SGX , one of the foundations of the disclosure-based regime is the continuous disclosure obligation on listed companies, where material information is immediately announced so that investors are able to make informed investment decisions, expects of disclosures involving Significant Litigation.
Listed companies know well that materially price-sensitive information is required to be disclosed under Listing Rule 703(1)(b). What is less well-known and currently provided under Listing Rule 703(1)(a), though no less important as far as listed company obligations are concerned, is that trade-sensitive information should also be disclosed to avoid the establishment of a false market. To clarify this position, SGX RegCo has made amendments to Practice Note 7.1 (Continuing Disclosure) of the Mainboard Rules and Practice Note 7A of the Catalist Rules (collectively, the “Practice Note”) , which takes effect from 7 February 2020.
We have seen at least one recent case where a listed company probably only considered the price-sensitivity test in deciding whether to make a disclosure, when applying the second trade-sensitivity test might have led to a different disclosure approach.
SGX RegCo would therefore like to remind listed companies that both tests of materiality are of equal importance. A negative response for the price-sensitivity test does not mean that the listed company can consider its disclosure obligations discharged; the listed company should also consider the trade-sensitivity test.
Assessing ‘materiality’
In assessing the materiality of the event and the information to be disclosed, listed companies must: (i) carefully exercise judgement based on the two tests above; and (ii) consider the impact of such information on shareholders and investors alike, and their ability to make informed investment decisions.
Guidance has been provided in the Practice Note, on the tests for trade-sensitive information and materially price-sensitive information, to address concerns about the possibility of a lack of understanding of the two materiality tests in Listing Rule 703(1). The Practice Note also includes further discussions on situations that listed companies commonly face and how these should be dealt with.
The following are definitions for materially price-sensitive and trade-sensitive information.
Materially price-sensitive information
Information which is likely to materially affect the price or value of a listed company’s securities may be referred to as materially price-sensitive information. SGX RegCo will examine the actual market reaction and prevailing circumstances to determine if the disclosure ought to have been made by the listed company.
Trade-sensitive information
Information that is necessary to avoid the establishment of a false market in a listed company’s securities may be referred to as trade-sensitive information. A false market may exist if information is not made available that would, or would be likely to, influence persons who commonly invest in securities in deciding whether or not to subscribe for, or buy or sell the securities. SGX RegCo will make an assessment as to whether investors will trade in the securities, in reliance of that piece of information. In that regard, we may consider information to be trade-sensitive even if there is no material price impact when the information is disclosed. As a guiding principle, listed companies are expected to assess whether a reasonable investor would expect the information to be disclosed and would the failure to disclose or omission of material facts lead to the establishment of a false market.
To illustrate how the two tests may be applied, we present the following examples of recommended actions with respect to disclosures.
Significant litigation
Consider a listed company that has received or been served a legal claim, or legal action or arbitral proceedings have commenced, against itself or its subsidiaries or associated companies (“Significant Litigation”).
Assessment of materiality of Significant Litigation
The listed company must immediately assess whether this information is materially price-sensitive or trade-sensitive and if it requires immediate disclosure.
- Assessment of materially price-sensitive information. The Significant Litigation may require disclosure if it has or is expected to have a material impact on the price of the listed company’s securities. In this regard, the listed company should take a prudent approach in assessing the associated risks and quantifying its maximum financial exposure.
However, the assessment of whether information is trade-sensitive extends beyond looking at potential price impact. Therefore, a listed company must also consider its obligations in respect of trade-sensitive information.
- Assessment of trade-sensitive information. The company should keep in mind that materiality extends beyond price movement-related aspects and includes trade sensitivity, where the information may influence an investor to either buy or sell the security.
Some factors that a listed company should take into account in determining materiality of Significant Litigation include:
- the quantum of the Significant Litigation vis-à-vis its financial performance (e.g. revenue, profit before tax and net profit etc);
- the type of proceedings involved (i.e. civil or criminal);
- the severity of the offence (in the case of criminal proceedings); and
- whether the Significant Litigation will affect: (a) its ability to continue its business operations and comply with the relevant laws and regulations; (b) its reputation; and (c) its viability and business prospects.
As an example, a listed company may announce a provision for outstanding litigation and quantify the potential maximum financial impact arising from the Significant Litigation, and consider itself as satisfying the price sensitivity test. However, in order to fully comply with the listed company’s disclosure obligations in respect of both price and trade sensitive information, it must also fully announce sufficient details of the Significant Litigation in a timely manner.
Listed companies are reminded that the content of each announcement must be factual, balanced and fair. In disclosing information that is materially price-sensitive or trade-sensitive, listed companies must avoid the omission of important unfavourable facts, or the slighting of such facts (for example, by “burying” them in the financial statements or footnotes of the annual report). The announcements must also contain sufficient information to enable investors to understand the matter at hand and its associated risks.
Where the listed company cannot quantify the potential financial impact of the Significant Litigation, it should make this clear and explain why this is so. This will enable investors to make an informed decision on the listed company’s financial exposure as well as material developments in the Significant Litigation.
Material developments in Significant Litigation
The Practice Note also provides that listed companies should follow up with further announcements to the market when there are subsequent material developments.
In the case of Significant Litigation, material developments can include:
- additional claims or charges preferred;
- a material change in the quantum claimed;
- the reaching of an outcome in the Significant Litigation;
- the dismissal of an appeal against the outcome; or
- the entry into of a settlement agreement.
These developments may have a material impact on the price or value of the listed company’s securities or may influence an investor’s investment decision.
Listed companies should also note that prior disclosure of: (a) the potential maximum financial exposure from Significant Litigation; or (b) the provisions made for the said exposure, does not relieve the listed company from following up with further announcements when there are subsequent material developments.
A final judgment on Significant Litigation (that has been previously announced) likely constitutes material information, notwithstanding that the claim quantum is fully provided for in the disclosed provisions.
Legal outcomes which are not finalised or subject to appeal
Outcomes of Significant Litigation can come in the form of a judgment, arbitral award or settlement agreement. Even if such outcomes are not final, e.g. the listed company receives a court judgment which is subject to appeal or pending formalisation, the listed company should still disclose such an outcome as it is a material development.
Listed companies must avoid adopting an unduly strict and legalistic approach in determining whether the outcome is sufficiently definitive to warrant disclosure.
Listed companies should also note that while the Board may seek external legal advice in relation to its disclosure obligations, the listed company and its Board are ultimately responsible for assessing if the information requires immediate disclosure. The Board cannot abdicate its responsibility to third party professionals. SGX RegCo will not accept sole reliance on external legal advice as a justification for the listed company’s failure to comply with its disclosure obligations.
Market rumours or speculation
SGX RegCo generally does not expect listed companies to respond to rumours or speculation unless there is unusual movements in its trading price or trading volume.
In addition, under Listing Rule 703(3), Listing Rule 703(1) does not apply to particular information while each of the following conditions applies:-
- Condition 1: a reasonable person would not expect the information to be disclosed;
- Condition 2: the information is confidential; and
- Condition 3: where one or more of the following applies: (i) the information concerns an incomplete proposal or negotiation; (ii) the information comprises matters of supposition or is insufficiently definite to warrant disclosure; (iii) the information is generated for the internal management purposes of the entity; or (iv) the information is a trade secret.
In our second and final example, the listed company has recently had a leakage of material information that it is facing Significant Litigation. This information has been reported in the media but the company has not made the relevant disclosure via SGXNet. If the information is reasonably specific and attributable to a reliable source, we will require immediate clarification from the listed company. Where necessary, the listed company should also request a trading halt and promptly release an announcement to disseminate the material information.
In this regard, listed companies should note that the leakage of material information would result in a loss of confidentiality and thus they can no longer rely on the aforesaid exceptions to immediate disclosure under Listing Rule 703(3).
Conclusion
Listed companies must have in place robust and effective internal controls for the assessment of material information requiring disclosure. If a listed company is unable to ascertain whether the information is material, or is in any doubt about whether to disclose, the recommended course of action is to announce the information immediately via SGXNet.
Tan Boon Gin
CEO
