The Australian Securities Exchange (ASX) has announced a number of important amendments to its Listing Rules and Guidance Notes that come into effect on 1 December 2017. The key change, which has received significant attention over the last two years, is a new requirement for a reverse takeover to be approved by the bidder's shareholders. Several other noteworthy amendments are being made at the same time, including:
- A general change to voting exclusion requirements such that the excluded persons are only prevented from voting in favour of a resolution but are entitled to vote against it.
- An expansion of the definition of "associate" to capture a wider range of groups of entities under common control and not merely corporate groups (for example, groups under control of an individual).
- Updates and additions to Guidance Note 1 on applying for admission (also see our client alert on the changes to admission requirements made last December).
- Updates and additions to Guidance Note 12 on significant changes to listed entities' activities.
What are the key implications of these changes
This diverse package of amendments has potential implications for a range of transactions:
- The requirement for shareholder approval will reduce the attractiveness of structuring certain transactions as a reverse takeover, although the high threshold imposed (an issue of at least 100% of existing capital) means that only a small number of transactions will be affected and this requirement may not be especially onerous in uncontested scenarios where there are strong reasons to prefer a reverse structure (such as avoiding adverse taxation or change of control implications).
- The general changes to voting exclusions and the "associate" definition will require careful attention in some situations, particularly where groups investing in or transacting with listed entities utilise trusts or other non-corporate entities, but are unlikely to have a significant impact more broadly.
- The amended guidance on admission requirements will be welcomed as clarifying existing requirements. This guidance largely sets out ASX's current practice regarding the financial information that will be required (such as when half year financials can be, or must be, included), and helpfully Guidance Note 1 now summarises the accounts that ASX and ASIC will expect in 14 of the most common listing scenarios. Additional guidance is provided on how the ASX rules regarding adequacy of working capital will be applied in practice.
- The amended guidance on significant transactions will require careful attention by listed entities and their advisers, particularly a number of changes regarding the notice of meeting where a transaction requires shareholder approval, and most importantly a number of changes regarding financial disclosures where an entity is required to seek re-admission following the transaction (such as in a backdoor listing scenario). ASX also confirms that a fixed and floating charge over all of a listed company's assets as security for financing does not constitute a disposal of the company's main undertaking that would require shareholder approval.
When will the new requirements take effect
The amendments come into effect on Friday, 1 December 2017. The requirement for bidder shareholder approval will apply to reverse takeovers announced on or after 1 December. The changes in relation to voting exclusions will apply to notices of meeting dispatched on or after 1 December.
We discuss the changes to the Listing Rules in more detail below.
A. Reverse takeovers
A reverse takeover involves a bidder acquiring a target company larger than itself and issuing its shares to the target's shareholders as consideration. Typically the target's shareholders collectively acquire majority ownership of the bidder, reversing the outcome of a standard takeover. While the shareholders of a takeover target have the right to accept or reject the offer to acquire their shares, or the right to vote on a proposed merger by way of scheme of arrangement, the shareholders of a company making a reverse takeover bid generally have no say regarding the transaction even though their interests may be significantly diluted or the nature of the bidder may be significantly altered. ASX also notes that the treatment of reverse takeovers in Australia is out of line with a number of major international exchanges which require bidders to obtain shareholder approval for relatively small issues (20 to 30% of existing capital).
To address this perceived gap in the regulatory framework, Listing Rule 7.2 will be amended so that a company proposing a reverse takeover will require the approval of its shareholders under Listing Rule 7.1. Under a new definition, a "reverse takeover" is a takeover bid or merger scheme where the bidder proposes to issue securities equivalent to at least 100% of its existing capital (either as consideration for, or to fund the cash consideration for, the acquisition) – that is, the bidder will at least double the number of fully paid ordinary securities it has on issue at the date of announcement. As an anti-avoidance measure, ASX has discretionary powers it can use to require approval where the rule applies in substance.
To accommodate the time practically required to complete the reverse takeover, the window under Listing Rule 7.3 for issuing the approved securities will be extended from three months to six months after the date of approval (although this does not accommodate the maximum 12 month offer period for a takeover under the Corporations Act, or offer periods longer than six months which can be necessary if lengthy competition approvals are required).
The notice of meeting sent to the bidder's shareholders will be required to include information about the reverse takeover – ASX intends to provide formal guidance on this requirement in due course, but has outlined that it will generally expect disclosures substantially equivalent to those made to target shareholders but will not require the bidder to prepare an independent expert's report. If materially new or different information emerges after the meeting, such as a material increase in the consideration offered, fresh shareholder approval may be required. This could hamper the normal course of a bid where there is more than one bidder and rapid responses are necessary.
In the process of consulting on these changes ASX acknowledged many potential implications of imposing an additional regulatory hurdle, including:
- placing affected bidders at a competitive disadvantage to other bidders who are not subject to shareholder approval requirements;
- increasing the costs of affected transactions, not only the direct cost of holding shareholder meetings but, perhaps more importantly, potential indirect costs such as a need for affected bidders to offer higher consideration or a break fee to counter the increase in deal uncertainty; and
- reducing the flexibility for affected bidders to vary their offer terms where this would require further shareholder approval. Tactically, a bidder is likely to be unwilling to get approval for a "buffer" above the current offer price, as this would signal to the target and the market that it is willing to pay more than it has offered.
Despite these drawbacks, ASX's decision to impose a "bright line" test (as opposed to a discretionary test based, for example, on control implications) provides welcome certainty to listed entities and their advisers in structuring relevant transactions.
Possible issues with the reverse takeovers new rules
One issue which is not clear from the new rules is the extent to which this interplays with the fiduciary duties of the directors of the bidder. The Takeovers Panel decided in the Gloucester Coal reverse takeover attempt by Whitehaven Resources in 2009 that a bidder proposing a reverse takeover of a larger target may well need to be allowed to terminate the transaction if the bidder receives an offer for its own company which is superior (from the point of view of the bidder's shareholders) as compared with the bidder's offer for the target, having regard to the fiduciary duties of the bidder's directors. It remains to be seen whether this concept will continue to apply in addition to a bidder shareholder approval rule, or whether this "fiduciary out" is superseded by the new rule in order to provide certainty to the target's shareholders. It is possible that the Takeovers Panel guidance in Guidance Note 1 footnote 51 will be updated in due course to address the new rule.
Another issue which is not clear from the new rules is what happens if bidder shareholders are in the process of approving or have approved a reverse takeover, and the bidder then wishes to increase the offer (for example, in response to a competing offer). It would seem that if the increased offer is able to be made within the bidder's residual 15% placement capacity then this would be permitted from a Listing Rules perspective under a shareholder approved mandate. However, some careful drafting of the rationale in the notice of meeting may well be needed to preserve this flexibility from the bidder's directors' duties perspective.
B. Voting exclusions
As well as amending the voting exclusion requirements for the purposes of reverse takeovers, ASX has taken the opportunity to amend Listing Rule 14.11 generally such that all voting exclusions will apply only to votes in favour of the relevant resolution, not to votes against it.
This change is not likely to have broad impact, and is aimed at situations where transactions have been structured by their proponents so as to attract a voting exclusion for persons known to be opposed to the transaction.
C. Associate test
In another change that has implications not only for reverse takeovers but also more broadly, ASX is expanding the meaning of "associate". Previously the Listing Rules incorporated the Corporations Act definition of "associate" that applies to questions of voting power, takeovers and so on. In the case of association resulting from control, that definition only captures association between bodies corporate, not other types of entities. The definition of "associate" in Listing Rule 19.12 will be amended so that, for the purposes of the Listing Rules, two "entities" (including individuals, partnerships and trusts as well as bodies corporate) are associates if one controls the other or both are under the common control of another person or entity.
This expanded meaning of "associate" widens the potential scope of all voting exclusions, which exclude not only specified classes of persons but also their associates. Other rules and guidance that refer to associates will be similarly impacted. For example, the change potentially:
- Widens the scope of the requirement under Listing Rule 10.1 for an entity to obtain shareholder approval for the acquisition or disposal of substantial assets from or to its related parties, subsidiaries or substantial holders, or any of their associates.
- Raises the bar for the minimum free float and minimum spread admission tests which require a minimum of 20% of securities to be held by non associated security holders and a minimum of 300 such security holders – the applicant's related parties and their associates do not count towards these requirements.
This is a diverse package of amendments containing a number of important developments. The new requirement for reverse takeovers to be approved by the bidder's shareholders is a significant change for affected transactions, although ASX's decision to impose a 100% threshold is a reasonable compromise which should affect only a small number of transactions while providing a reasonable degree of certainty regarding whether or not a transaction is affected. In other situations, listed entities and their advisers will need to pay careful attention to the changes to voting exclusions, the "associate" definition and ASX's guidance on significant transactions.