On 30 September 2014, ASX released an update to ASX Listing Rule Guidance Note 12: Significant Changes to Activities, which provides additional guidance for listed entities on how ASX approaches the regulation of back door listings.
Revised Guidance Note 12 is intended to provide further clarification on the circumstances in which ASX will exercise its discretions under Listing Rules 11.1 to 11.3 and provides additional guidance as to the practices and procedure adopted by ASX in applying these Listing Rules.
Significant updates incorporated into the revised Guidance Note 12 include the following:
- relaxation of the "20 cent rule" in certain circumstances;
- relaxation of the "minimum option exercise price rule" in certain circumstances;
- further guidance as to how ASX will apply the minimum spread test in the context of re-compliance with admission requirements;
- general guidance on how ASX will apply escrow requirements for restricted securities; and
- additional guidance as to the expectations of ASX regarding the contents of notices of meeting and other re-listing documents.
The updated policy guidelines and, in particular, ASX's willingness to relax compliance with certain technical requirements in specific circumstances is expected to facilitate and simplify back door listings by reducing risk and complexities that often arise when undertaking transactions of this kind.
Back door listings
A back door listing typically refers to a transaction in which an unlisted entity (target) is acquired by an entity which is already listed on ASX at the time of the Acquisition, rather than by applying for quotation under Listing Rule 1.1. The acquiring company is often a "shell" company. The shell company will generally purchase the target in exchange for an issue of securities and/or cash payment, to the vendors.
The practical effect of a back door listing is that the shareholders of the target company will acquire a controlling stake in the shell company by transferring their business into the shell.
A back door listing may, for some entities, be a more appealing and cost effective way of listing their business on ASX, particularly when compared to an Initial Public Offering process, which may not be appropriate for a number of reasons, including cost and timing considerations.
Quite often, a back door listing transaction involves changes to the shell company's nature and/or scale of activities, management and board of directors and will usually significantly dilute the listed entity's existing shareholding. ASX primarily regulates back door listings using its discretionary powers contained in Listing Rules 11.1 – 11.3. Guidance Note 12 contains the policy objectives of ASX in its regulation of back door listing transactions.
Key updates to Guidance Note 12 include the following:
- The 20 cent rule: The "20 cent rule"
requires that securities which are issued or sold in conjunction
with a back door listing have a minimum issue or sale price of at
least 20 cents per security.
Practically, this means that if an entity's securities have been trading at materially less than 20 cents each, the entity will usually need to consolidate those securities, or undertake another form of restructure to increase the value per share to around 20 cents. This has the potential to add complexities and commercial risk to a proposed transaction, as well as increase transaction costs.
ASX has adopted a new policy on the application of the "20 cent rule" to re-compliance listings. The new policy recognises that where an entity is not proposing to undertake a capital raising as part of, or in conjunction with, a significant change to the nature and scale of its activities, the "20 cent rule" has no application.
In particular, ASX will consider a request from the entity not to apply the "20 cent rule" where:
- the issue price or sale price for any securities being issued or sold as part of, or in conjunction with, the transaction is not less than 2 cents and is specifically approved by security holders as part of the approval obtained under Listing Rule 11.1.2; and
- ASX is otherwise satisfied that the entity's proposed capital structure after the transaction will satisfy Listing Rule 1.1.
ASX will address any concerns about the level at which an entity's securities are trading on a case by case basis.
- Minimum option exercise price: The "minimum option exercise price rule" is similar to the "20 cent rule" and requires options that are the subject of a back door listing to be exercisable for at least 20 cents in cash.
ASX has adopted a new policy on the application of the "minimum option exercise price rule" to re-compliance listings, which is similar to the "20 cent rule". This rule will apply where an entity is proposing to issue options over ordinary securities and its ordinary securities have been trading at less than 20 cents. ASX will consider a request from the entity not to apply the "minimum option exercise price rule", provided that:
- the option exercise price is not less than the issue price of securities under the back door listing (being a minimum 2 cents each under Guidance Note 12 and is specifically approved by security holders under Listing Rule 11.1.2; and
- ASX is otherwise satisfied that the proposed capital structure of the entity after the transaction will satisfy Listing Rule 1.1.
ASX may raise concerns if the number of options to be issued is disproportionate to the number of ordinary securities on issue.
- Minimum spread test: ASX has clarified that where an entity is undertaking a material capital raising in conjunction with a re-compliance listing, ASX will normally use the issue price under the prospectus or PDS for that capital raising to determine whether a holder's securities has a value of at least $2,000 (known as a "marketable price" under Chapters 1 and 2 of the Listing Rules) for the purpose of the minimum spread test. A different measure may be adopted if the entity is not undertaking a material capital raising in conjunction with its re-compliance or if ASX is concerned that the issue price under the prospectus or PDS does not fairly reflect the market value of its main class of securities.
- Escrow requirements for restricted securities: ASX has clarified the circumstances in which it will classify securities as "restricted securities" and therefore subject to escrow requirements. ASX has also indicated that it will look very closely at any issue of securities for cash that takes place shortly before or after a re-compliance transaction.
- Contents of Notice of Meeting and related material: Additional guidance is provided in relation to the information that should be included notices of meetings, prospectuses, PDSs and information memorandums in relation to back door listings. In particular, this includes audited financial information, if it is available at the time that the notice of meeting is prepared and despatched.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.