Company Disclosures About Businesses

Overview

Share Pledge Disclosures

In 2008 and 2009, Asian shareowners witnessed a number of cases of dramatic share price declines in companies where controlling shareowners and directors had pledged their shares to banks for margin loans. In some of these cases, pledged shares were forcibly sold in order to meet margin calls, producing large share-price declines, and at times resulting in a change in control of the company. The disclosure of margin loans to and shares pledged by directors and major shareholders and by the parties providing the loans is one area where disclosure requirements vary across the different jurisdictions in the Asia-Pacific region. 

Ongoing Disclosures

Companies have ongoing obligations to disclose in a timely manner information that investors would weigh in making informed investment decisions, including events that pertain to the dynamics of a company or otherwise have the potential to affect share value. This information should be made readily accessible to the investing public.

CFA Institute Viewpoint

Disclosure of Pledged Shares

  • Position: Market regulations should require directors and controlling shareowners of publicly-listed companies to disclose that they have pledged some or all of their shares as collateral for loans on an “event basis.”
  • Rationale: Shares pledged for loans can pose substantial risks to investors if they are not aware that shares owned by controlling shareowners are attached to personal debt covenants. The threshold should be some proportion of the number of shares pledged over the total issued shares. A low threshold of, for example, one percent may be too burdensome for companies in terms of compliance requirements, and investors may not consider this information to impact share price significantly. Therefore, the threshold for disclosure should be between three and five percent.

Privacy of Margin Call Triggers on Pledged Shares

  • Position: Individuals with pledged shares should not have to disclose price triggers for margin calls on their loans.
  • Rationale: Such details are private in nature. Disclosure of such information could make the borrower vulnerable to actions from other investors.

Notification of Unreliable Financial Statements

  • Position: Companies should make timely disclosures of any decision of the audit committee, board of directors, or management that any of the company’s previously issued financial statements are no longer reliable.
  • Rationale: This information will affect the valuations that investors place on a company’s securities, and should be disclosed immediately. 

Material Agreements

  • Position: Companies should have to file a copy of any letter of intent and other non-binding agreement in a formal report to investors and regulators without exception, and should provide updates on termination/completion of such agreements.
  • Rationale: Material contracts such as letters of intent to sell or acquire assets could affect the risk/reward dynamics of a company and therefore are of interest to shareowners. Disclosures would include when actual transfer of assets occurs, and any important changes to the agreement from its original form. 

Creation of Financial Obligation or Contingency

  • Position: Companies should disclose whenever they or third parties enter into transactions or agreements that create any material direct or contingent financial obligation for the company. 
  • Rationale: Creation of a financial obligation or contingency could impair the ability of the company to generate future cash flow and, consequently, could impair shareowner value. 

Company Debt Covenants

  • Position: Companies should disclose relevant debt covenant information about company debts to the market.
  • Rationale: This type of information will help investors make better-informed investment decisions. Information about company debt covenants will give investors a clearer picture of the potential risk factors in their investments resulting from potential debt defaults. Each market jurisdiction should decide what additional information should be part of any regulatory requirements. 

Disclosing Material Write-Offs or Charges

Position: Companies should have to disclose in a timely manner any material write-off or impairment, restructuring charge, or exit activity, including:

  • The date of the event
  • Description of the course of action taken
  • Reasons for the write-offs or charges
  • Description of the subject assets
  • Estimates of the amount and portion incurred in cash
  • Analysis of the effect on the company and the applicable segment
  • Updates for any material changes in previously disclosed information

Rationale: Investors can use these disclosures to determine the ultimate effect of the write-offs, charges, or impairments on their company’s ability to generate cash flow in the future. 

Notification of Pending Debt Rating Action

  • Position: Companies should have to immediately disclose to the market when they are notified by a rating agency of any initiation, withdrawal, or change in credit rating, including guaranteed or contingent obligations.

    Rationale:
    A credit downgrade can affect not only the price of a company’s debt securities, but also the value of its equity securities. 

Referenced Documents

Position: Companies should have to disclose in a timely manner any material write-off or impairment, restructuring charge, or exit activity, including:

  • The date of the event
  • Description of the course of action taken
  • Reasons for the write-offs or charges
  • Description of the subject assets
  • Estimates of the amount and portion incurred in cash
  • Analysis of the effect on the company and the applicable segment
  • Updates for any material changes in previously disclosed information

Rationale: Investors can use these disclosures to determine the ultimate effect of the write-offs, charges, or impairments on their company’s ability to generate cash flow in the future. 

Dissemination of Company Reports

  • Position: Listed companies should post required company disclosures in a central regulatory information repository and on the companies’ websites, and make the information available in a timely manner to any current or potential investor free of charge.

    Rationale: Such disclosures permit well-informed decision-making. The benefits of disclosure should be weighed against the costs of gathering and reporting such information and of competitive disadvantage from reporting such information. 

 

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