Alan Kohler
Continuous dysfunction
In times of stress like these, continuous disclosure is both more important than usual and more dangerous.
There are at least three situations where the market has obviously been uninformed – Centro, Allco and Macquarie’s Fortress funds – but where continuous information might have been even worse.
It’s now a month since Centro’s last update, and correspondence to Business Spectator’s Conversation pages from Centro shareholders has been running hot, as they complain about the fact that the shares have kept trading in a vacuum.
This morning trading in Centro was suspended pending an announcement, so judgement will also have to be suspended about the company’s behaviour until we know what has been achieved.
Meanwhile the Allco situation has become a farce, although at least the stock is not trading now.
It has been reported this week that the banks have appointed Ferrier Hodgson to investigate and watch over what’s happening and the board itself has appointed Korda Mentha to do the same thing.
And this morning the Financial Review reports that 10 buyers are looking at “all or part of the company” and that it’s trying to get out of the acquisition of a $US1.5 billion portfolio of US power stations. Seems like a good idea, in the circumstances.
Allco was queried by the ASX on January 21 and responded that it wasn’t “aware of any information that has not been announced which could be an explanation for the recent trading in the securities in AFG”.
The stock then traded until February 11, when it was put in a trading halt pending an announcement, then two days later it was suspended. Still no information.
The problem with Macquarie’s Fortress fund is it borrowed to pay distributions in the second half of last year when it must have been clear to the management that life had probably changed permanently.
Stephen Mayne suggests in his Mayne Report today that this may have had something to do with the fact that the 0.9 per cent fee is contingent on distributions being made.
Whatever the reason, investors in Fortress were lulled, and have now been hit with the sudden loss of 90 per cent of their money, a disaster made worse by the previous pretence that things were okay.
It seems to me the problem with Listing Rule 3.1, which requires continuous disclosure, is that its use of the word “reasonable” is circular and that the rule itself is, in effect, optional.
The rule says: “Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell the ASX that information.”
However the first exception to the rule is as follows: “A reasonable person would not expect the information to be disclosed.” I’ll see your reasonable person, and raise it with my more reasonable person.
The second exception is when “the information is confidential”.
Another exception is when “the information concerns an incomplete proposal or negotiation”.
All of which seems perfectly reasonable, as far as it goes. But the effect is to make continuous disclosure more or less optional. Anything can be confidential or incomplete, and what a reasonable person may or may not expect is entirely up for grabs – especially in times of financial stress.
Yesterday the CEO of the ASX, Robert Elstone, responded to suggestions that he had let Tricom off lightly by not putting the firm into default as soon as it failed to settle a large trade last month, by saying: “...had we done so it probably would have set off a far more cataclysmic set of consequences and events.”
Quite so. And the question of when a company in distress should confess its sins is similarly vexed.
There are no simple answers to this. Investors have shown by their treatment of companies that miss profit forecasts by a bit what they would do to company that suddenly disclosed it was having trouble making debt rollovers, or had defaulted on covenants.
On the other hand, this is when continuous disclosure actually means something – when investors need to be protected from expensive mistakes that could have been avoided had they known what the ASX tells them that they will know.
It is, after all, a basic deal: people trade on the stock exchange on the explicit understanding that they won’t be trading in the dark. Times like this are when that really matters.
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