23 September 2020 by , and Corporate & Commercial Alert

The JSE issues further guidance on disclosure obligations

As discussed in our previous Alert, the COVID–19 pandemic has had an impact on reporting obligations for listed entities. As a result, the JSE has reminded sponsors and designated advisors of their continuing disclosure obligations amidst the pandemic. On 10 September 2020, the JSE issued a further letter (JSE Letter) pertaining to communication with investors and the continuing obligation to disclose information when issuers embark on capital raisings. Now, more than ever, it is important that investors are provided with clear and transparent information in order to promote certainty and to counter volatility in share prices.

Under the general disclosure principles contained in paragraph 8 of the JSE Listings Requirements (Requirements), issuers must provide full information of activities that are price sensitive, ensure adequate opportunity to consider this information, ensure equal treatment for all shareholders, and ensure that the Requirements promote investor confidence in standards of disclosure. When raising capital, issuers should bear in mind the following focus areas:

Business insights

Given the uncertainty introduced by the pandemic, it is important that investors are provided with information which provides insight into the potential impact on the cash flow of issuers.

Issuers must provide a forward-looking assessment which includes a discussion of the following factors: (i) the impact the pandemic may have on demand for the issuer’s product or services, (ii) the impact on supply chain deliverables, and (iii) any other pandemic-related business issues which issuers are experiencing. The issuer must also provide its investors with insight into its future cash flow position, which should take into account factors such as debt covenant triggers, the proximity of the issuer breaching debt covenant triggers, and the board’s view of debt levels and how any potential breach of debt covenant triggers can be addressed.

An issuer should also provide a narrative account which considers the impact of the factors above on its income statement, balance sheet and cash flows. These business insights should be provided in terms of the issuer’s continuing obligations and in the context of any new corporate action.

Financial reporting obligations under IFRS

The JSE Letter reiterates the importance of presenting a statement of cash flow which complies with International Accounting Standard 7, that is, investors should be provided with detailed information which will allow investors to understand the future liquidity obligations of an issuer.

Specific disclosures in statements and circulars

Paragraph 7 of the Requirements sets out information which must be included in pre-listing statements and circulars relating to rights offers, capitalisation issues and Category 1 transactions. When providing disclosures in circulars pertaining to the description of the business, the prospects of the company, and the use of funds, the business insights above should be included.

The JSE warns issuers against using vague and generic language and suggests that a short paragraph will not be enough to comply with the Requirements. When disclosing the business activities and the prospects of success of the business, the issuer should address both the past and future impact that the pandemic has had or will have. When raising capital, issuers should provide a detailed explanation of the intended use of the funds and the objects that the issuer hopes to achieve. Sponsors and designated advisors are reminded to provide comprehensive and detailed disclosures in order for investors to be in a position to make informed decisions.

Frequency of reporting

The JSE suggests that more frequent and detailed communication to the market will benefit transparent price information. The JSE Letter discusses quarterly reporting, which is not mandatory. However the JSE suggests that more frequent updates, published together with a trading statement, may better assist success in capital raisings.

Trading statement obligations

In terms of paragraph 3.4(b) of the Requirements, issuers must publish a trading statement when a reasonable degree of certainty exists that the financial results for the period to be reported on next will differ by at least 20% from (i) the financial results for the previous corresponding period, or (ii) a profit forecast previously provided to the market in relation to such period. Trading statements must provide specific guidance by including comparative numbers which must take the form of (i) a specific number and percentage to describe the difference, (ii) a range of percentages and numbers to describe the difference, or (iii) a minimum percentage difference and number difference, together with any other relevant information that the issuer has at its disposal at the time. Issuers are reminded that the reference to 20% is the trigger for a trading statement. Therefore, issuers must advise the market of the actual minimum percentage change in earning and headline earnings which they anticipate and not solely refer to the 20%. If issuers publish a minimum percentage, issuers must provide an update to the market as soon as more certainty exists as to the actual percentage or by providing a range to describe the differences.

Additional disclosures for capital raising

Investors have indicated that more information will be of great assistance in deciding whether to inject further capital into an issuer. The JSE therefore requests that the following be included in any capital raising documents, for the foreseeable future (at least the next 12 months):

  • paragraph 7.A.15 of the Requirements (details of material loans);
  • paragraph 7.F.7 of the Requirements (material risks) specifically in the context of risks that impact cashflows; and
  • the information discussed in the business insights paragraph above.

Rights offer timetables

The JSE notes that concerns have been raised about the negative impact of delays the rights offer timetables brought between the announcement of the intention to embark on a capital raising exercise and the provision of the key terms of a rights offer including the (i) total amount to be raised, (ii) the pricing mechanism / formula to apply, and (iii) the actual price. These delays can lead to price volatility.

In order to reduce the concerns, issuers are encouraged to implement the following mechanisms:

  • strict internal controls around the flow of information so that issuers are not forced to make an early intention announcement when they have not finalised the key terms;
  • as short a period as possible between the intention announcement and the formal declaration date in terms of the JSE corporate actions timetables;
  • disclosure of all of the key terms as soon as possible, and if it is not possible to disclose all of the key terms, disclosure of those key terms that are known;
  • disclosure of the identity of any intended underwriters to the rights offer; and
  • disclosure of the business insights as soon as possible.

Underwriting

The JSE requires full transparency with regard to the identity of all underwriters, sub-underwriters and shareholders who have provided irrevocable undertakings together with the fee structure applicable to each of these parties. The disclosure must include details of (i) whether the fee is payable on the entire rights offer or only the portion for which irrevocable undertakings were not provided by the shareholders, and (ii) the amount payable to each party, expressed as both a rand amount and a percentage of the amount being underwritten (Market Related Disclosures). Fees paid to shareholders must be market related.

The JSE notes that the Market Related Disclosures strictly speaking only apply when the underwriter is a shareholder. However, the JSE now requires that this information be disclosed in all circumstances regardless of whether the underwriter is a shareholder. The Market Related Disclosures must also be provided when there is a commitment fee payable for providing an irrevocable undertaking.

Furthermore, issuers are required to include a narrative, explaining why they believe the fee is market related, taking into account the nature of the service. If the fee is being paid to a related party, the issuer must explain the governance process applied to the negotiation process. These disclosures are to be provided for underwriting, sub-underwriting and commitment fees.

Governance

While the content and timing of disclosures are important, issuers are reminded to apply the highest level of corporate governance to their processes and capital raising exercises. Investors should be treated fairly in terms of access to information and price sensitive information must be disclosed in accordance with the Requirements.

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