Continuous disclosure under the microscope in FMA-Wynyard investigation
The FMA has published its investigation into Wynyard Group Limited’s compliance with continuous disclosure. The key findings are that:
- no individuals contravened the Financial Markets Conduct Act 2013 (FMC Act);
- but the FMA considers Wynyard may have contravened its continuous disclosure obligations.
The FMA has decided not to pursue enforcement against Wynyard as it is now in liquidation and the FMA also considers that there is no reasonable prospect of success against the directors. A link to the Report is available here.
Following Wynyard’s failure, the FMA and NZX undertook an investigation into the conduct of the company and its directors leading up to the company’s failure. The key issues were:
- what information was available to Wynyard during 2016 and whether any of this information was material; and
- whether material information was released immediately upon Wynyard becoming aware of it.
- Wynyard did not sufficiently engage with its disclosure obligations and failed to proactively anticipate the information needs of the market;
- while Wynyard adopted formal board processes around disclosure (some of which aligned with best practice), the contemporaneous board minutes did not reflect the level of discussion on disclosure issues which the FMA was told did occur; and
- Wynyard’s difficult financial position had significantly lowered the threshold for materiality meaning that incremental change could now have strategic importance.
In particular, there was no evidence to suggest that the decision to place the company into voluntary administration was unreasonable, but given Wynyard’s previous disclosures, the decision came as a surprise to the market. While the market was aware that Wynyard was in financial difficulty, there was limited understanding that the company’s issues were so acute.
The statement to the market that Wynyard “expected to be cash positive at year end” was important in providing the market with confidence that it had a reasonable period of time to secure a large government contract or bring in capital from an asset sale. The “Skipton Facility” appeared available to bridge any potential gap between achieving that asset sale or obtaining a government contract.
In the meantime, a revised forecast had been presented to the board which showed that there were delays to several items in Wynyard’s revenue pipeline. There was also no meaningful progress on other options such as asset sales or obtaining a government contract. This revised forecast also showed that the forecast cash position had worsened by $3.2 million. In addition, the board now considered that it was likely that it would need to draw down on the Skipton facility (a change from the previous forecast). The FMA concluded that this was material information which would have had a material effect on the share price and none of the exceptions to disclosure applied. As such, when the board decided not to release this information, the FMA considered that it may have failed to comply with its continuous disclosure.
The FMA considered whether the directors could be liable as accessories for contravention of the continuous disclosure obligations. The FMA noted that this requires actual knowledge that the information was material and was not generally available to the market. The FMA concluded that it would be challenging to establish this evidence to the required standard.
Recommendations from the FMA
- The board must apply an “enquiring mind” to information received from management. This is of particular relevance to early stage issuers who have limited track record and high-growth aspirations.
- Minutes should adequately reflect the debate that has occurred about continuous disclosure. Although directors of Wynyard said that detailed continuous disclosure discussions did occur, there was no support for this in the minutes.
- Early stage issuers should provide appropriate context to the market including at times considering a range of potential scenarios which sit behind the guidance.
- Loss-making issuers need to manage cash runway proactively. If cash runway is narrow, the information needs of the market are likely to change with heightened needs to engage with investors to avoid surprises.
The FMA’s conclusions are likely to result in boards having more in-depth continuous disclosure discussions fully recorded in the minutes. A stock standard phrase about continuous disclosure obligations “having been considered” may no longer be sufficient to evidence compliance.
This new guidance also needs to be considered in the context of the new Listing Rules which require disclosure of material information that a director or senior manager “ought to have known”. This means that boards should be looking afresh at how they assess their continuous disclosure obligations and decisions in that regard.
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