Although trading halts give companies more time to assess issues and inform the market, they also risk damaging company valuations, making markets less efficient and frustrating investors.
News reports this week suggest growing concern among leading companies about the use of trading halts.
Some perspective is needed. InvestorWeekly’s analysis of ASX market data shows no discernible rise in the use of trading halts, despite growth in company listings and higher market volatility.
There were an average 110 trading halts per month in 2009/2010; 111 per month in 2010/2011; and just under 100 per month for most of 2011/2012. There has not been a significant rise in trading halts so far this year, based on ASX statistics.
The volume of company announcements on the ASX has also been steady. These averaged 9,818 per month in 2009/2010; 10,524 per month in 2010/2011; and 10,466 per month for most of 2011/2012.
Concerns that listed companies will have to announce more information to the market, and ask ASX to suspend their stocks more frequently – to assess information or market rumours – are not supported by the data.
But super funds need to watch this issue closely. Right or wrong, the market tends to view trading halts negatively because of fears a company will have surprise bad news. Also, the suspension of trading, often for several days, can frustrate investors who want to trade the security and value its liquidity.
Another risk is companies going into a trading halt, assessing information, releasing no announcement and trading again, in turn confusing the market and damaging share prices.
Trading halts also create greater compliance costs for companies, yet more seem likely in coming years as organisations wrestle with complex continuous disclosure challenges and the rising risk of shareholder class actions.
The ASX believes trading suspensions give companies more opportunity to assess information and market rumours, and to decide whether to inform the market. Clearly, trading halts have their place, in the right circumstances, and nobody could argue against the benefits of the marketing being better informed.
In theory, suspending trading reduces the risk of a continuous disclosure breach and the potential magnitude of a shareholder class action against a company, of which there have been more in recent years. But surely part of the answer is to make continuous disclosure laws more practical for listed companies, and to reform litigation funding to ensure only cases with genuine class actions are funded and pursued.
The core issue is the Australian Securities and Investments Commission’s (ASIC’s) interpretation of when information should be disclosed. ASX Listing Rule 3.1 states that, “Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on price or value of the entity’s securities, the entity must immediately tell ASX that information.”
Exceptions to the rule include cases in which a reasonable person would not expect disclosure; where information is confidential; and one of five exception categories around certain types of disclosure situations.
ASIC has a rigid interpretation of ‘immediately’ – “immediately means immediately”, the Commission says. The Australian Institute of Company Directors (AICD) believes listed companies should be able to release information as soon as practicable rather than immediately, to give companies and boards time to assess information before deciding whether to disclose, without going straight for a trading halt.
AICD said in its submission on ASX Listing Rules Draft Guidance Note 8, “While the trading halt mechanism has a useful place in the continuous disclosure regime, there are occasions where the trading halt mechanism will not be helpful in assisting an entity to comply with its continuous disclosure obligations.
“Promptly and without delay is a more pragmatic test than some other interpretations of immediately . we recommend the ASX and ASIC give further consideration to Listing Rule 3.1 being reframed with an ‘as soon as reasonably practicable’ or ‘promptly and without unreasonable delay’ standard.”
As reported in Company Director magazine, the requirement to release information immediately can frustrate boards that deal with practical organisational challenges, such as material issues sometimes taking time before they are brought to the chief executive’s attention and then the board’s; the challenge of boards having to assess significant information between board meetings; and the need for boards to test management assumptions with certain information, and in some cases seek independent verification and quantification of data.
Tony Featherstone is a former managing editor of BRW and Shares magazine and a columnist for Company Director magazine.
