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In 2015, Alexandre Alexander, Kimberley Diamonds’ former chief executive, was charged with four offences relating to false and misleading statements under the Corporations Act 2001 (Cth) (Corporations Act). The conduct relates to his statements regarding Kimberley Diamonds’ future earnings forecast and his failure to disclose earnings to the Australian Stock Exchange (ASX). As a result, Mr Alexander was charged with four counts of making false and misleading statements to the ASX. Each offence carries a maximum penalty of five years jail time and a possible $34,000 fine.

This article explores your obligation to disclose your business’ earnings to the ASX and possible consequences for failing to do so.

What Went Wrong?

Allegedly, statements made on Kimberley Diamonds’ behalf to the ASX, were false and misleading. Likewise, Alexander authorised these statements. Indeed, Kimberley Diamonds commercial-in-confidence negotiations with Tiffany & Co anticipated a 30% increase in the value of its rare yellow diamonds. However, Kimberley Diamonds’ statements failed to disclose any basis for its earnings forecast.

What Continuous Disclosure Does ASX Require?

Under the ASX continuous disclosure rules, once an entity becomes aware of any information that a reasonable person would expect to have a real impact on the price or the value of the entity’s securities, the entity must immediately notify the ASX.

The continuous disclosure obligation is significant in respect of an entity’s periodic disclosure obligations regarding earnings.  Under the continuous disclosure rules, entities must promptly disclose additional facts or circumstances that may have a material effect on their earnings guidance, beyond the periodic disclosure regime.

What Are the Exceptions?

In certain circumstances, the ASX continuous disclosure rules permit an entity to keep a deal confidential, including while it is still uncertain. This is a necessary exception to the ASX continuous disclosure rules. In its absence, the market could not confidently operate if entities were required to disclose speculative and uncertain deals. 

However, an entity must disclose a transaction if it forms the basis of its earnings forecast.

Include Detailed Assumptions

An entity needs to set out the facts on which it bases its forward-looking statements. This includes detailed assumptions and any earnings forecast in an entity’s forward-looking statements. Such information may assist potential investors in considering any risks going forward.

Do Not Base Forward-Looking Statements on Uncertain Events

Alternatively, entities should not base forward-looking statements on uncertain events. Business owners need to check their financial statements carefully. Accordingly, they should do this task with their chief financial officer and accountant. This can provide owners with a complete understanding of the basis of their reports and set out the reasoning behind any assumptions. It is prudent to base earnings forecasts and other forward-looking statements on sufficiently certain events.

Earnings Surprises

It may be the case where an entity provides forward-looking statements or earnings guidance. Alternatively, in some circumstances, an entity may not provide any earnings guidance. In that case, it must ensure continuous disclosure in respect of the market’s expectations relative to these disclosures.

Generally, entity’s must disclose circumstances in which their actual earnings for a reporting period materially differ from the market’s expectations of its earnings. They must do so as soon as the entity becomes aware of the discrepancy.  These circumstances are known as earnings surprises. Business owners require disclosure if the entity’s actual earnings deviate from the market’s expectation of its earnings by between 5% and more than 10%. Alternatively, disclosure is required where an entity has not disclosed earnings guidance, a 15% or more deviation from its best estimate of the market’s expectations.  

How Can Entities Protect Themselves?

In addition, business owners should discuss their statements with internal and external financial advisors. Likewise, it is best practice for entities to engage a lawyer for a second opinion. A well-advised entity can obtain advice from a lawyer with capital market expertise.

Key Takeaways

Entities have significant disclosure obligations and must maintain a dynamic approach to earnings disclosures. This ensures they satisfy their continuous disclosure obligations. Likewise, entities must be particularly wary of forward-looking statements or earnings forecasts. In addition, they must proactively and promptly disclose information to the ASX. For example, changes in the assumptions which underpin such statements if the effect of such changes is material. 

As the Kimberley Diamonds case demonstrates, the consequences for failing to satisfy the continuous disclosure obligations can be quite severe. For more information on your obligation to disclose earnings and other directors’ duties, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What are my disclosure obligations to the ASX?

Entities must proactively and promptly disclose additional facts or circumstances that may have a material effect on their earnings guidance, beyond the periodic disclosure regime.

What are the consequences of failing my disclosure obligations?

From the Kimberley Diamonds case, the consequences for failing to satisfy the continuous disclosure obligations can be quite severe. For example, making false and misleading statements to the ASX carries a maximum penalty of five years jail time and a possible $34,000 fine.


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