What are the highlights?
The proposed amendments seek to ensure the reputation and integrity of the ASX market while still serving the interests of both investors and issuers. The proposed amendments relate to:
1. The issuance of securities by listed entities (Capital Raises)
Any listed entity looking to perform capital raisings through share purchase plans, pro-rata issues, and material placements will have more constraints and further disclosure requirements.
Security Purchase Plan (SPP)
Currently, rule 7.1 requires listed entities to obtain security holder approval if they issue securities comprising more than 15% of their ordinary share capital within any 12-month period (commonly referred to as the “15% placement limit”). Exception 5 of rule 7.2 excludes from the 15% placement limit securities issued under an SPP that meets the conditions set out in that exception.
To still be able to rely on Exception 5 of rule 7.2, ASX is proposing that entities disclose in the SPP documents, the scale back arrangements that will be used if the offer is oversubscribed. Any scale back must be administered on a pro-rata basis to all SPP participants, depending on either:
- the size of their security holdings on the record date for the SPP or an earlier date selected by the entity; or
- the number of securities they have applied for under the SPP.
Security holders who have bought a nominal number of shares to obtain the SPP offer or divided their holdings to receive several offers may be addressed by the scale back arrangements. This proposal is aimed at pre-empting some inappropriate practices ASX had occasionally observed in relation to SPPs, where directors would apply preferential scale-back arrangements to themselves or to particular security holders they favoured, compared to other security holders.
Pro rata issues (entitlement offers)
ASX is proposing amendments to Exception 3 in rule 7.2, which allows entities to place the shortfall of an entitlement offer without using its 15% placement capacity, similar to the adjustments suggested for SPPs above.
The proposed changes will require an entity to set out its shortfall allocation policy in the offer documentation for a pro rata issue. The allocation policy must indicate that:
- at first instance the shortfall will be offered to holders who participated in the offer and applied for more than their entitlement; and
- that the shortfall be allocated to those security holders on a pro rata basis based on either:
- the size of the security holder\’s holding on the record date for the entitlement offer or an earlier date selected by the issuer, or
- based on the number of securities the security holder has applied for in excess of their entitlement.
Currently, when an entity makes a material placement, which ASX suggests defining as a placement of securities that comprises more than 10% of the number of ordinary securities on issue at the time the placement begins or for an aggregate issue price of more than $50 million (whichever is less), the entity must:
- disclose in the offer documents whether existing security holders will be entitled to participate, and if so, on what basis;
- disclose the results of the offer to the market within 5 business days of its completion, including details of the issuer\’s approach to identifying investors to participate in the offer and how it determined their respective allocations in the offer (including the key objectives and criteria used in the allocation process). Whether one of those objectives was to allocate pro-rata to current security holders with any major exceptions/differences); and
- within 5 business days of being requested by ASX, provide to ASX (not for market release) a detailed allocation spreadsheet showing:
- details of the persons to whom securities were allocated in the offer (including their name, existing holding as understood by the entity, the number of securities they applied for at or above the final price or were offered in the offer, and the number of securities they were allocated); and
- details of persons who applied for securities at or above the final price and who did not receive an allocation in the offer (including their existing holding as understood by the issuer and the amount of securities applied for at or above the final price).
2. The admission of an entity to the official list and quotation of its securities (IPOs);
The minimum spread rule
Currently, under Rule 1.1 condition 8 an entity applying for admission to the ASX must have at least 300 non-affiliated security holders, each of whom holds a parcel of the entity’s main class of securities that are not “restricted securities” and that are not subject to voluntary escrow, with a value of at least $2,000.
ASX proposes to narrow this test by specifying that only security holders who are residents of Australia or another jurisdiction acceptable to ASX will count towards the 300 non-affiliated security holder threshold. This is in response to some difficulty ASX has had validating the authenticity of some foreign security holders. This may have a significant impact on small companies seeking admission to the ASX, particularly those with assets in foreign jurisdictions and who have raised capital from investors in those jurisdictions.
The commitments (assets) test
Currently, an entity applying for admission to ASX under the assets test must:
- have commitments consistent with its stated business objectives to spend at least half of its cash and assets readily convertible to cash, or
- have less than half of its total tangible assets (after raising any funds) in cash or in a form readily convertible to cash
ASX proposes that if an entity has a track record of profitability or revenue that ASX approves, it will not be needed to include those commitments in its IPO prospectus, nor will it be required to provide quarterly activity and cash flow reports. This amendment basically puts companies asking for admission under the assets test that have a track record of profitability or revenue on par with issuers applying under the profit test.
3. Transactions by listed entities with persons in a position of influence
ASX proposes amendments to the restrictions on termination benefits, allowing benefits to be provided (increased above the 5% limit) with shareholder approval in certain circumstances.
ASX proposes to amend rule 10.18 to empower security holders to approve an officer of the entity or of any of its child entities being entitled to termination benefits (or an increase in them) if a change occurs in the shareholding or control of the listed entity or child entity, in the same way that security holders can approve a termination benefit that exceeds the 5% limit in rule 10.19.
The ASX anticipates that the amendments to the Listing Rules outlined in the consultation paper will take effect on 1 December 2022.
Stakeholders are invited to provide feedback on the amendments, with submissions open until 27 May 2022.
This article was written by GRT Lawyers, Panashe Muzira (Law Graduate).