and key executive team carry out the agreed course of action.
- Rectifying its licence issues, allowing it to resume selling into the Chinese market.
- Renegotiating its supply chain agreements with it major suppliers.
The lesson – an important one for listed entities – is that with the right approach, it is possible to restructure listed businesses without formal insolvency procedures.
This information provides a summary of the subject matter only. It should not be acted on without first seeking professional advice. For more information, contact Peter on:
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