Last week, the Australian Securities Exchange (ASX) released an updated version of ASX Listing Rules Guidance Note 12 - Significant Changes to Activities (GN12).
In this Alert, Senior Associate Alex Davies and Trainee Solicitor Andrew Clements give a brief overview of some of the key changes to GN12 and how these changes may benefit those who are considering a backdoor listing.
The 20 cent rule
The most significant and positive change to GN12 is that ASX has adopted a new policy on the application of the “20 cent rule” to re-compliance listings. Usually, re-compliance with the admission requirements in Listing Rule 2.1 Condition 2 requires shares to be issued with, or have a sale price of, a minimum of 20 cents each.
The updated policy recognises that where an entity’s securities have been trading on ASX at less than 20 cents, having to undertake a consolidation or other restructure to facilitate compliance with the 20 cent rule can impose a range of prohibitive factors to the completion of a transaction that might not otherwise be in the interests of an entity and its shareholders. ASX have confirmed in the new GN12 that it will consider not applying the 20 cent rule provided:
- the issue price or sale price of shares is not less than two cents each; and
- the issue price is approved by shareholders under Listing Rule 11.1.2; and
- ASX is otherwise satisfied that the entity’s proposed capital structure will satisfy Listing Rules 1.1 Condition 1 and 12.5 (appropriate structure for a listed entity).
The new policy also recognises that where an entity is not proposing to undertake a capital raising as part of the broader transaction, the 20 cent rule has no application. In that case, if ASX has any concerns about the price at which an entity’s securities are likely to trade, it will address those concerns on a case-by-case basis.
Given the difficult market conditions of recent times, we think this new policy to potentially relax the minimum share price away from the 20 cent benchmark is a positive move by ASX designed to, in certain circumstances, preserve existing shareholder value and encourage renewed interest in backdoor listing transactions.
Meeting the minimum spread requirements
Further guidance has been included in GN12 about how ASX will examine spread for re-compliance transactions (which is consistent with, and an extension of, Listing Rule 1.1 Condition 7). Where an entity is undertaking a material capital raising in conjunction with a re-compliance listing, ASX will normally use the issue price under the prospectus to determine whether a holder’s securities have a value of at least $2,000 for the minimum spread test.
ASX may, however, use a different measure to determine the value of a holder’s securities if the entity is not undertaking a material capital raising in conjunction with its re-compliance, or if ASX is concerned that the issue price under the prospectus does not fairly reflect the market value of its main class of securities.
Pre-emptive capital raisings and escrow requirements
ASX acknowledges that a listed entity that is short of working capital may need to issue securities to raise cash to cover the costs of getting a transaction to the stage of shareholder approval.
Where such an issue occurs by way of a pro rata offer to existing shareholders, ASX is unlikely to classify the securities concerned as restricted securities. However, if the issue occurs by way of a placement (whether before or after the announcement of the transaction), ASX will examine it carefully. If ASX forms the view that the cash raised constitutes seed capital (including promoter stock), ASX is likely to classify the securities as restricted securities (making them subject to the normal ‘frontdoor’ escrow requirements in Chapter 9 of the Listing Rules).
Key take away points
We see these changes to GN12 as a positive move by ASX to ease the burden on entities who participate in backdoor listing transactions. Whilst ASX is steadfast on its position that you should not be able to achieve through the backdoor that which cannot be completed through the frontdoor, the updated policy and the relaxed position on the ‘20 cent rule’ will certainly reinvigorate the interest in backdoor listings whilst still enabling directors to preserve some existing shareholder value.