Upcoming Mallesons seminarsListed entities, investment banks and other advisers handling confidential information, primarily in the context of capital raisings and mergers and acquisitions.
What do you need to do?Consider ASIC's proposed reforms, and contact us if you wish to discuss possible responses to the consultation paper.
Shannon Finch
Partner
David Friedlander
Partner
Shannon Finch
Partner
T +61 2 9296 2497
David Friedlander
Partner
T +61 2 9296 2444
Sydney
Evie Bruce
David Eliakim
Shannon Finch
David Friedlander
John Sullivan
Melbourne
Jonathan Hamer
Alison Lansley
Stephen Minns
ASIC has released its much awaited Consultation Paper 128 on Handling Confidential Information (CP 128) and draft Regulatory Guide.
ASIC is concerned about the leakage of price-sensitive confidential information about transactions prior to announcement to the market.
The Paper and draft Regulatory Guide set out proposals for best practice guidelines on the handling of confidential information by entities and their advisers so they can benchmark their practices and strengthen their controls and procedures.
The proposals would add significant burdens on entities and their advisers, and minimise the number of personnel aware of transactions. If all of these proposals survive the consultation process, there will be a profound change in the internal administration of capital raising and M&A transactions within corporate Australia.
ASIC has also sought to provide guidance on how, and the circumstances in which, confidential information may be communicated to potential investors through market soundings. It consulted widely during 2009 on this topic. During that period, many of our clients were concerned that ASIC may move to prevent soundings. As we predicted, ASIC has accepted the importance of soundings in capital raising and other contexts. It has, however, proposed for comment additional integrity measures to the sounding process in the Paper.
Confidential soundings
ASIC has indicated that market soundings should be undertaken in accordance with formal procedures and in a carefully controlled manner to ensure there is no leak of price-sensitive confidential information. In particular, ASIC proposes that the following procedures should be followed:
- soundings should involve a formal process that is well understood by the issuing entity, its investment banks and the institutions involved;
- soundings should be undertaken when the market is closed or the particular stock is in a trading halt;
- only a limited number of parties should be sounded;
- individual bankers conducting the soundings should have a formal script, which gives the institution an opportunity to decline to be made an “insider” before any confidential information is disclosed;
- written confirmation (eg by exchange of emails) should be obtained, before disclosure, that institutions will comply with insider trading restrictions and keep information confidential - this is more cumbersome than current practices adopted by some investment banks, although ASIC suggests that in exceptional circumstances the initial agreement may be verbal, with subsequent written confirmation; and
- the investment bank should keep records of all contact with the institutions it has sounded and must notify ASIC within 48 hours of the sounding - this will prove to be one of the most controversial parts of the proposal.
ASIC has confirmed that details of a capital raising should never be provided to the market or the press before being released to ASX, regardless or whether the entities’ securities remain subject to a trading halt.
Soundings of existing shareholders in an M&A transaction would follow a similar process.
Entities’ handling of confidential information
ASIC proposes that the following practices should be followed:
- the number of people with access to confidential information should be limited to the maximum extent possible and entities should maintain a register of all people, including any advisers, who are insiders on sensitive transactions;
- entities should consider implementing certain information barriers, document and IT controls, and conduct regular internal training;
- appropriate confidentiality obligations and securities trading restrictions should be incorporated into employment contracts and where appropriate, individuals involved in highly sensitive transactions should be required to sign individual confidentiality agreements;
- entities should have documented policies restricting an employee from trading in the entity’s financial products in a personal capacity where that employee has confidential price-sensitive information; and
- where there is a leak or suspected leak of confidential information, a formal leak investigation should be considered.
Release of confidential information to third parties
When releasing confidential information to third parties, ASIC proposes that the following practices should be followed:
- at a minimum, entities should require third parties involved in price-sensitive confidential transactions to comply with the entity’s confidentiality policies and procedures;
- entities who actively participate in M&A transactions or capital raisings should consider setting up umbrella agreements relating to the general principles an adviser must adhere to when undertaking work for the entity, including in relation to the handling of confidential information; and
- advisers should be required to sign confidentiality agreements for specific transactions, including before the release of confidential information during a “beauty parade” to select advisers.
Entities should require that their advisers and other service providers have appropriate systems in place to protect the entity’s confidential information. CP 128 includes best practice guidelines for advisers’ and third parties’ handling of an entity’s confidential information (which largely mirror the above).
ASIC consultation and timeframe for responses
ASIC is seeking feedback and comment on the financial and other impacts involved with its proposals and any alternative approaches, including whether best practice guidelines are the appropriate mechanism through which to raise the standard of handling confidential information.
Submissions on CP 128 are due by 21 February 2010, with the final regulatory guide expected to be released in April 2010.
The Mallesons equity capital markets and M&A team will be involved in providing submissions in response to CP 128, and would welcome your views.