Shutting the back door: Recent changes to ASX Guidance Notes may signal the end of back door listings.
On 28 August 2020, ASX released amendments to 4 of its guidance notes, with minor updates to guidance notes 3 and 4 and substantial updates to:
Guidance Note 12 – Significant Changes to Activities (GN 12); and
Guidance Note 19 – Performance Securities (formerly ‘Performance Shares’) (GN 19).
Significantly, ASX’s amendments to GN 12 may prove to be a further nail in the coffin for back door listings on ASX, given that:
entities seeking re-admission to ASX which were subject to a deed of company arrangement (DOCA) or creditors’ scheme of arrangement (Creditors’ Scheme) in the 2 years prior to announcing a proposed back door listing (and which have remained suspended since effectuation) will no longer be able to apply for a “2 cent waiver”; and
where a re-compliance listing involves a material capital raising, ASX has indicated that it may impose a condition of re-admission that a person is only counted for spread if they obtained a holding of the entity’s main class of securities with a value of $2,000 as a result of participating in the capital raising related to re-admission (i.e. by applying for securities in accordance with the re-admission prospectus).
In addition, GN 12 sets out updated guidance on the process that entities must follow when considering and announcing a transaction where Listing Rule 11.1 applies, including detailed new requirements for entities undertaking re-compliance transactions.
GN 19 sets out new rules in relation to the approval of performance securities (including a streamlined process for “ordinary course of business remuneration securities”), together with further guidance on inappropriate terms for performance securities and a new requirement for entities to obtain an independent expert report in circumstances where the number of shares issued upon achievement of the relevant milestones applicable to performance securities exceeds 10% of the shares on issue.
Outlined below are some of the key changes to GN 12 and GN 19.
1 GN 12 – Significant Changes to Activities
1.1 Reworking of the process for announcing a transaction under Listing Rule 11.1
ASX’s guidance on the steps to take ahead of announcing a transaction under Listing Rule 11.1 have been substantially re-worked.
In particular, ASX has clarified that entities, by seeking in-principle advice on ASX’s potential application of Listing Rules 11.1.2, 11.1.3 or 11.2 to a proposed transaction “before it comes under an obligation to announce the proposed transaction to the market”:
can have a high degree of confidence about ASX’s position (noting that previous references to “certainty” have been replaced); and
will not have to “face the embarrassment of having to correct or retract an announcement about the proposed transaction should ASX’s initial view on these matters be an unfavourable one”.
Importantly, where ASX exercises its discretion under Listing Rule 11.1.3 to require re-compliance under Chapters 1 and 2 of the Listing Rules, but has nonetheless given in-principle advice that ASX would not refuse re-admission under Listing Rule 1.19, ASX has cautioned that such in-principle advice is not, by itself, an indication that the entity will receive any other Listing Rule waiver or confirmation required or contemplated by the proposed transaction. ASX notes that, if an entity wants comfort in that regard, it will need to apply for specific in-principle advice on ASX’s preparedness to grant the waiver or confirmation in question.
ASX has also strongly encouraged entities to have a template trading halt/voluntary suspension letter ready for use at all times whilst negotiating a significant transaction that is potentially notifiable to ASX under Listing Rules 3.1 and 11.1.
1.2 Detailed guidance on re-compliance transactions under LR 11.1.3
ASX has outlined a new 6 step process that an entity must follow before and after announcing a transaction which requires re-compliance with Chapters 1 and 2 of the Listing Rules. This process is set out broadly in the table below (with the entity remaining suspended from quotation throughout the process).
Following completion of the 6 steps and assuming the transaction proceeds, ASX notes that it will only consider reinstating the entity’s securities to quotation if it is satisfied that:
the cumulative announcements the entity has made about the proposed transaction contain all of the information referred to in Annexure A of GN 12;
the entity has not in the preceding 12 months announced any other proposed transaction under Listing Rule 11.1 which required re-compliance pursuant to Listing Rule 11.1.3 and which, for any reason, did not proceed to completion;
the entity is in compliance with its obligations under the Listing Rules (including, in particular, its continuous and periodic disclosure obligations in Chapters 3 and 4, and its ongoing obligations in Chapter 12); and
there is no other reason for trading in the entity’s securities to remain suspended.
Otherwise, the entity’s securities will remain suspended from quotation until the entity has either re-complied with ASX’s admission and quotation requirements or the requirement to re-comply has ceased to apply (with the entity’s further announcement about the transaction following step 6 to clearly disclose this).
1.3 Requirement for shareholder approval and an updated prospectus where a
significant transaction is announced soon after admission
Where an entity announces a significant transaction soon after listing which is not consistent with its listing prospectus, ASX has clearly stated its position that it will consider afresh whether the entity is suitable for admission or re-admission to the official list.
In addition, even where ASX does not change its decision on the entity’s listing, ASX considers that shareholders should have a vote on whether the entity pursues the new transaction and that the entity should also issue an updated prospectus reflecting the new transaction.
1.4 Existing holders will not count for spread for re-compliance listings involving a
capital raising
ASX has confirmed that in the case of re-compliance listings which involve a capital raising, spread can only be obtained by investors in the capital raising. Accordingly, pre-existing shareholders (to the extent they don’t otherwise participate in the capital raising) will not be counted towards meeting ASX’s minimum spread requirements.
In addition, in the case of entities pursuing transactions that have a connection with an emerging or developing market, ASX has noted it will exercise its discretion to require that 100% of the minimum spread comes from investors resident in Australia (or other jurisdictions acceptable to ASX.).
1.5 2 cent waivers no longer available to post-DOCA or post-Creditors’ Scheme
entities
ASX has outlined some key changes to the circumstances in which it will grant relief from the 20 cent rule for re-compliance listings (i.e. a “2 cent waiver”).
In particular, entities which have been subject to a DOCA or Creditors’ Scheme in the 2 years prior to the date of the announcement of the proposed transaction and which have been continuously suspended since the DOCA or Creditors’ Scheme was effectuated will no longer be able to seek a “2 cent waiver” (to allow the price of the entity’s securities upon re-admission to be below 20 cents). ASX has also confirmed it will not grant relief from the minimum option exercise price rule where the same circumstances apply.
1.6 Further restrictions on 2 cent waivers
In addition to the disqualification of post-DOCA or post-Creditors’ Scheme entities, GN 12 also provides that:
ASX will not grant a 2 cent waiver unless either:
- the price at which the entity’s securities traded on ASX over the last 20 trading
days on which the entity’s securities have actually traded on ASX preceding the
date of the announcement of the proposed transaction (or, if the entity was
already suspended at the time of the announcement, the last 20 trading days on
which the entity’s securities have actually traded on ASX prior to its suspension)
was not less than the offer price; or- the entity announces at the same time that it announces the proposed
transaction that it intends to consolidate its securities at a specified ratio that will
be sufficient, based on the lowest price at which the entity’s securities traded
over the 20 trading days referred to previously, to achieve a market value for its
securities of not less than the offer price; andentities conducting capital raisings in the lead-up to, or following, the announcement of a transaction requiring re-compliance will be closely examined by ASX when considering whether to grant a 2 cent waiver. In particular, if a capital raising is conducted via a placement of securities (including convertible securities) to related parties, promoters, professional advisers involved in the transaction (or any of their respective associates), ASX will expect the effective price of those securities to be not less than the offer price of securities under the prospectus for the re-compliance transaction.
2 GN 19 – Performance Securities
2.1 Guidance now refers to “performance securities”
Although ASX has been applying the principles in GN 19 to performance options and performance rights for some time, GN 19 has now been updated to specifically refer to “performance securities” (which includes performance shares, performance rights and performance options).
In this regard, ASX has included a new section 3 to GN 19 which explains the different types of performance securities and clarifies ASX’s view that any agreement to issue ordinary shares following a nominated performance milestone being achieved will be considered a performance right for the purpose of GN 19 (even in circumstances where consideration may be referred to as “contingent consideration” or “deferred consideration”).
2.2 In-principle advice not required in some circumstances
In a new section 7 of GN 19, ASX has noted that entities will not need to seek ASX in-principle advice that the terms of performance securities satisfy Listing Rules 6.1 and 12.5 for the following:
an issue of cash-settled performance rights (as they are not considered “equity securities” under the Listing Rules);
an issue of performance shares, performance options or deliverable performance rights pursuant to a takeover bid under Chapter 6, or a merger by way of scheme of arrangement under Part 5.1, of the Corporations Act (as ASX’s view is that the oversight by ASIC, the Takeovers Panel and/or the Court are such that ASX’s further regulation is not warranted); or
an issue of performance shares, performance options or deliverable performance rights by an entity under an employee incentive scheme or as part of the remuneration package of a director or employee, where the issue has been made in the ordinary course of business of the entity and not in connection with a new or re-compliance listing and has been approved:
- if Listing Rule 10.11 applies, by shareholders under Listing Rule 10.11;
- if Listing Rule 10.14 applies, by shareholders under Listing Rule 10.14; or
- if Listing Rules 10.11 and 10.14 do not apply, by the board or a remuneration
committee of the board,(together referred to in GN 19 as “ordinary course of business remuneration securities”), which ASX considers raise far fewer concerns under the Listing Rules than other types of performance securities and which should be a matter for the board of the entity and/or the shareholders to determine.
2.3 Expanded information requirements when seeking in-principle advice
ASX has expanded the information which must be given to ASX when seeking in-principle advice on performance securities. In particular, where performance securities are being issued in connection with an acquisition of another entity or undertaking, ASX will require:
an explanation of why the performance securities are being issued, including the commercial goals the entity is trying to achieve and the risks it is trying to manage by imposing performance milestones; and
details of how the entity determined the number of performance securities to be issued to the vendor and why it considers that number to be appropriate and equitable.
2.4 Further guidance on inappropriate terms for performance securities
ASX has provided additional guidance on inappropriate terms for performance securities, including:
where the number of ordinary shares that will be issued on conversion is determined by reference to the market price of the ordinary shares at a future date or over a future period and there is no floor on the conversion price;
where conversion is triggered by any of the below:
- introducing a given number of new investors without any meaningful thresholds
around the amount of funds invested by them;- winning a given number of new customers without any meaningful thresholds
around the amount of sales generated from them;- launching a new product or service without any meaningful thresholds around the
level of sales generated by the new product or service;- launching a new sales outlet or channel without any meaningful thresholds around
the level of sales generated by the new outlet or channel; and- signing-up/registering a given number of new website users without any
meaningful thresholds around their level of usage of the website (including
counting users who are on a free trial or discounted introductory offer); andwhere performance milestones:
- are tied to revenue or profit for a particular period that do not expressly exclude
or disregard:- one-off or extraordinary revenue items;
- revenue received in the form of government grants, allowances, rebates or
other hand-outs; or- revenue or profit that has been “manufactured” to achieve the performance
milestone;- are tied to a projected financial measure for a particular period rather than an
actual financial measure for that period;- involve a financial measure that is not audited by the entity’s external auditor or
some other quantitative or qualitative measure that is not signed off by another
suitable expert;- are vague, uncertain, ambiguous or not transparent; and
- are subjective or otherwise based on opinion.
2.5 New requirement for independent expert reports
GN 19 also includes a new requirement for an independent expert report to be obtained confirming that the issue of performance securities is fair and reasonable to non-participating shareholders in the following circumstances:
where an entity is already listed and the number of ordinary shares that will be issued on conversion (in aggregate) on achievement of the milestone is greater than 10% of the number of ordinary shares the entity has or proposes to have on issue as at the date the performance securities are proposed to be issued (taking into account any ordinary shares that the entity may be issuing in connection with the same transaction); or
where an entity is applying to be listed, it has or proposes to have performance securities on issue at the date of its admission to quotation and the number of ordinary shares that will be issued on conversion (in aggregate) on achievement of the milestone is greater than 10% of the number of ordinary shares the entity proposes to have on issue at the date of its admission to quotation (taking into account any ordinary shares that the entity may be issuing in connection with its listing).
In the case of a listed entity, the independent expert report must be included in a notice of meeting seeking shareholder approval for the terms of the performance securities, while in the case of an entity applying to be listed, the independent expert report must be included in the listing prospectus.
Next steps
If you have any queries about the recent amendments to the ASX guidance notes, get in touch with our team.
Important
The contents of this publication should not be replied upon as legal advice, but instead as commentary and general information. Specific legal advice about your circumstances should always be sought separately before taking any action based on this publication.
Contact the authors
George Henderson
george.henderson@aghlaw.com.au
+61 408 909 575
Alex Dewhirst
alex.dewhirst@aghlaw.com.au
+61 401 759 965