Insights / August 16th, 2016

Listed companies – think twice before announcing a Memorandum of Understanding ("MOU")

ASX has recently warned listed companies that they cannot expect to keep secret the names of counterparties to material transactions disclosed to ASX.

ASX’s view is that, generally speaking, the name of a counterparty to a transaction is materially price sensitive. This includes a counterparty under a non-binding MOU or term sheet that is announced to ASX.

This means that a company cannot partially rely on the exceptions to continuous disclosure for discrete information if it announces an MOU to ASX. If the company chooses to disclose, then it must be prepared to disclose every term or run the risk of having its securities suspended from quotation.

Does entry into an MOU require announcement?

A non-binding MOU that:

  • reflects an incomplete proposal or negotiation which remains confidential; or
  • is not materially price sensitive,

is not required to be announced under the company’s ASX Listing Rules continuous disclosure obligations.

Listed companies may choose to announce entry into an MOU even though there is no legal obligation to do so. In practice, the announcement of an MOU may serve as a marketing tool for the company to show shareholders and the market that there is third party interest in its business and projects.

When making such an announcement, it may be commercially beneficial for the company to omit the name of the counterparty, or it may be under a confidentiality obligation not to disclose. The company may be concerned that naming the counterparty will result in competitors seeking to disrupt the proposed transaction or attempt to initiate a relationship with that counterparty. However, listed companies should be aware that if they choose to announce the MOU, then ASX is likely to take the view that all key details of the MOU should be disclosed.

What does ASX expect an announcement to include?

ASX has advised that it considers that if a transaction is sufficiently material to warrant disclosure under Listing Rule 3.1, the identity of the other party or parties will generally itself be material information that must be disclosed under that rule. Such information is required by investors and their professional advisors to understand the ramifications of the transaction and assess its impact on the price or value of the company’s securities.

What will ASX do if a counterparty is not named?

According to ASX, it has recently identified a number of instances where listed companies have announced a material transaction without disclosing the identity of the other party or parties to the transaction. The transactions have included binding and non-binding terms sheets or MOUs for acquisitions or disposals of assets, off-take agreements, distribution agreements, strategic investments and financing arrangements.

ASX has said if it finds instances where a listed company has not disclosed an appropriate level of information about the other party or parties to a material transaction, ASX will not hesitate to suspend trading in the company’s securities until the information has been released to the market.

What should you do?

Listed companies should carefully weigh up the pros and cons of announcing entry into an MOU if it is not required to under the Listing Rules, with the knowledge that if it does announce, then it must disclose all of the key terms of the MOU.

Parties dealing with a listed company on an MOU should discuss whether the listed company is required to announce entry into an MOU under the Listing Rules, and if not, whether it intends to voluntarily announce.

Please contact us if you are considering announcing an MOU or term sheet to ASX, or would like any further information on ASX’s interpretation of the Listing Rules generally.