In certain situations, Swiss listed companies are required to inform the market about expected changes of their financial results. In its completely revised Commentary on the Directive on Ad hoc Publicity, SIX Exchange Regulation included a more detailed disclosure regime applicable if market expectations deviate from actually expected results. The article discusses the regime and how it affects Swiss listed companies.

By Jakob Höhn (Reference: CapLaw-2012-15)

1) Disclosure of potentially price-sensitive information (ad hoc publicity)

A company whose securities are listed on the SIX Swiss Exchange is required to disclose potentially price-sensitive facts (so called ad hoc publicity). It must inform the market of any price-sensitive facts which have arisen in its sphere of activity, and in exceptional cases, also facts outside the company’s sphere (DAH Commentary N 41). Price-sensitive facts are facts which are capable of triggering a significant change in market prices. If a company becomes aware of a potentially price-sensitive fact, it must inform the market without delay. Disclosure must be made in order to ensure the equal treatment of all market participants.

Companies subject to the disclosure requirements can obtain guidance as to the scope of their disclosure obligation from the Listing Rules (LR), the Directive on Ad hoc Publicity (DAH) and the Commentary on the Directive on Ad hoc Publicity (DAH Commentary) issued by SIX Exchange Regulation as well as from decisions by the Sanction Commission of the SIX Swiss Exchange. The DAH Commentary has been completely revised as of 1 November 2011. It includes a more detailed regime regarding the disclosure in connection with profit warnings, profit collapses and profit hikes.

2) Noteworthy and significant deviations from market expectations

a) Relevant market expectations concerning financial results and other driving factors

The LR and the DAH do not provide an exhaustive list of potentially price-sensitive facts. Concerning financial results, the DAH Commentary distinguishes between profit warnings and profit collapses. With a profit warning a company informs the market that it will not meet the expectations it caused itself with its statements. With the announcement of a profit collapse a company informs the market that its figures will be significantly lower than those in the prior year. Of course, these notification requirements do not only apply in case of bad news but also in case of good news. Relevant is only that the news are either not in line with the guidance given by the company or with prior years. While the DAH Commentary refers mainly to the changes in business performance when discussing a company’s duty to change market expectations, it is likely that the same principles apply also to other key figures that are driving factors for the share price. For instance, if a social media company raises expectations regarding the increase in MAUs (monthly active users) and DAUs (daily active users) and these figures are key factors for the performance of the share price, then noteworthy deviations from the expectations raised by the social media company or significant deviations from expectations raised by prior year figures require the company to inform the market.

b) Profit warnings: the correction of expectations raised by the company itself

A company must inform the market about foreseeable changes in profits or losses, if it has provided guidance to the market and the expectations raised by the guidance can no longer be met. It is sufficient that the change is noteworthy and that the company has provided guidance to the market. On the other hand, a company that has not raised any expectations is never required to issue a profit warning (DAH Commentary N 80). However, it has to review whether the information of the market is required under the regime applicable to profit collapses or profit hikes.

c) Profit collapses: the correction of expectations based on prior years

Even if a company has not provided any guidance in respect of its earnings, it may be obligated to disclose changes in earnings. It is assumed that the market comes up with earnings expectations based on prior years. Accordingly, the company is obligated to correct such market expectations, if it becomes apparent that they cannot be met. If earnings deviate significantly from previous years, the company is required to inform the market even though it has not provided any guidance. The DAH Commentary refers to expectations raised by the figures of the prior year. Thus, it can be assumed that market expectations raised by previous quarters or half year figures are normally irrelevant.

d) The standard to measure deviation: noteworthy or significant

The LR and the DAH do not provide any clear guidance on when a deviation from the market expectation shall be deemed “noteworthy” or “significant”. It is only clear that a “significant” deviation is a bigger deviation than a “noteworthy” deviation (DAH Commentary N 82). But since the two standards are used to determine when a disclosure of price-sensitive information must be made, it is clear that each category of deviation must be price-sensitive and that the general principles to determine price-sensitivity apply. This means that it is not possible to schematically refer to threshold values or percentages (DAH Commentary N 89). Rather, one must determine whether a deviation is noteworthy or significant in each individual case (DAH Commentary N 90). In particular, the “noteworthy” standard depends on the guidance provided by the company itself. If the company provided detailed earnings guidance, the “noteworthy” threshold is reached much faster than if the company only reluctantly provided some general guidance. If precise guidance was given, then a change is noteworthy even if it is not so significant (DAH Commentary N 77). On the other hand, if the company did not provide any guidance at all, it should not be easily forced to provide guidance. Thus, the “significance” threshold appears to be a high standard that may only be reached if the deviation comes for the market—taking into account all other information available (such as industry performance, relevant economy performance etc)—as a huge surprise.

e) Time of disclosure

The company must immediately inform the market about a noteworthy or a significant change once it becomes foreseeable that the expectations raised by the company or expectations based on the prior year cannot be met. A company may wait until its board had a chance to discuss the change. The DAH Commentary implies that an announcement must be made as soon as an executive in the Company is aware of the change (DAH Commentary N 78). However, this seems to be too stringent: it must be possible for the company to inform its board members and to allow them to have a meaningful discussion on the cause and effects of the change prior to the information of the market. On the other hand it is clear that the company must act based on approximate figures and cannot wait until the exact figures become available (decision of the Sanction Commission 2010-AHP-II/10).

f) Details to be provided

In the event that the company has provided guidance, the correction must be in line with the guidance provided. If the guidance caused very detailed expectations, the correction must be accordingly detailed. In case only general guidance was given, the correction may be more general. In any event, a confirmation by the company that the media had provided an accurate view of the financial situation is not sufficient (DAH Commentary N 79). If a company is
required to correct its own forecast, it cannot simply confirm that the market expectations are correct. Rather it must give its own guidance. Also, a company that has practiced silence in respect of forecasts but was forced to correct market expectations because of a significant change to the prior year must thereafter not only inform about significant changes but also about noteworthy changes.

3) Compliance with the requirements to timely correct market expectations

To permit a company to comply with its duty to correct market expectations it is advisable for the company to implement a monitoring system as follows:

(a) The company must identify the periodically reported figures that are relevant for its share price. In most instances, this will be earnings; however as explained above, depending on the industry, other figures may be relevant

(b) The company must determine whether it wants to provide guidance to the market in respect of these figures. While the determination of this policy does not seem to be one of the matters exclusively reserved to the board, it is advisable for the board to determine this policy itself since it can have a considerable impact on the perception of the company by the market. The more guidance a company provides the more it encourages the market to take a short term perspective which makes it more difficult for the management and the employees of the company to focus on the creation of long term value for all constituents of the company.

(c) If the company determines that it wants to provide guidance to the market, it must adopt clear rules as to who within the company can provide guidance and ensure that all other representatives do not provide guidance.

(d) Whether or not a company has decided to provide guidance, it must monitor the market expectations in relation to the relevant figures and identify the causes of these market expectations. It must particularly take into consideration market expectations that are the result of guidance provided by the company or that are based on results of the prior year.

(e) The company must compare the market expectations with the relevant figures that become internally available. If it is foreseeable that the actual figures will deviate in a noteworthy manner from the market expectations and such market expectations are mainly based on guidance provided by the company, the company must inform the market. If it is foreseeable that the actual figures will be significantly higher or lower than the market expectations and the market expectations are mainly based on the prior year, the market must be informed.