Disclosure rules make it hard to sift facts from farce
Investors aren't served by meaningless announcements scripted by lawyers, especially when the verbiage hides what's really going on
Recently, I spotted a company announcement that left me scratching my head. On July 11, a diversified holding company called South China published an open letter to Sinosoft Technology "regarding a certain representation made in a prospectus … issued by Sinosoft Technology Group which is incomplete or, to the best of our knowledge, inconsistent with the relevant fact".
What makes this company announcement intriguing is the mix of huffiness (Sinosoft and South China are locked in a public dispute) and the utter vagueness of South China's complaint. What is this "certain representation"? What is the "relevant fact"?
Welcome to the world of company announcements. These missives to shareholders published on the Hong Kong exchange website and in newspapers are required by regulation. They are meant to give all shareholders disclosure about share-price sensitive information on listed firms at the same time.
The changes followed the collapse of the internet bubble in 2001, during which analysts colluded with issuers and bankers to pump up the price of dodgy dotcoms.
Nowadays, if a listed company wants to say something to shareholders, it can't go through a favoured analyst. It needs to make a public statement. It's a nice idea. But at best, these announcements are jargonistic and confusing. At worst, they deflect investors' attention from the true story.
In the "good old days" before regulators took over, investors and analysts could ring up a company's management for input on a range of company issues. Now, companies are required to disclose everything and anything in public announcements that are apparently written by lawyers, and which are extremely lacking in information and insight.
I don't see how this has helped investors. For example, after you've been bamboozled by a public announcement that makes no sense or has near-zero content, if you ring up the management requesting clarification, you are most likely to be met with "no comment".
If one investor cannot understand a disclosure, it's highly likely that others have the same problem, thereby leaving a large swathe of a company's investors totally clueless.
One of my favourite public announcements is in relation to a significant stock-price swing. Hong Kong companies are required to make a public announcement anytime there is any "unusual trading movement of its listed securities".
Companies' boilerplate response to such events is to say: "We have noted a decrease in the price of the shares of the company and … we are not aware of any reasons for these price movements".
Of course, most of the time the management knows exactly why the stock price moved, and it's usually because someone on the inside is trading the shares, or perhaps it's because hedge funds and investment banks have found out the firm is about to do a big fundraising.
If a company is going to blitz investors with announcements, it should be required to use simple, clear and specific language. And if it claims to not understand why its share price is gyrating, it should be held accountable for that statement when the company issues a giant block of shares the next evening.
In cases where an announcement misleads the public, it's best to avoid announcements altogether as no information is better than bad information.