Clifford Chance

The Australian Securities and Investment Commission (ASIC) has joined the discussion on activist short selling campaigns, with the release on 1 June 2021 of a new information sheet (Information Sheet 255 Activist short selling campaigns in Australia).

Short selling involves selling a financial product a person does not own with a view to repurchasing the product for less at a later date (thereby making a profit). Generally, 'covered' short selling (where the seller has a securities lending agreement in place) is permitted under the Corporations Act 2001 (Cth), whereas 'naked' short selling without such an agreement is not.

Activist short selling is a form of aggressive short selling which involves a person taking a short position in a financial product and then publicly disseminating information directly or through an agent to negatively impact the price of that product.

ASIC's information sheet provides an overview of short selling and the potential issues it can create (while recognising the positive impact of accurate and meaningful new information on price formation and market integrity), an overview of the Australian regulatory framework and obligations that apply to short selling (such as false or misleading statements, insider trading and market manipulation), and offers guidance on 'best practice' for or activist short sellers and authors of short reports. ASIC suggests:

• releasing short reports outside of Australian trading hours and not immediately before market open;
• ensuring short reports are based on reliable information and any recommendation or opinion should be formed on a reasonable basis;
• fact checking with the target entity;
• avoiding overly emotive, intemperate or imprecise language; and
• disclosing conflicts of interest.

The information sheet also offers practical guidance on best practice for target entities to make themselves less attractive to activist short sellers, and strategies to implement when entities become a target.

ASIC indicates transparency is key, noting that "our research indicates that activist short selling campaigns tend to target entities with complex and opaque corporate structures and accounting practices, or poor disclosure." ASIC suggests that the best way to avoid becoming a target entity is to be transparent about the company's business model and financial statements. However, should a company become the subject of a short selling campaign, ASIC suggests a trading halt to allow sufficient time to prepare a comprehensive response.

Whether ASIC's guidance will be enough to assist Australian entities the subject of 'short and distort' campaigns selling squeeze remains to be seen.