The recently enacted safe harbour legislation1 provides protection to company directors and officers from a claim for insolvent trading where they develop a course of action that is reasonably likely to result in a ‘better outcome’ for a company. A ‘better outcome’ means an outcome that is better for the company than the immediate appointment of an administrator or liquidator, although questions might arise about what is meant by ‘the company’ in this context.2
The rationale underpinning the new legislation is to encourage directors to take proactive steps to restructure companies including fully exploring other options and alternatives to appointing an insolvency practitioner. Without safe harbour protection, directors may act prematurely and even when there is the possibility of a turnaround.
When directors decide to develop a course of action that leads to safe harbour protection, it’s critical for them to consider whether, and if so how and when, they should disclose that they are in ‘safe harbour’ to third parties. In a previous article, we explored the implications of disclosing restructure plans to creditors when a company enters safe harbour. In this article, we focus on how the disclosure of a listed company’s entry into safe harbour might be impacted by its continuous disclosure obligations.
What are the continuous disclosure obligations?
The continuous disclosure obligations in the ASX Listing Rules3 require a listed company to disclose any information concerning it that a reasonable person would expect to have a ‘material effect’4 on the price or value of the entity’s securities. Examples provided in the ASX Listing Rules include a transaction that will lead to a significant change in the nature or scale of an entity’s activities, a material acquisition or disposal, the fact that the entity’s earnings will be materially different from market expectations or the appointment of a liquidator, administrator or receiver.
The continuous disclosure obligations require the company and its directors to ensure that all material information is disclosed to the market in a timely manner. The obligations are given force of law by s 674 of the Corporations Act 2001; meaning significant civil and criminal penalties may be imposed on the company and its directors and officers where the obligations are breached.
When is disclosure not required under continuous disclosure rules?
The ASX Listing Rules contain an exception to the continuous disclosure rules. ASX Listing Rule 3.1A provides that information does not have to be disclosed to the market if each of the following limbs is satisfied:
- Firstly, one or more of the following applies:
- it would be a breach of a law to disclose the information
- the information concerns an incomplete proposal or negotiation
- the information comprises matters of supposition or is insufficiently definite to warrant disclosure
- the information is generated for the internal management purposes of the entity, or
- the information is a trade secret.
- Secondly, the information is confidential (or secret) and ASX has not formed a view that the information has ceased to be confidential.
- Thirdly, a reasonable person would not expect the information to be disclosed.
Safe harbour protection will be enlivened when directors take steps to develop one or more courses of action that are reasonably likely to lead to a better outcome for the company.
How does safe harbour interact with continuous disclosure?
The safe harbour regime does not require the directors to make a positive declaration of reliance; rather it provides a veil of immunity from insolvent trading laws where it can be proven that the directors took reasonable steps to secure a better outcome for a company.
The Explanatory Memorandum to the safe harbour bill provides that:
‘…safe harbour does not affect any obligation of a company (or any of its officers) to comply with its continuous disclosure obligations under the law, including under section 674 of the [Corporations] Act…5
Safe harbour protection will be enlivened when directors take steps to develop one or more courses of action that are reasonably likely to lead to a better outcome for the company. Safe harbour may include taking advice from various experts or developing strategies for restructuring the company to improve its overall financial position. At this time, provided the ASX Listing Rules exception to disclosure can be satisfied (for example, if information is insufficiently definite to warrant disclosure or generated for internal management purposes) the directors may reasonably determine that disclosure of these actions is not required.
This position would likely change once a restructure plan had been agreed as it is information that would have a ‘material effect’ on the price or value of the entity’s securities and the exception would no longer be available. Disclosure of the restructure plan would therefore be required at that time.
Where to from here?
Parliament expressly intended that the continuous disclosure obligations and safe harbour would co-exist. It did not however, go as far as requiring companies to give specific notice of when they are in safe harbour, leading to some confusion about how the two regimes will interact.
Ultimately, a case-by-case analysis of the company’s circumstances must inform the directors’ decision whether to disclose their reliance on safe harbour. In late 2017, an ASX company announced that it and its directors had adopted safe harbour status to the extent available under those provisions. In this instance, the directors clearly determined that the company’s circumstances warranted such disclosure.
We understand that ASX is currently drafting additional guidance for Guidance Note 8 regarding the ramifications of continuous disclosure in the context of the safe harbour provisions. Ahead of this guidance from ASX, we recommend that legal advice about the application of the continuous disclosure regime should form part of the advice sought by directors when they are considering entering safe harbour.