Continuous Disclosure in Live M&A: When LR 3.1A Breaks

Written for chairs, directors and CFOs of ASX-listed entities. If you want to understand your board's exposure on this issue, contact JR3 Legal.

For an ASX-listed board in live M&A discussions, the disclosure question never gets simpler than two parts: when does LR 3.1 require an announcement, and how long can the LR 3.1A exception keep deferring one?

The answer to both turns on the confidentiality limb of LR 3.1A. While it holds, deferral is available. When it breaks, the board has minutes, not hours, to choose between immediate disclosure and a trading halt under Chapter 17.

What sits between those two moments is where the structural problem is.

The rule

LR 3.1 is the operating obligation. Once an entity is aware of information that a reasonable person would expect to have a material effect on the price or value of its securities, the entity must immediately tell ASX. “Immediately” in this context means as soon as practicable, not after the next board meeting.

LR 3.1A is the exception. Disclosure can be deferred where three conditions all hold. First, one of the listed carve-out circumstances must apply. In M&A, that is typically because the information concerns an incomplete proposal or negotiation, or is a matter of supposition. Second, the information must remain confidential and ASX must not have formed the view it has ceased to be confidential. Third, a reasonable person must not expect the information to be disclosed.

The confidentiality limb is the pressure point. While it holds, deferral is available. The moment it breaks, the exception falls away.

Where the exception breaks

Four patterns show up repeatedly.

The leak trigger. Press speculation, broker chatter, unusual trading volume, social-media speculation about the entity, or an unsolicited media call to investor relations. Each of these may constitute evidence that the information has ceased to be confidential, even where no formal leak has been traced. ASX's confidentiality guidance treats the entity's actual position rather than the entity's wish as the determinative question: if the information is, in fact, no longer confidential, the LR 3.1A exception falls away regardless of how the leak occurred. Confidentiality monitoring is not a one-off check at the start of negotiations; it is a live function that needs to be running throughout the disclosure-decision window.

The indicative-proposal timing call. Non-binding approach received. The question is no longer whether the proposal is binding – it is whether a reasonable person would expect the information to have a material effect on price or value. Per Guidance Note 8, materiality does not depend on certainty of outcome alone; market sensitivity can arise well before a binding document is signed. The probability that the proposal proceeds, multiplied by the magnitude of the price impact if it does, determines whether the disclosure obligation is engaged. A 30 per cent probability of an offer at a 40 per cent premium is materially price-sensitive. The board's instinct that “it might not happen” is not the test.

The exclusivity or due-diligence lock-in. The moment exclusivity is granted, or due diligence opens, or a counterparty is given access to confidential financial or strategic information, the insider population expands. Each new person who knows is a new point of failure for the confidentiality limb. The LR 3.1A exception was always a temporary mechanism for this transaction; the question is now how long it can plausibly hold. The compliance-side answer is: only as long as the entity can demonstrate that the information is, in fact, confidential. The commercial-side reality is that more people knowing makes that demonstration progressively harder.

The regulator inquiry. An ASX aware letter or price query about M&A activity. By the time the regulator is asking, the entity is no longer the sole judge of whether the information remains confidential – ASX has formed its own view, and it is asking for a public response. The LR 3.1A exception requires that ASX has not formed the view that the information has ceased to be confidential. An aware letter is the operational signal that the second half of that condition no longer applies.

Where the structural problem sits

The confidentiality limb of LR 3.1A is not something the board can outsource. It is the only limb that requires continuous, live management between the moment an indicative proposal is received and the moment the deal is announced or terminated.

But none of the entity's deal-team advisers is structurally responsible for it.

The corporate adviser is running the deal. The corporate adviser's incentive is execution velocity – moving from indicative proposal to bid to scheme implementation as quickly as price and certainty permit. Confidentiality preservation is a constraint on that velocity, not a function the corporate adviser actively owns.

The transactional lawyer runs the LR 3.1 analysis on demand. Each time a material development occurs, the lawyer is asked whether disclosure is now required. The lawyer answers the question that has been asked. The lawyer is not continuously monitoring the entity's confidentiality position.

The company secretary handles ASX lodgements and the Chapter 17 halt mechanics. When the halt request is needed, the company secretary makes it. Until then, the company secretary is not the disclosure decision-maker.

The board signs off on the disclosure decision when one is escalated. The board does not, in the ordinary course, know that the confidentiality limb has broken until someone tells it.

The four functions are present. The continuous accountability is not.

A common pattern

A small-cap board receives an unsolicited indicative proposal from a strategic acquirer on a Wednesday. The proposal is non-binding, conditional on due diligence and shareholder approval, and represents a 40 per cent premium to the entity's last trading price. The board takes external advice. The legal advice is that, in the form received, the proposal is sufficiently incomplete and contingent that LR 3.1A applies and disclosure can be deferred. An NDA is negotiated and a small data room is opened on the Friday.

Over the weekend, a financial-trade publication runs a story citing unnamed sources that the entity is in early-stage discussions with a potential acquirer. The story is partly accurate.

On Monday morning, before the open, the entity is in a position where the confidentiality limb of LR 3.1A has fallen away. The board has not yet seen the formal proposal in board-paper form. The corporate adviser is travelling. The transactional lawyer is in another matter. The company secretary is asking what to do.

The right answer is a trading halt under Chapter 17 followed by an announcement that confirms the entity has received an indicative proposal, that the proposal is conditional and may not proceed, and that further announcements will follow.

The wrong answer is silence while the team tries to coordinate.

The difference between the two outcomes is whether someone was continuously responsible for the confidentiality limb in the period between Wednesday afternoon and Monday morning.

Closing

For boards of small-to-mid cap ASX entities, the question is not whether you understand LR 3.1, or whether you can recite the limbs of LR 3.1A. It is whether one person on the entity's deal team has been given continuous, named responsibility for the confidentiality limb – and the trading-halt decision that follows when it breaks – before the next indicative proposal arrives. If that person has not been identified before the deal is live, the LR 3.1A exception is a structural fragility, not a tool.

Related reading: Responding to ASX Query and Aware Letters  ·  The ASX Close Review Procedure

Julian Rockett is principal of JR3 Legal – external general counsel and company secretary to ASX-listed entities, primarily in resources, energy, and technology. JR3 Legal acts on continuous disclosure governance in M&A negotiations as an integrated service. Contact julian@jr3legal.com or visit jr3legal.com or connect on LinkedIn.