Australian Securities Exchange (ASX) compliance update

In its most recent update, ASX has clarified its position on deferred consideration and its effect on placement capacity, provided a reminder on the use of the term ‘over-subscribed’ and outlined its proposal to publish a quarterly list of long-term suspended entities.  

In brief

• ASX has clarified that when an entity agrees to pay deferred or contingent consideration in the form of a new issue of securities, the entity’s placement capacity will be reduced by the maximum number of securities that may be issued under the agreement (even if the consideration could take the form of cash rather than securities at the listed entity’s election), unless the agreement provides that the future issue of securities will be subject to securityholder approval.
• ASX has reminded listed entities that the term ‘over-subscribed’ means that applicants have applied and paid for more securities than were allocated to them with excess funds being remitted to them and that the term should not be used if that was not what occurred.
• ASX will soon begin publishing a quarterly list of entities whose securities have been suspended for more than three months.

Calculating placement capacity in relation to deferred or contingent consideration

ASX Listing Rule 7.1 provides that the aggregate limit on the number of ‘equity securities’ an entity can issue or agree to issue without security holder approval in any 12 month period is equivalent to 15% of its fully paid ordinary issued capital, subject to certain exceptions. ASX’s published guidance provides that the granting of a ‘simple put option’ by a third party that does nothing more than confer on the listed entity a right to require the third party to subscribe for equity securities will generally fall outside the definition of ‘equity security’.

ASX noted in its Compliance Update that it is aware of instances of listed entities structuring agreements so that the form of consideration that the listed entity must pay may be in cash or newly issued securities, at the election of the listed entity, and that it is sometimes asserted that an agreement of this type constitutes a ‘simple put option’ such that placement capacity is not reduced by entering into the agreement on the basis that it is not an agreement to issue ‘equity securities’. 

ASX clarified its position that it does not consider an agreement to pay deferred or contingent consideration to be a ‘simple put option’ for the purpose of assessing a listed entity’s available placement capacity. At the time a listed entity agrees to pay deferred or contingent consideration (even if the consideration could take the form of cash rather than securities at the listed entity’s election), the maximum number of securities which may ultimately be issued under the agreement will count towards variable ‘C’ (reducing available placement capacity), unless the agreement provides that the future issue of securities will be subject to security approval.

Use of the term ‘over-subscribed’

ASX has remined listed entities that when an entity announces that a placement was ‘over-subscribed’ it means that applicants applied and paid for more securities than were ultimately allocated to them and the excess funds were remitted to them. ASX has flagged that this term should only be used where this exact situation has occurred. If the demand for the placement was in excess of the funds sought to be raised then the entity may make a comment about that in its announcement, but it should use words that describe the situation such that it is not inaccurate or misleading.

ASX’s reminder comes some months after the Federal Court decision was handed down in ASIC’s proceedings against ANZ finding insufficient disclosure in relation to the allocation of a material number of securities to underwriters.¹ We expect that the focus on clear and consistent expression in respect of the outcome of capital raisings will continue and all listed entities will need to be precise in their announcements in this regard.

Long term suspended entities

ASX will now be releasing a list each quarter of entities whose securities have been suspended for more than three months. The list will be released on the market announcements platform of each entity on the list and will set out:

• the name and ASX code of each long term suspended entity;
• the periodic reports referred to in listing rule 17.5 that the entity has failed to lodge (if any);
• the 1 year deadline date for lodging the oldest outstanding periodic report; and
• the entity’s 2 year deadline to execute its plans for trading in its securities to resume, to ASX’s satisfaction.

If the entity does not meet the 1 or 2 year deadlines, it will be removed from the official list, with removal typically taking effect from the first trading day after the deadline date.

Long term suspended entities should be aware that reinstatement of their securities to quotation is not granted automatically on application and that ASX must be satisfied that all issues relating to the ongoing suspension have been addressed and that the entity complies with the listing rules at the point of reinstatement.  We have observed that some of the key issues that ASX has considered important to address ahead of reinstatement to quotation are that the entity has sufficient cash flow for its operations and that there is fulsome disclosure about the entity’s financial status and operations when the suspension is lifted. Suspended entities should also be aware that the continuous disclosure requirements continue to apply during the period of suspension.