Legal Insights

Final changes to the ASX Listing Rules announced

By Catherine Merity, Rosamond Sayer

• 14 October 2019 • 9 min read

Final changes to the ASX Listing Rules announced. The ASX released its response to feedback received on its consultation paper.

On 10 October 2019 the Australian Securities Exchange (ASX) released its response to feedback received on its consultation paper ‘Simplifying, clarifying and enhancing the integrity and efficiency of the ASX listing rules’, together with the final changes it is making to the ASX Listing Rules and guidance notes which will come into effect on 1 December 2019.

All in all, ASX is proceeding with the vast majority of the changes proposed in its consultation paper. Those aimed at providing additional clarity on the Listing Rules, seeking to simplify and streamline processes (including avoiding the need for a range of standard waivers) and introducing a more practical two-tier approach to escrow (lock-up) restrictions were largely supported by respondents and are generally being made in the form proposed. ASX has, however, taken on board feedback in some areas, particularly around increased reporting obligations, and in some instances has decided not to proceed with certain proposed changes.

ASX is also strengthening its powers to operate the market and to monitor and enforce compliance. The changes make it clear that ASX can exercise (or decide not to exercise) any power under the Listing Rules in its absolute discretion and will have specific new powers to request fairly wide-ranging information (including verified under oath) with respect to compliance with the Listing Rules or that ASX reasonably requires to perform its obligations as a market operator. Finally, ASX is introducing a new power to formally censure a listed company for breach of the Listing Rules and to publish this to the market.

We have summarised below ASX’s final position on some of the more significant changes, both with respect to admission to listing and ongoing obligations for listed entities.

Admission to the ASX

SUBJECTCURRENT RULECHANGES
Mandatory escrow (lock-up)ASX will generally impose mandatory escrow on some or all of the existing security holders of an entity seeking to list under the ‘assets test’ that is not able to demonstrate an acceptable track record of profitability or revenue. This is designed to prevent those security holders from selling down shortly after listing and unfairly profiting from the IPO.

Each escrowed security holder must sign an escrow agreement and deliver to ASX as a condition to listing.

ASX is making changes to the mandatory escrow provisions, including simplifying the categories of shareholders subject to escrow, providing stronger guidance around what constitutes an ‘acceptable track record of revenue' (which has the potential for more growth stage companies to avoid the mandatory escrow provisions) and introducing a two-tier system to reduce the administrative burden particularly for companies with a large number of shareholders.

‘Acceptable track record of revenue’

While considered on a case-by-case basis, the following tests must generally be met to be considered ‘acceptable’ and therefore avoid mandatory escrow:

  • going concern for at least 3 financial years with the same main business activity
  • aggregate revenue over the last 3 financial years of at least $20 million
  • revenue for the last 12 months of at least $15 million
  • raising at least $20 million under IPO
  • market capitalisation at listing of at least $100 million.

Two-tier escrow administration

ASX is implementing a two-tier approach to escrow under which only significant holders (such as related parties, promoters, substantial holders and service providers) will be required to sign a formal escrow agreement. For less significant holders, ASX will permit entities to instead rely on a provision in their constitution containing the restrictions on transfer and the imposition of a holding lock on their securities.

ASX is also amending the escrow rules to permit escrowed security holders to transfer escrowed securities to a related party where there is no change in beneficial ownership and to accept into a takeover offer or scheme of arrangement.

While these changes will not take effect until 1 December, ASX has indicated that it would be prepared to allow an entity to adopt these changes in respect of a listing or issue of restricted securities prior to this date on request.

Working capital testEntities applying to list under the ‘assets test’ are required to have working capital of at least $1.5 million, including its budgeted revenue and administration costs for the first full financial year following listing in its working capital calculations.The budgeted revenue after administration costs is being removed so that entities seeking admission under the asset test must confirm that they have at least $1.5 million in working capital at the time of admission and these funds will enable the company to accomplish the objectives set out in its prospectus.
Good fame and character testAll directors must meet the ASX ‘good fame and character’ test.The ‘good fame and character’ requirement is being extended to an entity’s CEO and CFO, even where they do not sit on the Board.
ASX liaison officerEach company must have a person available during market hours who is responsible for communication with ASX on Listing Rule issues.For entities applying for admission, the entity’s proposed ASX liaison officer will be required to undertake an online listing compliance course and attain a satisfactory pass mark. To allow time for the development of this course, this change will not take effect until 1 July 2020.

This requirement will also apply in respect of existing listed entities, to any person appointed to this role after 1 July 2020.

Ongoing obligations

SUBJECTCURRENT RULEPROPOSED CHANGES
Quarterly reportingAny entity that listed under the assets test and had more than half of its total tangible assets in cash is required to lodge a quarterly cashflow report (Appendix 4C).These entities will also be required to provide a quarterly activities statement with its Appendix 4C to provide an update on its business activities to the market, which will be required to:
  • report against the use of funds statement in its listing prospectus or expenditure program provided to ASX that covers the relevant period, and explain any material variances
  • disclose details of, and the reasons for, any related party payments.

ASX has dropped its proposed requirement for companies to explain any material differences in cash flows between quarters.

Enhanced disclosure in Notices of MeetingSpecific rules apply with respect to the disclosure of information for relevant listing rule approvals.ASX is introducing certain additional disclosure requirements including:
  • for approval or ratification of share issues eg., for private placements – requiring companies to list the names of recipients of shares where known and likely to be material to the decision of security holders. Note – this is a better position than originally proposed which required investors to be named if less than 10
  • introducing minimum content requirements for resolutions approving related party transactions under Listing Rule 10.1
  • requiring the disclosure of a director’s total current remuneration package for resolutions approving the grant of equity incentives to a director
  • requiring notices to summarise relevant listing rules and explain the consequences if the resolution is and is not passed.
Listing Rule 7.1A placement capacityCertain entities can ask shareholders to approve an additional 10% placement capacity (in addition to the 15% under Listing Rule 7.1) over a 12 month period which can be used to issue shares for cash or non-cash consideration.The ability for listed entities to use the additional 10% placement capacity for the issue of shares for non-cash consideration eg., as consideration for an acquisition, is being removed.
Agreements to issue shares pre-listing-ASX is introducing a new exception to Listing Rule 7.1 which will allow entities to issue securities pursuant to an agreement entered into prior to listing without impacting their 15% placement capacity, provided that the agreement is disclosed in the listing prospectus/PDS.
Voting exclusions at shareholder meetingsVarious specific voting exclusions apply.

Shares held by an employee incentive scheme trust can be voted at meetings.

ASX is changing voting exclusions with respect to resolutions under Listing Rules 10.1 and 10.11 (related party transactions), 11.1.2 and 11.2 (significant changes to nature or scale) and 11.4 (no disposal of major asset without offer) so these apply to persons ‘who will receive a material benefit as a result of the transaction’. ASX considers a 'material benefit' to be one 'that is likely to induce the recipient of the benefit to vote in favour of the transaction regardless on its impact on ordinary security holders’. The persons excluded would include, for example, advisers who receive a success fee upon the transaction occurring and underwriters of a capital raising conducted for a transaction.

Shares held by employee share trusts will only be able to be voted where they have been allocated to a participant under the incentive scheme and the participant has directed how the trustee is to vote the shares (where the participant is not excluded from voting under the Listing Rules). Where un-allocated shares are held by an employee share trust, they will be excluded from voting at shareholder meetings.

Timetables and forms-ASX is proceeding to update a number of its timetables for corporate actions, in addition to amending forms and introducing new forms for reporting including to split the obligation to announce an issue of securities and seek quotation of securities into different forms.

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