ASX’s efforts to encourage more NZSX listed companies to also list on ASX could be frustrated by a technical wrinkle in the Corporations Act which inhibits a company’s ability to raise capital.
ASX recently amended the ASX Listing Rules to make it easier for companies that are already listed on the NZSX main board to obtain a “foreign exempt listing” on ASX.
The advantage of a foreign exempt listing over a standard ASX listing is that the issuer is not required to comply with the vast majority of the ASX Listing Rules, so long as it complies with the rules of its home jurisdiction. That concession significantly reduces the compliance costs of a dual listing.
Prior to the recent changes, a foreign exempt listing has only been available to large foreign issuers who had an operating profit of at least A$200 million in each of its last three full financial years or had net tangible assets of at least A$2,000 million at the time of listing.
Those high thresholds have meant that those NZSX listed issuers that have chosen to also list on ASX have typically done so through a standard ASX listing.
The new ASX changes make it far easier for NZSX listed companies to obtain a foreign exempt listing.
Essentially, issuers who are listed on the NZSX main board can now apply for a foreign exempt listing if their profits are over A$1 million in each of the last three years or they have more than A$3 million of net tangible assets. There are no shareholder spread requirements.
These are sensible reforms and advance the trend towards greater integration between the Australian and New Zealand capital markets.
There is, however, a wrinkle in the Corporations Act that could discourage NZSX listed companies from taking immediate advantage of ASX’s offer.
The problem lies in the fact that a company that has a foreign exempt listing is not a “listed disclosing entity” for the purposes of the Corporations Act. At first glance that is a good thing for issuers, as it means that they are not subject to the Australian continuous disclosure rules contained in section 674 of the Corporations Act.
However, this treatment also complicates the issuer’s ability to raise capital by way of a rights issue or an exempt issue (such as an institutional placement). This is because an entity that is not a “listed disclosing entity” cannot issue a cleansing notice. Sections 708A and 708AA of the Corporations Act require a cleansing notice to include a statement that, as at the date of the notice, the issuer “has complied” with the continuous disclosure requirements of section 674.
An issuer with a foreign exempt listing cannot make that statement, as it is not a “listed disclosing entity” required to comply with section 674 in the first place.
This could have significant consequences for some capital raisings. Specifically:
- the issuer may need to create a prospectus to extend a New Zealand rights issue to Australian holders (unless they are able to rely on another exemption - such as the exemption described in ASIC Regulatory Guide 72 which applies where no more than 10% of the shares are offered to Australian residents); and
- in the context of a private placement, the issuer will need to find an alternate way to manage the risk that a sale offer of the placement shares in Australia during the first 12 months after their issue might breach the secondary sales provisions of the Corporations Act. The traditional options of either issuing a prospectus at the time of the placement, or somehow restricting the recipient’s ability to offer those shares for sale in Australia in the first 12 months after issue, are unlikely to be attractive.
We understand that ASIC is aware of this issue and is considering its regulatory response. There would seem to be a sound policy basis for ASIC to allow a NZSX listed issuer to issue a cleansing notice so long as it is able to state that it is in compliance with the disclosure requirements of NZSX. Applications for case by case relief will no doubt be framed on that basis.
Class order relief to that effect would, however, pave the way for many more NZSX listed issuers to access Australia’s deeper capital pools.
Until there is a clear regulatory response, we expect that some NZX issuers may prefer to stay at home.