The Australian Securities and Exchange Commission (ASX) has released its final response to submissions to its November 2018 consultation paper: Simplifying, clarifying and enhancing the integrity and efficiency of the ASX listing rules. The response includes a range of rule amendments as well as new, updated and expanded guidance.
- Following consultation, the ASX has released final changes to the ASX Listing Rules and guidance and a statement outlining its response to consultation.
- The broad range of changes are aimed at improving disclosures to the market, making the listings rules easier to understand and comply with, and enabling the ASX to better monitor and enforce compliance.
- Key changes include (among others): a) new measures to address breaches of the listing rules (eg the option for the ASX to publicly censure entities for breach of the rules); b) changes to ASX’s quarterly reporting regime; c) more guidance and direction on the information that should be given to shareholders in notices of meetings; d) changes to results of meeting disclosure; e) new education requirements for those appointed to deal with the ASX; and f) the extension of ASX’s ‘good fame and character’ listing condition to include non-director CEOs and CFOs
- Timing: The new rules will come into effect from 1 December this year (with two exceptions). The new education requirements will apply from 1 July 2020. Changes to the Appendix 4C and Appendix 5B quarterly cash flow reports will come into effect for the quarter beginning 1 January 2020 and ending 31 March 2020.
- ASX will be conducting a national roadshow on its rule and guidance changes in late October and early November.
The changes are fairly broad. For ease, the consultation grouped them into eight areas: 1) enhancing ASX’s powers to operate the market and to monitor and enforce compliance with the listing rules; 2) improving market disclosures and other market integrity measures; 3) making the rules simpler and easier to follow; 4) making aspects of the listing process and ongoing compliance with the listing rules more efficient for issuers and for ASX; 5) updating the timetables for corporate actions; 6) correcting gaps or errors in the listing rules; 7) general drafting improvements, including removing redundant rules; and 8) more and better guidance.
The response document explaining the final changes and setting out ASX's response to the community consultation broadly follows the same structure as the consultation.
Snapshot: Key changes?
Announcing the release of the changes, the ASX highlighted the following as 'key initiatives':
- new measures to address breaches of the listing rules
- changes to ASX’s quarterly reporting regime to provide a more robust disclosure framework for start-up entities
- more guidance and direction on the information that should be given to shareholders in notices of meetings
- more guidance and direction on the voting processes that should be followed at shareholder meetings and more consistent reporting of voting outcomes
- simpler and clearer processes and forms to announce a proposed issue of shares and to seek their quotation
- better and timelier disclosure by listed investment companies and listed investment trusts of their net tangible assets (NTA) backing
Other changes highlighted by ASX include: a) the simplification of ASX’s escrow rules and guidance to make the escrow process less burdensome for listed entities; b) an extension of ASX’s ‘good fame and character’ listing condition to include non-director CEOs and CFOs; c) measures to address inappropriate behaviours by promoters and professional advisers in new and back door listings; and d) new education requirements (for any person appointed to be responsible for communicating with ASX about listing rule matters).
ASX Chief Compliance Officer, Kevin Lewis, said that the changes are intended to improve disclosures to the market, make the listings rules easier to understand and comply with and finally, to enable ASX to better monitor and enforce compliance with the listing rules.
A high level overview of some of the key changes impacting ASX's monitoring and enforcement of compliance with the listing rules and changes aimed at improving market disclosures and market integrity is below.
[Note: A mark-up of the changes to the listing rules can be accessed on the ASX website here. Marked up copies of the changes to the Guidance Notes can be accessed on the ASX website here. The full text of the ASX response paper is here]
Monitoring and enforcing compliance with the listing rules
The ASX has made a number of rule changes aimed at enhancing its powers to operate the market and to monitor and enforce compliance with the listing rules. These include the following:
- Compliance requirements: Rule 18.8 has been amended to list specific examples of the types of requirements ASX may impose on a listed entity to ensure compliance with the listing rules. These include (among others) requirements to: 1) give specified information to ASX for release to the market; 2) update, correct or retract information previously released to the market; 3) not to enter into or perform an agreement or transaction that would breach the listing rules; 4) cancel or reverse an agreement or transaction entered into in breach of the listing rules; 5) seek the approval of the holders of its ordinary securities to an agreement or transaction required under the listing rules; 6) include specified information in a notice of meeting proposing a resolution under the listing rules; 7) update, correct or retract any information in a notice of meeting proposing a resolution under the listing rules; 8) introduce or update a policy or process to comply with the listing rules; and 9) cause specified officers or employees to undertake a compliance education course.
- Option to publicly censure entities for breach of the rules: A new rule (18.8A) has been added which gives ASX the power to formally censure a listed entity for breach of the listing rules, or condition imposed under the listing rules, and to publish the censure and the reasons for it to the market.
- Conditional no-action letters: Rule 18.5 has been amended to make clear that ASX can impose conditions in connection with its decision not to take action against an entity for breaching the listing rules, and to make clear that and if it does impose any such conditions, that the entity must comply with them.
- Giving ASX information: Rule 18.7 has been amended to provide that ASX can require information to enable it to be 'satisfied that the entity is, and has been, complying with, or will comply with, the listing rules or any conditions or requirements imposed under the listing rules; or reasonably requires to perform its obligations as a licensed market operator'. In addition, ASX has expanded rule 18.7 to require that the information documents or explanation be verified under oath.
- Granting waivers: Rule 18.1 has been amended to make it clear that ASX can grant waivers to a specific class of entities or to all entities generally.
- Discretion applying the rules: A new rule (18.5A) has been included to make clear that ASX can exercise or decide not to exercise any power or discretion conferred under the listing rules in relation to an entity in its absolute discretion. The new rule also makes clear that ASX may do so on conditions, and if it does so, that the entity must comply with the conditions.
Improving market disclosures and other market integrity measures
Enhancing the quarterly reporting regime to provide a more robust disclosure framework for start-up entities
ASX proposed a number of changes to its quarterly reporting regime to provide a more robust disclosure framework for start-up entities and to give them a vehicle to communicate developments in their business to the market on a regular basis. ASX says that generally, the proposed changes were supported and consequently it is proceeding them (with some modifications to those proposed in the consultation). Final changes include the following.
Quarterly activity reports
- A new rule (rule 4.7C) has been added requiring start-up entities that currently lodge an Appendix 4C quarterly cash flow report with ASX under rule 4.7B, to also lodge a quarterly activities report with ASX. The rule also sets out the information that the report must include with the aim (according to the consultation document) of making start up entities: 1) more accountable for the 'use of funds' statements and expenditure programs included in their listing prospectuses and product disclosure statements (PDSs); 2) more transparent about quarter to quarter differences in projected and actual cash outflows; and about related party payments. Rules 5.3 and 5.4 have also been amended to require the quarterly activity reports of mining exploration entities and oil and gas exploration entities under those rules to include certain information.
- Adding rule 4.7C and 4.12 (discussed below) to the list of documents in rule 17.5 failure to lodge documents that attract an automatic suspension if not lodged with ASX on time
'Better and timelier disclosure' by listed investment companies and listed investment trusts of their net tangible assets (NTA) backing
The changes include a number of measures aimed, according to the consultation document, at improving the disclosure by listed investment companies (LICs) and listed investment trusts (LITs) of their NTA backing. These include (among other changes):
- amending the definition of 'net tangible asset backing' in rule 19.12 to clarify its intended operation
- amending rule 4.10.20 to require a LIC/LIT to disclose certain information (eg the net tangible asset backing of its quoted securities at the beginning and end of the reporting period and an explanation of any change therein over that period) in its annual report
- amending rule 4.12 to require a LIC/LIT to disclose its monthly NTA backing as soon as that information is available and in any event not later than 14 days after the end of that month
According to the consultation document, the changes are intended to 'address issues ASX has experienced recently with some LICs regarding their valuation methodology for investments in unlisted securities' and a desire by ASX to 'standardise and improve NTA reporting by LICs and LITs'.
Disclosure of closing dates for the receipt of director nominations
Rule 3.13.1 has been amended to make clear that entities must give five business days notice to the market of the closing date for the receipt of director nominations. Though the amended rule provides that the 'failure to give such notice does not invalidate the meeting or the election of any director at the meeting'.
Disclosure of voting results at meetings of security holders
Rule 3.13.2 has been amended to standardise the disclosure of voting results at meetings of security holders. Among other things, the amended rule now requires an entity to disclose for each resolution put to a meeting of security holders: a) both the number and a short description of the resolution; b) whether the resolution was passed or not passed; and c) whether the resolution was decided on a show of hands or a poll.
ASX notes that one respondent to the consultation suggested that the listing rules make polls mandatory on all resolutions. The ASX response document states that the revised guidance included in the consultation package makes clear that because of the possible application of voting exclusions, all resolutions under the listing rules should be decided by a poll and not by a show of hands. The response goes on to say that 'It is not clear to ASX that the LR [listing rules] could properly require this in relation to non-LR resolutions. ASX would also note that this matter has been addressed in a non-mandatory way in the fourth edition of the Corporate Governance Principles and Recommendations (see recommendation 6.4) and this should lead to a greater adoption of voting by poll over time'.
The ASX also notes that one respondent to the consultation suggested that there should be a requirement to disclose the proxy outcomes of proposed resolutions where the proxy deadline has passed but the resolution is subsequently not put to the meeting. ASX states that it 'considers the proposed new requirement in LR [listing rule] 3.13.2 [which is included in the final version of the rules] to include an explanation as to why a resolution was not put to a meeting is sufficient for these purposes'.
Disclosure of underwriting agreements
New rule 3.10.9 has been inserted requiring a listed entity to notify the market if it has entered into an agreement to underwrite a DRP and to disclose the name of the underwriter, the extent of the underwriting, the fee or commission payable, and a summary of the significant events that could lead to the underwriting being terminated.
Rules 3.11.3, 7.2 and 10.12 and Appendix 3B (announcements of new issues) have been amended to require an entity to disclose the details mentioned above about the underwriting agreements referred to in those provisions.
Good fame and character requirement extended to CEOs and CFOs
The 'good fame and character' requirement in the conditions for admission as an ASX Listing (rule 1.1 condition 20) has been expanded to cover an entity’s CEO or proposed CEO, it's CFO or proposed CFO as well as its directors and proposed directors.
The ASX notes that one respondent to the consultation suggested that the ASX extend the requirement to other C-suite executives. Though ASX has extended the requirement to CFOs (in response to this feedback) 'given the pivotal role they play at listed entities' the response states that it is 'wary of extending it any further at this stage, given the administrative burden it would create for applicants for listing in obtaining good fame and character documentation for a broader set of executives'.
New education requirements for persons responsible for communication with ASX on listing rule issues
To improve listing rule compliance, ASX has amended rule 1.1 condition 13 and rule 12.6 to require the person who has been appointed by an entity to be responsible for communication with ASX in relation to listing rule matters to have completed an approved education course and examination covering listing rule compliance matters and to have achieved a 'satisfactory pass mark in the examination for that course'.
The changes to condition 13 come into effect on 1 July 2020 and apply to entities that lodge an application to be admitted to the official list on or after that date. The changes to rule 12.6 similarly apply from 1 July 2020.
Voting by employee incentive scheme securities
New Rule 14.10 provides that securities held by or for an employee incentive scheme must only be voted on a resolution under the listing rules if, and to the extent that they are, held for the benefit of a nominated participant in the scheme who is not excluded from voting on the resolution under the listing rules and who has directed how the securities are to be voted.
Listing Rules 15.5 has been amended to make it clearer how a document should be given to ASX. A document given by an entity to ASX must: include, or be sent with a covering letter that includes, the entity’s name, address and corporate logo, unless a form prescribed by the listing rules or an Australian law is used; be dated; identify the title of the body, or the name and title of the officer, of the entity who authorised the document to be given to ASX; and if the document is an announcement under rule 3.1, include the name, title and contact details of a person who security holders or other interested parties can contact if they have any queries.
New rule 3.10.5(b) has been inserted and requires that where an entity issues a new class of quoted equity securities, the distribution schedule should include the number of recipients in the following categories — 1 - 1,000, 1,001 - 5,000, 5,001 - 10,000, 10,001 - 100,000, 100,001 and over — and the total percentage of those securities held by the recipients in each category.
Announcing issues of securities and seeking their quotation
ASX has implemented a number of changes aimed at simplifying and rationalising the current process for announcing issues of securities and applying for their quotations. These include changes to listing rules 2.7, 2.8 and 3.10.3 and Appendix 3B; the replacement of LR 3.10.5; and the introduction of new listing rules 3.10.3A, 3.10.3B and 3.10.3C as well as the inclusion of a new Appendix 2A.20.
When do the changes apply?
Subject to the receipt of the necessary regulatory approvals — and with two exceptions outlined below — the listing rule amendments and new and updated guidance notes will come into effect on 1 December 2019.
The first exception is the changes to Listing Rule 1.1 condition 13 and Listing Rule 12.6 to require the person who has been appointed by an entity to be responsible for communication with ASX in relation to listing rule matters to have completed an approved education course and examination covering listing rule compliance matters. To allow more time to complete the development of ASX’s online education course and examination, ASX has decided to push back the transition date for these particular rule changes to 1 July 2020.
The second exception is the changes to the Appendix 4C and Appendix 5B quarterly cash flow reports, which will come into effect for the quarter beginning 1 January 2020 and ending 31 March 2020.
ASX will be conducting a national roadshow on its rule and guidance changes in late October and early November. The Sydney event will be held on 7 November.