The Australian Securities Exchange (ASX) recently released its much awaited consultation paper ‘Simplifying, clarifying and enhancing the integrity and efficiency of the ASX listing rules’, seeking feedback on proposed changes the ASX Listing Rules and guidance notes, which are proposed to take effect on 1 July 2019.

Many of the proposed changes are welcome, 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. However, other amendments introduce more onerous obligations on listed entities, particularly from a disclosure perspective. Although aimed at bolstering the integrity of the ASX market, they may not all be welcomed by listed companies or members of the investment community.

ASX is also proposing to strengthen its powers to operate the market and to monitor and enforce compliance. The proposed changes make it clear that ASX can exercise (or decide not to exercise) any power under the Listing Rules in its absolute discretion and introduce 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 proposes to introduce 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 some of the more significant changes proposed both with respect to admission to listing and ongoing obligations for listed entities.

ADMISSION TO THE ASX

Subject Current rule Proposed changes
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 has proposed very welcome 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.

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 three financial years with the same main business activity
  • aggregate revenue over the last three financial years of at least $30 million
  • revenue for the last 12 months of at least $20 million
  • raising at least $20 million under IPO
  • market capitalisation at listing of at least $100 million.

Two-tier escrow administration

ASX has proposed 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 also proposes to amend the escrow rules to permit escrowed security holders to transfer escrowed secruities to a related party and to accept into a takeover offer or scheme of arrangement.

Working capital test Entities 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 has been 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 ou tin its prospectus.
Good fame and character test All directors must meet the ASX ‘good fame and character’ test. The ‘good fame and character’ requirement is proposed to be extended to an entity’s CEO even where they do not sit on the Board.
ASX liaison officer Each company must have a person available during market hours who is responsible for communication with ASX on Listing Rule issues. The entity’s proposed ASX liaison officer will be required to undertake a listing compliance course and attain a satisfactory pass mark.

ONGOING OBLIGATIONS

Subject Current rule Proposed changes
Quarterly reporting Any 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
  • explain any material differences in cash flows between quarters
  • disclose details of, and the reasons for, any related party payments.
Enhanced disclosure in Notices of Meeting Specific rules apply with respect to the disclosure of information for relevant listing rule approvals. ASX is proposing certain additional disclosure requirements including:
  • for approval or ratification of share issues e.g., for private placements – requiring companies to list the names of recipients of shares where there are less than 10. We anticipate that this will not be welcomed by certain institutional and sophisticated investors who remain below the substantial shareholder level for disclosure and seek to preserve confidentiality
  • 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 capacity Certain entities can ask shareholders to approve an additional 10 percent placement capacity (in addition to the 15 percent under Listing Rule 7.1) over a 12 month period which can be used to issue shares for cash or non-cash consideration ASX proposes to remove the ability for listed entities to use the additional 10 percent placement capacity for the issue of shares for non-cash consideration e.g., as consideration for an acquisition.
Agreements to issue shares pre-listing ASX is proposing 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 percent placement capacity provided that the agreement is disclosed in the listing prospectus/PDS.
Voting exclusions at shareholder meetings Various specific voting exclusions apply. ASX is proposing to change voting exclusions with respect to resolutions under Listing Rules 10.1 (related party transactions), 11.1.2 and 11.2 (significant changes to nature or scale) so these apply to persons ‘who will receive a material benefit as a result of the transaction’ being a ‘benefit that is likely to include the recipient to vote differently from other ordinary shareholders’. 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 the trustee 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 proposing 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.