It is finally here. After beginning an extensive consultation process back in late 2015, the Australian Stock Exchange (ASX) has released an update on the final changes to the ASX Listing Rules (Listing Rules) that will affect reverse takeovers when it comes into effect on 1 December 2017. The changes will include:
- a requirement that shareholder approval is given under Listing Rule 7.1 for a company to issue securities under a reverse takeover bid where the issue exceeds the company’s 15% placement capacity;
- amending the voting exclusion for Listing Rule 7.1 to explicitly detail who is excluded from voting in the reverse takeover context; and
- amending Listing Rule 14.11 so that excluded persons are only precluded from voting in favour of a resolution, which applies to all voting exclusions under the Listing Rules (not just those relating to a reverse takeover).
Broadly speaking, a reverse takeover occurs when a company (the bidder) issues its own shares as consideration for the acquisition of a second company (the target), resulting in the target company’s shareholders acquiring a majority holding in the bidder company. This is in direct contrast with a traditional takeover, where the bidder acquires a majority ownership in the target company without a significant change to its own shareholder base.
Currently, the Listing Rules require the approval of the target company’s shareholders for a reverse takeover, while there is no corresponding requirement in place for the bidder’s shareholders, even though their interest in the bidder may be significantly diluted as a result of the transaction (unless of course approval under Chapter 11, change to the nature and scale of a company’s activities, is required). In fact, an issue of securities under an off-market bid is specifically exempt from the restriction under Listing Rule 7.1 where an issue of shares in excess of 15% of a company’s existing capital must not be made without shareholder approval (Takeover Exemption).
The ASX has now confirmed that as of 1 December 2017, where a transaction falls within the definition of ‘reverse takeover’ the entity can no longer benefit from the Takeover Exemption, and shareholder approval will be required under Listing Rule 7.1. Under the Listing Rules, a reverse takeover will be defined as a takeover bid or a merger by way of Scheme of Arrangement under Part 5.1 of the Corporations Act 2001 (Cth). This is where an entity proposes to acquire securities of another body and the aggregate number of equity securities issued or to be issued by the entity:
- under the takeover bid or scheme; and/or
- to fund the cash consideration payable under the takeover bid or scheme,
is equal to, or greater than, the number of fully paid ordinary securities on issue in the entity at the date of announcement of the takeover bid or scheme.
Accordingly, where an entity issues shares in excess of 100% of its existing share capital as consideration for an acquisition by way of a takeover bid or scheme (and consequently exceeds the entity’s 15% placement capacity), shareholder approval will be required. The ASX has confirmed that separate issues will be aggregated if, in the ASX’s opinion, they form part of the same commercial transaction.
Where an entity receives approval via Listing Rule 7.1 to issue securities in excess of its 15% placement capacity, the Listing Rules currently require the entity to issue the securities within three months. The ASX has extended this period to six months for issues under a reverse takeover, and has been mindful to give an entity time to complete any issue of securities which form part of a (typically) larger transaction process, while also ensuring the issue takes place within a reasonable timeframe after shareholders approve the issue.
The amendments to chapter seven of the Listing Rules will apply to reverse takeovers when announced on or after 1 December 2017.
Voting exclusion changes
In the context of reverse takeovers, as of 1 December 2017, Listing Rule 14.11.1 will be amended to include explicit wording to the effect that the voting exclusion will extend to:
- in the case of a proposed issue under a reverse takeover, the target and any person who will obtain a material benefit as a result of the reverse takeover or the proposed issue (except a benefit solely by reason of being a holder of ordinary securities in the entity or the reverse takeover target); and
- in the case of a proposed issue to fund a reverse takeover, the target, any person who is expected to participate in the proposed issue, and any person who will obtain a material benefit as a result of the reverse takeover or the proposed issue (except a benefit solely by reason of being a holder of ordinary securities in the entity or the reverse takeover target).
An interesting and important change which has implications beyond the context of a reverse takeover is the further amendment to Listing Rule 14.11. Those subject to the voting exclusion under Listing Rule 7.1 will only be precluded from voting in favour of a resolution. At present, the voting exclusion requirements in Listing Rule 14.11 apply regardless of whether the person is voting for or against the resolution.
This change has been prompted by a number of instances where an entity has structured a transaction in such a way that a voting exclusion applies to any persons opposed to the transaction, resulting in their inability to vote on the resolution. The ASX has highlighted that the purpose of the voting exclusion is to ensure that the resolution is passed by shareholders who do not have a material personal interest in the resolution. Accordingly, where a shareholder is found to have a material personal interest in a resolution, the shareholder can still exercise a vote against the resolution.
The amendments to the voting exclusion requirements will apply to notices of meeting dispatched after 1 December 2017.
More to come…
ASX has flagged its intention to release a new guidance note which will set out, amongst other things, the disclosures ASX expects to see in a notice of meeting. This includes a resolution to approve the issue of securities under, or to fund a reverse takeover, which will likely require an entity to provide specifics on the reverse takeover including details on the target (industry, financials, business model) and material terms of the transaction. We will keep track of this and provide an update in the future.