The Australian Securities Exchange (ASX) states that it is committed to continually improving its ASX Listing Rules (Rules) to enhance the reputation and integrity of the market and to ensure that it continues to serve the interests of both investors and issuers.
In accordance with this mandate, on 27 April 2022, ASX released a public consultation paper (Paper) seeking feedback from key stakeholders on proposed enhancements to the Rules.
While various changes are contemplated, this alert focuses on the most significant proposals relating to changes to the Rules that directly impact primary capital raisings (IPOs and RTOs) and secondary capital raisings (placements, rights issues and SPPs) and admission requirements for IPOs. Most of these changes are intended to target what ASX considers inappropriate practices such as raising capital for IPOs in emerging markets (where the legitimacy of the shareholders cannot be confirmed), favourable allocation of shortfall on rights issues and SPPs, and the allocation of placement entitlements to preferred institutional investors.
Other proposed changes relating to financial reporting, transactions with a person of influence and other miscellaneous matters are not contemplated in this alert.
ASX is currently considering the submissions it has received in response to the Paper before finalising the proposed amendments to the Rules – and then, subject to the receipt of any necessary regulatory approvals, it is proposed that the amendments to the Rules will take effect from 1 December 2022.
Admission and quotation requirements
ASX is proposing various changes to the rules regulating the admission of an entity to the Official List of ASX and the quotation of its securities. While this article does not cover all of them, the significant enhancements proposed by ASX in this regard are as follows:
- Typically, an entity seeking admission to the Official List of ASX must satisfy ASX that it has at least 300 non-affiliated security holders, each holding a marketable parcel of unrestricted securities (being a parcel of securities with a value of at least $2,000) (Spread Requirement). By making an amendment to Rule 1.1 Condition 8, ASX is proposing to narrow this test by specifying that only security holders resident in Australia or another jurisdiction acceptable to ASX will count towards the Spread Requirement threshold. It is likely that ASX will exclude from spread calculations shareholders resident in some emerging markets. This is consistent with current ASX practice but formalises this approach.
- The addition of a new note to Rule 1.1 Condition 1 prescribing that for an entity to be considered to have a structure appropriate for a listed entity, the terms of the entity’s securities must comply with Chapter 6 of the Rules and must have governance arrangements suitable for that of a listed entity. Broadly, Chapter 6 of the Rules sets out the rights and obligations that must be attached to securities of a listed entity (whether the securities are listed or unlisted), including voting rights and dividend and distribution rights. The new note suggests ASX will pay closer attention to the rights and obligations attaching to securities of entities seeking to be listed. The note also suggests ASX may pay closer attention to corporate governance arrangements including such matters as whether directors specified in the corporate governance statement as independent are properly characterised in that way. It is likely that upon implementation of this proposed change ASX will provide additional supporting guidance.
- Typically, an entity applying for admission to the Official List of ASX under the ‘assets test’ is required to include spending commitments (and an expenditure program) in its prospectus for the public offer, which must include commitments to spend at least half of its cash in circumstances where more than half of the entity’s tangible assets are cash or in a form readily convertible to cash. The entity must then lodge quarterly activity and cash flow reports with ASX, updating the market as to how the entity is tracking against the expenditure programme in its prospectus. By amending Rule 1.3.2, ASX proposes to introduce an exception that if the issuer has a ‘track record of profitability or revenue acceptable to ASX’, it will not be required to provide such commitments in its prospectus, and it will not need to prepare quarterly activity and cash flow reports. This change will essentially enable entities applying for admission under the assets test that also have a track record of profitability or revenue acceptable to ASX, to be on an even footing and aligned under the rules as entities applying for admission under the profit test. This is consistent with the approach ASX takes to compulsory escrow, which is also to relieve entities listing based on the assets test and raising in excess of $20m from the escrow requirements where they meet an acceptable level of profitability (broadly, this being aggregated profit for the last 3 financial years of $1m) or revenue (broadly, this being aggregated revenue for the last 3 financial years of $20m and $100m market capitalisation).
- ASX is proposing the addition of new Rules 1.19A and 2.9A, which will stipulate that the admission of an entity to the Official List of ASX is not to be interpreted in any way as an endorsement by ASX as to the merits of investing in, or the prospects of, the entity. We suspect it is likely that ASX will also make it an explicit requirement that a statement to this effect is included in an issuer’s prospectus. This would be consistent with the requirement in Rule 1.1 Condition 3, pursuant to which a prospectus must contain a general statement that ASX has no responsibility for the content of a prospectus.
Securities purchase plans
Pursuant to Exception 5 in Rule 7.2, issuers are able to conduct a securities purchase plan (SPP) without utilising their 15% placement capacity.
As part of its emergency COVID-19 relief measures, ASX imposed a requirement for SPPs – being that the issuer had to disclose the scale back arrangements to be applied in the event the SPP offer was over-subscribed. This requirement was designed to prevent any inappropriate practices relating to the application of a scale back where directors may apply preferential scale back arrangements to themselves or other favoured security holders, compared with other security holders.
ASX is proposing that any scale back must be applied to all security holders who participated in the SPP on a pro rata basis, based on either:
- the size of the security holder’s holding on the record date for the SPP, or an earlier date selected by the issuer; or
- the number of securities the security holder has applied for under the SPP.
The proposed changes require an issuer to include in the SPP document a description of the scale back arrangements and the policy that will be applied should the SPP be oversubscribed (which is to be in accordance with the above).
An entity will still be able to adopt a scale back policy that is not consistent with the above, although it will not attract the benefit of Exception 5 in Rule 7.2 – in other words, it will utilise the issuer’s 15% placement capacity.
Pro rata rights issues
ASX is proposing changes to Exception 3 in Rule 7.2, which allows issuers to place the shortfall of an entitlement offer without utilising its 15% placement capacity.
Similar to the concerns raised with respect to SPPs discussed above, the changes are designed to eliminate the allocation arrangement issues and inappropriate practices that may arise in respect of the allocation of shortfall in a pro rata rights issue – namely where larger allocations are given to particular shareholders favoured by the issuer’s directors, in comparison with other shareholders.
ASX is proposing that any shortfall under a pro rata rights issue must in the first instance be allocated to security holders who participated in the offer and applied for more than their entitlement. Furthermore, the shortfall must be allocated to these 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
- the number of securities the security holder has applied for in excess of their entitlement.
The proposed changes require an issuer to include in the relevant offer document a description of the shortfall allocation policy (which is to be in accordance with the above).
ASX is proposing the addition of the new Rule 7.10, which would essentially make permanent the requirement introduced in connection with ASX’s COVID-19 relief measures pursuant to which issuers who conducted an institutional placement (followed by an SPP or pro-rata issue) were required to disclose information about their approach to identifying and determining who participated in the placement component.
ASX is proposing that the new Rule 7.10 would only be applicable to ‘material placements’, which would be a placement of securities comprising more than 10% of the number of the issuer’s ordinary securities on issue at the commencement of the placement or where the placement raises more than $50 million.
Broadly, the new Rule 7.10 will require an entity to disclose the following with respect to all non-pro rata offers:
- in the documentation for the offer, whether existing holders of securities will be entitled to participate in the offer and, if so, on what basis;
- within 5 business days of completing the offer, an announcement to the market of the results of the offer, as well as details of the approach the entity took in identifying investors and how it determined the respective allocations;
- within 5 business days of being requested to do so, provide a detailed allocation spreadsheet in electronic format to ASX. The spreadsheet will need to show the details of the people who were allocated securities in the offer and details of the persons who applied for securities at or above the final price and did not receive an allocation.
While the above changes are proposed by ASX, they may or may not be implemented. ASX sought submissions from key stakeholders relating to the proposed changes throughout May 2022, which it is now considering. As a result of this feedback, it may alter the proposed changes (or abandon them altogether). We will publish an update to this alert in due course, should this become the case.
ASX is then targeting 1 December 2022 for the final proposed rule changes to take effect.
For further information please contact an author or any member of our Corporate & Commercial team.
This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.