03 December 2018

Major reforms proposed for ASX listing rules

This article was written by David Friedlander and Amanda Isouard.

Overview

On 28 November 2018 the Australian Securities Exchange (“ASX”) released a public consultation paper titled “Simplifying, clarifying and enhancing the integrity and efficiency of the ASX listing rules” (“Consultation Paper” or “CP”). 

The Consultation Paper sets out a broad range of proposed amendments to the ASX listing rules which affect entities seeking to list on ASX as well as those who are already listed.  This alert summarises the key proposed reforms and implications including enhancements of ASX’s powers, streamlining escrow arrangements, a heightened focus on disclosure (e.g. of underwriting arrangements and for transactions where securityholder approval is required) and that related party waivers will be harder to get.

As ASX notes, the last major update to the listing rules was in 2016.  In our view, ASX’s proposed comprehensive reforms contain many good ideas and will go a long way to achieving their objectives of simplifying, clarifying and enhancing the integrity and efficiency of the ASX listing rules.  Where changes are needed, these will likely be picked up in the consultation process which ends on 1 March 2019 – with a view to the reforms taking effect on 1 July 2019.  It is important that entities and their advisers are aware of the proposed reforms so that they can be factored into planning for the year ahead.

Key take-aways

If ASX implements the reforms as currently drafted, the key points to note are as follows (and we expand on each of these and other points in the table that follows):

  • powers: ASX will have enhanced operational, monitoring and enforcement powers, which is not surprising in Australia’s current regulatory environment;
  • timetables: entities considering a corporate action will need to factor revised timetables into their transaction planning – this will have broad applicability to M&A, equity capital markets and capital management transactions;
  • escrow: mandatory escrow arrangements will differ based on how significant a securityholder is and will be streamlined so that an entity can include escrow provisions in its constitution for less significant securityholders rather than needing to enter into escrow deeds;
  • placement capacity: placement capacity (the 15% or 25% threshold) will be easier to calculate and more detail has been provided on the exceptions;
  • mid to small caps: mid to small caps will be affected by changes to their issuance capacity requirements (e.g. revised disclosure requirements and changes to issue terms);
  • placement subscribers: subscribers in placements to 10 or less investors will need to be named where securityholder approval is required, rather than just the basis of selection;
  • underwriting arrangements: entities will need to include specific disclosure regarding certain capital raising underwriting arrangements (e.g. summary of material circumstances where underwriter has right to avoid or change its obligations); 
  • assets test: entities seeking to list under the assets test will no longer be able to rely on budgeted revenue and budgeted administration costs to satisfy the A$1.5 million minimum working capital requirement; 
  • delisting: ASX has thought through delisting to a greater level of sophistication than the past;
  • incentive schemes for directors:  entities will need to disclose a director’s total remuneration package when seeking securityholder approval for a grant of securities to that director;
  • voting of undirected incentive scheme securities: ASX has followed the Australian Securities and Investments Commission’s (“ASIC”) lead in disentitling an employee incentive scheme trustee from voting undirected underlying securities on spin-outs and other corporate actions;
  • good fame and character: chief executive officers (“CEOs”) and proposed CEOs will be subject to the good fame and character tests;
  • related parties: related party waivers for transactions involving a person in a position of influence (e.g. LR 10.1 and 10.11) will be significantly harder to get;
  • listed funds and REITs: ASX will no longer provide waivers to allow listed fund managers or REITs to transfer significant assets to other funds managed by the same responsible entity (or its subsidiaries);
  • spin-outs: there is new guidance on when spin-outs of major assets require securityholder participation, broadening the current regime and setting a 25% threshold on all metrics for assessing applicable spin-outs (previously 20% on some, 15% on others); 
  • investment entities: changes to the timing for disclosure of net tangible assets (“NTA”) by investment entities (i.e. listed investment companies and listed investment trusts);
  • deferred settlement trading: it is likely that there will be changes made to deferred settlement trading;
  • quarterly activity reports: more entities (in particular start-ups) will be required to prepare quarterly activity reports; and
  • resources entities: mining and oil and gas exploration entities will have enhanced disclosure requirements.

Further details regarding ASX’s proposed reforms are set out below.

Summary of key changes

Key change

Commentary

ASX powers

Enhanced powers

LR 18 amended to enhance ASX’s powers to operate the market and to monitor and enforce compliance with the Listing Rules (“LR”).  The amendments:

  • clarify ASX’s power to grant waivers and exercise compliance powers;
  • facilitate ASX requiring information from entities (including under oath) about their compliance with any conditions or requirements imposed under the LRs, and any future compliance; and
  • empower ASX to disclose this information to the market and to formally publicly censure entities where a breach is egregious.[1]

ASX considers that its powers extend to areas including cancelling or reversing an agreement or transaction, enforcing provisions in a constitution, and assessing or introducing a compliance framework.  If these powers are exercised they could have significant implications on the transactions undertaken by, or operations of, an entity.

The LR 18 amendments are not surprising in the context of the enhanced regulatory environment that we are seeing in Australia at the moment.

Equity capital markets

Quality of disclosure

Where ASX has concerns with the quality of disclosure in a disclosure document, it will not accept an argument that ASIC has not raised any concerns.[2]

This is important for both entities and their advisers to note.  Allowing time to attend to comments from ASX on disclosure documents may need to be factored into transaction planning.

Good fame and character tests

Good fame and character tests extended to CEOs and proposed CEOs in addition to directors and proposed directors.[3]

ASX had previously expressed concern that attempts were being made to circumvent the good fame and character test (e.g. major shareholders being appointed as company secretary or consultant to board).  GN 1 was updated earlier this year to make it clear that ASX “may” require management to have these checks. 

Assets test

It is now clear that entities seeking admission under the assets test must disclose the objectives they are hoping to achieve from their initial public offering (“IPO”) so that they can confirm that they have adequate working capital to achieve those objectives.  Entities can no longer rely on budgeted revenue and budgeted administration costs to satisfy the A$1.5 million minimum working capital requirement.[4]

Entities intending on applying under the assets test and their advisers to note.

Revamp of escrow regime

ASX can (and will) require certain significant holders of restricted securities and their controllers to execute formal escrow deeds (App 9A).  Significant holders includes related parties, promoters, substantial holders, service providers and their associates.  Less significant holders of restricted securities will be subject to escrow restrictions under the entity’s constitution, which will be notified to them by a restriction notice from the entity and will not require entry into an escrow deed (App 9C). 

Escrowed quoted securities must be held on the issuer sponsored subregister and be subject to a holding lock.[5]

Changes generally streamline the escrow regime and clarify the circumstances when securityholders will be subject to mandatory escrow and for how long. 

The changes will be particularly helpful to entities with a large number of minority shareholders as signed escrow deeds for restricted securities will not need to be obtained from all of them.

 

Related party arrangements in new and re-compliance listings

New and re-compliance listings will be scrutinised in respect of issuances of securities in the lead-up to, or following, the announcement of a new or re-compliance listing and any associated capital raising to see if securities have been issued to related parties, promotors or professional advisers (and their family, friends and associates) at a significant discount.  If this is the case and ASX forms the view that the purpose was not to raise genuinely needed capital but rather to confer a benefit, ASX is likely to classify those securities as restricted securities and impose mandatory escrow requirements.[6]

Entities must disclose whether any adviser to the IPO has a material interest in the success of the IPO over and above its normal professional fees (and provide relevant details).  Enhanced disclosure and escrow measures will be put in place to deal with behaviours ASX has recently encountered with financial advisers on new listings extracting excessive equity-based fees.

Entities seeking to list on ASX will need to consider the implications of these changes on their transaction structure and the remuneration of advisers.

Placement capacity

GN 21 clarifies the calculation of placement capacity under LR 7.1 and 7.1A.2 and addresses flaws which had meant that entities could issue securities in certain circumstances without using up their placement capacity (even though no exception was available).[8] 

It also sets out more detail in the placement capacity exceptions in LR 7.2, including in relation to an issue of securities to make up a shortfall on a pro rata issue (exception 3).  The directors must have stated as part of the offer that they reserve the right to issue the shortfall and what their allocation policy will be in relation to the shortfall (including the factors they will take into account when exercising their discretion).  The issue must occur no later than 3 months after the close of the offer and the issue price must not be less than the pro rata offer price.[9]

Entities issuing securities using their placement capacity under LR 7.1 will be required to complete a worksheet provided in GN 21 and submit to ASX when making a placement within its existing placement capacity (previously only LR 7.1A entities had to).  Entities relying on a LR 7.2 placement capacity exception do not have to complete these worksheets.[10]

This change will assist with calculating placement capacity, which some entities have struggled with in the past. 

The additional requirements in LR 7.2 exception 3 will be relevant to entitlement offers where deferred settlement of the shortfall to the underwriter takes place.  Deferred settlement may occur because the underwriter would be in breach of law if it took up a large shortfall on the settlement date for the relevant tranche of the entitlement offer – so that the underwriter will not be in breach, the shortfall will be issued in stages.

Mid to small caps issuance requirements changes

Entities with a market capitalisation of less than A$300 million will be affected by changes to the LR 7.1A issuance capacity requirements (e.g. changed disclosure requirements, removal of ability to make an issue under LR 7.1A for non-cash consideration, time period to issue without recalibrating price extended to 10 trading days after price agreed).[11]

Entities with a market capitalisation of less than A$300 million should note these changes.

Disclosure in notice of meeting approving or ratifying issues of shares

The information required to be included in notices of meeting to approve the issuance of shares under LR 7.1, additional issuance capacity under LR 7.1A, a previous issuance of (or agreement to issue) shares under LR 7.4 or a transaction with, or an issue of securities to, a person of influence under LRs 10.1 and 10.11 has been revised.[12]  ASX will generally expect subscribers for placements to 10 or fewer persons to be named in the notice of meeting, rather than just the basis of their selection.[13] 

ASX has rationalised the list of equity issues that can be made without securityholder approval.[14]

Updated disclosure requirements are unlikely to have any significant impact on disclosure – the information required is relevant and useful to shareholders in determining how to vote and information that would be logical to include irrespective of the listing rule requirements.  These changes continue the recent ASX trend requiring terms of material agreements to be disclosed (e.g. the recent changes to GN 8).

The changes also introduce more flexibility for LR 7.1 approvals – the minimum price constraint has been removed.

Entities will also no longer need to seek a waiver to ratify an agreement to issue securities.[15]

Shareholder distribution schedules

Shareholder distribution schedules for new classes of quoted equity securities must disclose total percentage (in addition to the number) of securities held by each top 20 holder.[16]

Entities to note when preparing distribution schedules.

Monthly CDI notifications

Entities that have Chess Depositary Interests (“CDIs”) must notify ASX of the number of CDIs on issue on a monthly basis (with a new form App 4A to be used instead of an App 3B).[17]

Entities with CDIs to note – there has been an increase in foreign primary and secondary listings following takeovers and more are in the pipeline.  App 4A is tailored for CDIs and should be easier to complete. 

Disclosure of underwriting arrangements

Prescribed disclosure of underwriting arrangements for certain capital markets transactions has been included (i.e. name of underwriter, extent of the underwriting, fee or commission payable, summary of material circumstances where underwriter has right to avoid or change its obligations).  Disclosure regarding underwriters and sub-underwriters of a pro rata offer who are LR 10.1 related parties is needed so that approval is not required under LR 10.11 to issue securities to them.[18]

The disclosure requirements apply to underwritten pro rata offers, dividend reinvestment plans and exercises of options.  Most of this information is commonly included in disclosure materials and is similar to the information that ASIC states should be included in prospectuses.[19]  More detail may be required on conditions precedent to underwriting arrangements.

Additional warranties to ASX

Additional warranties are proposed to be added to App 1A, 1B, 1C and 3B that the securities to be quoted by ASX have been validly issued and all of the relevant documents and information given to ASX are, or will be, accurate, complete and not misleading.[20]

This adds an “accurate” and “complete” requirement which may be broader than the Corporations Act 2001 (Cth) “not misleading or deceptive (including by omission)” requirement.  This may need to be reflected in due diligence process sign-offs for capital raisings.

Incentive schemes

Incentive schemes for directors

ASX has made changes dealing with the approval for a grant of securities to a director (or their associates) under an employee incentive scheme.[21]  In the notice of meeting, entities will need to disclose, among other things, material terms of the scheme, each director’s total remuneration package and an explanation as to why the particular type of securities were chosen.[22]

Many entities are already disclosing information of this nature and this disclosure will already be in the remuneration reports.

These changes are consistent with increased market focus on remuneration and providing more information to securityholders.

Voting by employee incentive schemes

Undirected underlying securities held by a trustee for an employee incentive scheme cannot be voted on spin-outs and other corporate actions.[23]

No practical impact for companies who rely on ASIC Class Order 14/1000 to offer their employee incentive schemes (which most would) as that Class Order already prohibits a trustee voting undirected shares.

Related parties and persons in a position of influence

Generally

Under GN 24, ASX will only grant a waiver for the requirement for securityholders to approve an acquisition or disposal of a significant asset to an LR 10.1 counterparty in exceptional circumstances.[24]

Under GN 25, ASX will only waive the requirement for securityholders to approve an issue of equity securities to a related or closely connected party in exceptional circumstances.[25]   

In both cases, to receive a waiver the entity must establish that there is no reasonable prospect of the counterparty, either itself or through its connections to the board or a controlling securityholder, influencing the terms of issue or transaction to favour themselves at the expense of the entity.[26]  In both cases, the bar is high and it is not sufficient for the relevant director to excuse themselves from the relevant Board approval.[27]

GN 24 and 25 indicate that related party waivers for transactions involving a person in a position of influence (e.g. LR 10.1 and 10.11) will be harder to get.

Listed trusts

It used to be possible to obtain waivers from LR 10.1 from the obligation to seek shareholder approval for transfers of significant assets from/to listed trusts and other funds or mandates managed by the responsible entities of listed trusts.  Generally, listed trusts or their managers could rely on these waivers to set up new unlisted funds or to transfer assets to already existing unlisted funds.

Based on the drafting of new GN 24 (particularly LR 4.2, 6.1, 8.1 and fn 51), it is apparent that ASX’s policy has changed so this waiver will likely no longer be provided.[28]

This is likely to have significant impacts on fund managers and listed trusts that also operate unlisted funds.  We are aware that ASX is already administering waiver requests in line with the proposed changes to GN 24.

Structural changes

Pre-emptive loans where significant changes to activities

GN 12 includes new guidance on “pre-emptive loans”.  ASX will require full disclosure of details of the loan.  If the loan is material, ASX may make enquiries of the entity and publish the responses.  If ASX believes that the loan has been structured to avoid compliance it will consider this to be a serious breach and take remedial action (e.g. suspend quotation or terminate listing or direct entity to cancel or demand repayment of loan).[29]

Pre-emptive loans are loans that are given by a listed entity to another entity that it is proposing to enter into a significant transaction with, prior to entering into that transaction.

Entities planning transactions that will involve a significant change of activities need to ensure that any loans are not in breach of these requirements given the consequences of breach.

Spin-outs of major assets

GN 13 has been substantially re-written to provide guidance on the application of (and prohibitions in) LR 11.4 on spin-outs of major assets and the exceptions to that rule.[30]

GN 13 has been drafted to capture all types of spin-outs so it is important for entities considering a transaction of this nature to comply with it, particularly given the consequences of breach.

This includes sales of assets to third parties who intend immediately to list the business.

The metrics that test a “major asset” for the purposes of the rule have been simplified so that all are measured by testing whether they constitute 25% of the head entity’s consolidated equity interests, consolidated assets etc.

Investment entities

NTA

Currently, an investment entity must disclose the NTA backing of its securities within 14 days of the end of each month, rather than when it becomes aware of the information.

Under the proposed changes, each investment entity will need to provide that information as soon as it is available and, in any event, no later than 14 days after the end of each month.  This accelerates when the information must be provided.  Failure to provide this information will result in automatic suspension of its securities.[31]

The reason for the change is to prevent insider trading in the investment entity’s securities where the NTA backing information is ready and available to limited persons, but has not been disclosed to ASX.

Corporate actions

Timetables for corporate actions

ASX has updated the timetables for corporate actions in App 6A and 7A.  This includes new timetables specifically for mergers or takeovers via a court-approved scheme of arrangement and changes to record dates, payment dates, interest payment dates and quotation periods.[32]

This will have broad applicability. Entities considering a corporate action should carefully check the revised App 6A and 7A to ensure that they comply with it.

Deferred settlement trading

Timeframes for deferred settlement trading for securities issued under certain corporate actions may be shortened and standardised.[33]

ASX is looking to receive feedback from stakeholders on deferred settlement trading.

Financial reporting

Quarterly reporting

LRs 4 and 5 amended to require start-up entities which currently lodge App 4C quarterly cash flow reports to prepare quarterly activity reports.

Changes have also been included to further enhance the disclosure requirements for mining and oil and gas exploration entities.[34]

This is particularly relevant to start-up entities – more detailed and frequent disclosure will be required. 

The changes will also increase accountability and transparency for mining and oil and gas exploration entities.

Delisting

Removal from listing following suspension

GN 33 shortens the trigger period before entities will be automatically removed from ASX as a result of being suspended.  ASX may grant extensions in certain circumstances.[35] 

The shift from 3 years to in most cases 2 years will have an immediate practical impact for entities that are suspended at the time the rule is introduced.

Voluntary removal from listing

GN 33 also provides additional guidance on requests for voluntary removal, including reasons that will be accepted, voting exclusions and disclosure.[36]

Notice of meeting disclosure should include, among other things, the consequences of the removal and an explanation of remedies that securityholders may pursue.[37]

Proposed voting exclusions may impact material shareholders and management.



[1] LR 18; CP s 6.

[2] Guidance Note (“GN”) 1 s 3.3; CP s 9.1.

[3] LR 1.1 condition 20; CP s 2.7.

[4] LR 1.3.3 and 19.12; CP s 3.2.

[5] LR 9; App 9A, 9B and 9C; GN 11; CP s 4.1 and 9.2.

[6] GN 1 s 4.3, GN 11 s 2.2 and 10.3 and GN 12 s 8.6; CP s 9.2.

[7] GN 1 s 4.2; CP s 9.1.

[8] LR 7.1 and 7.1A.2; GN 21 s 2.1 and 2.2; CP s 7.3 and 9.5.

[9] LR 7.2 exc 3; CP s 3.5.

[10] LR 7.1 and 7.2; GN 21 s 2.10 and Annex A to C; CP s 9.5 and 10.

[11] LR 3.10.5A; App 3B; CP 3.4.

[12] LR 7.3, 7.3A, 7.5, new rule 10.5 and 10.13; GN 21 s 7; CP s 3.6.

[13] GN 21 s 7.2 footnote (“fn”) 169; CP s 9.5.

[14] LR 7.2, 7.6, 7.9 and 10.12; CP s 3.5.

[15] LR 7.4, 7.5; CP s 7.4.

[16] LR 3.10.5(b) and 4.10.7; CP s 2.11.

[17] New LR 4.11; CP s 3.3.

[18] New LR 3.10.9; LR 3.11.3, 7.2 exc 2 and 10.12 exc 2; App 3B; CP s 2.6.

[19] ASIC Regulatory Guide 228 (“Prospectuses: Effective disclosure for retail investors”) s 166.

[20] App 1A, 1B, 1C and 3B; CP s 7.15.

[21] LR 10.15; CP s 3.7.

[22] New LR 10.15.3; CP s 3.7.

[23] New LR 14.10; CP s 2.9.

[24] GN 24 s 8.1; CP 9.6.

[25] GN 25 s 2.8; CP 9.7.

[26] GN 24 s 8.1 and 25 s 2.8; CP 9.6 and 9.7.

[27] GN 24 s 8.1 and GN 25 s 2.8.

[28] LR 4.2, 6.1, 8.1 and fn 51; GN 24; CP 9.6.

[29] GN 12 s 3.5; CP s 9.3.

[30] LR 11.4; GN 13; CP s 9.4.

[31] LR 4.12 and 17.5; CP s 2.3.

[32] App 6A and 7A.

[33] CP s 5.14.

[34] LR 4 and 5; CP s 2.1.

[35] GN 33 s 3; CP s 9.8.

[36] GN 33 s 2; CP s 9.8.

[37] GN 33 s 11; CP s 9.8.



Other article contributors: Isaac Evans, Joshua McVey, Jack Hill, Michelle Siekierka, David Jewkes, Caitlin Sharp, Patrick Mackenzie, Daniel Natale, Jo Ruitenberg, Shabarika Ajitkumar, Anthony Boogert, Jennifer Cheung, Chloe Johnston, Luke Mulcahy, Gemma McMahon, Anthony Farag and Georgia Feltis.

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In March 2019, King & Wood Mallesons (KWM) established the Belt & Road Center for International Cooperation and Facilitation (BRCICF).

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