On 12 May 2016, the Australian Securities Exchange (ASX) released a Consultation Paper detailing a number of proposed changes to its admission and quotation requirements in order to ensure that ASX continues to be a market of quality and integrity, and remains internationally competitive. The key changes, which will affect both initial public offerings (IPOs) and backdoor listings, include:
- increasing the financial thresholds for listing – both for the profit test and the assets test;
- introducing a minimum free float requirement;
- amending the minimum spread requirement;
- amending the minimum working capital requirement so it is the same for all entities utilising the assets test;
- introducing a new requirement for entities admitted under the assets test to provide three full years’ audited accounts; and
- reinforcing ASX’s absolute discretion in deciding whether to admit an entity to the official list.
Our previous alert “ASX listing changes: Does size really equate to quality?” discusses these amendments in further detail. In addition, ASX is also updating its Guidance Note 12: Significant Changes to Activities (GN 12) to address some emerging issues in relation to back door listings. This alert considers the implications of these further amendments on the backdoor listing process.
Suspension from quotation
Previously, where a listed entity announced a backdoor listing, ASX allowed the entity to continue trading up to the day on which its shareholders were asked to approve the transaction. If approved, the entity’s securities were suspended until it re-complied with the ASX’s admission and quotation requirements. ASX has amended this policy, with immediate effect, so that the entity’s securities will be suspended from the time of the announcement of the proposed transaction and will remain suspended until the entity has re-complied with the ASX’s admission and quotation requirements.
This amendment brings backdoor listings into line with IPOs, which can only trade if they are in compliance with the ASX’s admission and quotation requirements under Chapters 1 and 2 of the ASX Listing Rules. The amendment removes a number of advantages of the backdoor listing process in that the listed entity can no longer gauge market reaction to the announcement of the transaction by virtue of a change to its share price, nor will it have the benefit of any increase in value perceived from the transaction when undertaking a fundraising in conjunction with the transaction.
20 cent rule
The 20 cent rule requires the issue or sale price of all securities for which an entity seeks quotation (other than options) to be at least 20 cents in cash. The ASX’s current policy with respect to backdoor listings is that the 20 cent rule will not apply where:
- the issue price of any securities (other than options) is not less than two cents and the issue price is specifically approved by shareholders as part of their approval of the transaction; and
- ASX is satisfied that the entity’s capital structure after the transaction will be appropriate for a listed entity
ASX has updated this policy so that in order to take advantage of the above exception to the 20 cent rule, the price at which the entity’s securities last traded on ASX must not be less than two cents per share. ASX has confirmed that if an entity does not meet this additional requirement, it will not be granted relief from the 20 cent rule. Accordingly, an entity whose share price is below two cents will be precluded from undertaking a backdoor listing without first consolidating its issued capital so that it complies with the 20 cent rule.
Notice of meeting and timing of ASX review
At present, ASX will review a draft notice of meeting in relation to a back door listing within five days of receipt of the notice. ASX proposes to change this requirement so that in respect of a transaction which requires both shareholder approval and re-compliance with Chapters 1 and 2 of the Listing Rules, it will take closer to 15 business days to review the notice of meeting and longer if the notice raises any issues under the Listing Rules. ASX also proposes to charge a fee of $10,000 (plus GST) for this review. These amendments will add both time and expense to the back door listing process and impact on two of the perceived advantages of a back door listing in comparison to an IPO.
Pre-emptive capital raisings
The amendments to GN 12 also indicate an increased focus and scrutiny on pre-emptive capital raisings; that is capital raisings undertaken in advance of securityholder approval for the proposed transaction. ASX has emphasised that it will carefully examine the issue of any securities by an unlisted entity which become securities in the listed entity once the transaction is completed. ASX will also carefully examine any capital raising by a listed entity which occurs in the lead up to, or after, the announcement of the proposed transaction to determine if it is in the nature of a pre-emptive capital raising. However, ASX has indicated that a capital raising which is undertaken solely to cover the costs of getting the transaction to the stage of securityholder approval or achieving re-compliance with the ASX’s admissions and quotation requirements will not be regarded as a pre-emptive capital raising. ASX’s decision to suspend trading in a listed entity’s securities from when the transaction is announced will also mean that a listed entity’s ability to undertake a pre-emptive capital raising will be greatly reduced.
The amendments to GN 12 indicate ASX’s strong preference for the IPO process by removing some of the perceived benefits offered by backdoor listings and making the process a less attractive option for start-ups and other early stage companies. The immediate suspension of a listed entity’s securities from the time the back door listing is announced impedes price transparency and means the market will not have the opportunity to factor into the share price the perceived value of the transaction. This was seen to be one of the main advantages of the backdoor listing process. The proposed amendments may also result in fewer opportunities for listed entities to engage in the backdoor listing process where their securities are trading at less than two cents each, as ASX will no longer grant a waiver of the 20 cent rule in these circumstances. The proposed amendments will also push out the transaction timetable for backdoor listings by a minimum of two weeks in light of ASX requiring a minimum of 15 business days to review the notice of meeting relating to the transaction.