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trendsetting – ASX and ASIC changes indicate tighter disclosure regulation is here to stay

14 November 2019
olivia christensen nicola stewart
Read Time 5 mins reading time

Market crashes, low investor confidence, failed IPOs and volatile political and economic climates are frequent problems in the listed space, especially where the outcome is risk-averse investors.

For ASX-listed entities, many threats are imported, like the 2008 GFC, escalations in a US-China trade war or Brexit. But the Hayne Royal Commission into the Banking and Finance Industry was an Australian special and as a public market-maker the ASX has no choice but to respond.

The ASX has announced the final line up of changes to the ASX Listing Rules (ASX LR) which are set to commence on 1 December 2019.

The new rulebook, introduced for the purpose of ‘Simplifying, clarifying and enhancing the integrity and efficiency of the ASX listing rules’, has received a warm welcome from listed entities and advisors alike.

Whilst it predominately achieved this purpose, an unmissable feature of the changes is an increase in disclosure and reporting requirements and a significant enhancement in the ASX’s regulatory powers.

The Hayne Royal Commission was undoubtedly necessary but the main outcomes have so far included the expansion of ASIC’s litigation budget and the ramp up of available corporate regulatory powers (and could even be blamed for decline in international investor sentiment resulting in Latitude Finance’s second IPO failure in October).

disclosure and reporting – prepare for more

 A raft of changes have been made to the disclosure and reporting regime which will impact every listed entity. Examples include:

  • Standardisation for the disclosure of voting results at security holder meetings (see amended ASX LR 3.13.2) ;
  • Clarification of ASX LR 14.11 regarding the disclosure of voting exclusion statements;
  • Changes to Chapter 10, additional disclosure requirements for persons in a position of influence seeking to acquire or dispose of assets in a transaction;
  • Increased disclosure for entities issuing securities utilising their additional 10% placement capacity.

Increasing disclosure and reporting predominately results in extra administrative work for the issuer and its nominated ASX liaison; but is intended to bolster market integrity (and hopefully encourage investors to open their wallets).

A pointed change by the ASX was the amendment to the disclosure of underwriting and the extent of underwriter involvement in transactions.

Underwriting is critical for companies to mitigate risk in large capital raises and is often favoured by investors (as it greatly increases the likelihood that an entity will achieve its fundraising objectives).  Notoriously poor underwriting disclosures have led to a perception of unfairness (particularly in institutional placements where opaque allocation policies are prevalent).  Overall these under disclosures do not bode well for positive market perception.

Expanded underwriting disclosures must now cover the nature and extent of the underwriting (including the amounts or proportion of the raise that is underwritten), all forms of consideration rather than just fees or commissions (including discounts to the issue price received by participants) and a summary of key terms which may result in termination.

Conveniently, the changes follow ASIC’s decision to prosecute ANZ for breaches of its continuous disclosure obligation for failing to disclose the extent of underwriter involvement in a $2.5 billion placement – the same failure which has launched the ACCC criminal cartel case against the bank.  The amendments remove any ambiguity over disclosure requirements and may reduce the possibility of underwriting giving rise to ‘unacceptable circumstances’ (affecting control) or misrepresentation prosecutions.

Another interesting addition is the expansion of reporting requirements for high risk entities (i.e. mining exploration and oil and gas entities and start-ups) or those admitted under the asset test that are currently required to lodge quarterly cash flow reports.

Cash-flow reports will now need to be accompanied by activities reports detailing ‘use of funds’.  As these entities frequently capital raise (and typically have high cash-burn), the additional reporting obligation is intended to encourage transparency and market integrity (and more frequent related party disclosures).

beware of the regulator

In our post Hayne Royal Commission regulatory environment, the expansion of the ASX’s monitoring and enforcement powers in the new rulebook are unsurprising. The ASX in its absolute discretion can investigate compliance failures and exercise various enforcement powers for breaches of the listing rules.

Chapter 18 of the ASX LRs expressly expanded the ASX’s powers to include, requiring companies to disclose information to the ASX, the requirement to verify information under oath, to cancel or reverse a transaction, a power to delist companies or impose escrow periods on securities.  The ASX has also added LR18.8A, to publically censure companies for egregious breaches, similar to the LSE and SEHK.

Practically, ongoing compliance with the rules will be critical, particularly when entering into M&A transactions or capital raisings. Listed entities should consider the following:

  • Beware of the censure power – negative press on the ASX can harm investor confidence and hurt share prices at critical moments;
  • Seek waivers of listing rules where possible – the ASX can grant waivers for certain rules which are often used to get around timetabling issues in raisings and corporate transactions;
  • Don’t be afraid of disclosure, particularly for risky transactions – it is better to disclose first than have to deal with a transaction reversal later;
  • Employ advisors who know the rules and ensure that your Board and C-suite are familiar with the listing rules in the event a quick response is necessary to avoid enforcement action.

For companies considering IPO, the ASX will have complete discretion to refuse admission even if all of the criteria are met. Considering recent IPO tragedies such as  WeWork, Lyft,  Uber and Latitude Finance – this pre-existing muscle may be flexed a little more often.

Now, more than ever, listed entitles will need to ensure that they have competent advisors and take proactive steps to avoid interference and public reprimand by regulatory authorities.

If you have any questions or concerns about listing or your future compliance abilities, our Corporate team can assist you.

stay up to date with our news & insights

trendsetting – ASX and ASIC changes indicate tighter disclosure regulation is here to stay

14 November 2019
olivia christensen nicola stewart

Market crashes, low investor confidence, failed IPOs and volatile political and economic climates are frequent problems in the listed space, especially where the outcome is risk-averse investors.

For ASX-listed entities, many threats are imported, like the 2008 GFC, escalations in a US-China trade war or Brexit. But the Hayne Royal Commission into the Banking and Finance Industry was an Australian special and as a public market-maker the ASX has no choice but to respond.

The ASX has announced the final line up of changes to the ASX Listing Rules (ASX LR) which are set to commence on 1 December 2019.

The new rulebook, introduced for the purpose of ‘Simplifying, clarifying and enhancing the integrity and efficiency of the ASX listing rules’, has received a warm welcome from listed entities and advisors alike.

Whilst it predominately achieved this purpose, an unmissable feature of the changes is an increase in disclosure and reporting requirements and a significant enhancement in the ASX’s regulatory powers.

The Hayne Royal Commission was undoubtedly necessary but the main outcomes have so far included the expansion of ASIC’s litigation budget and the ramp up of available corporate regulatory powers (and could even be blamed for decline in international investor sentiment resulting in Latitude Finance’s second IPO failure in October).

disclosure and reporting – prepare for more

 A raft of changes have been made to the disclosure and reporting regime which will impact every listed entity. Examples include:

  • Standardisation for the disclosure of voting results at security holder meetings (see amended ASX LR 3.13.2) ;
  • Clarification of ASX LR 14.11 regarding the disclosure of voting exclusion statements;
  • Changes to Chapter 10, additional disclosure requirements for persons in a position of influence seeking to acquire or dispose of assets in a transaction;
  • Increased disclosure for entities issuing securities utilising their additional 10% placement capacity.

Increasing disclosure and reporting predominately results in extra administrative work for the issuer and its nominated ASX liaison; but is intended to bolster market integrity (and hopefully encourage investors to open their wallets).

A pointed change by the ASX was the amendment to the disclosure of underwriting and the extent of underwriter involvement in transactions.

Underwriting is critical for companies to mitigate risk in large capital raises and is often favoured by investors (as it greatly increases the likelihood that an entity will achieve its fundraising objectives).  Notoriously poor underwriting disclosures have led to a perception of unfairness (particularly in institutional placements where opaque allocation policies are prevalent).  Overall these under disclosures do not bode well for positive market perception.

Expanded underwriting disclosures must now cover the nature and extent of the underwriting (including the amounts or proportion of the raise that is underwritten), all forms of consideration rather than just fees or commissions (including discounts to the issue price received by participants) and a summary of key terms which may result in termination.

Conveniently, the changes follow ASIC’s decision to prosecute ANZ for breaches of its continuous disclosure obligation for failing to disclose the extent of underwriter involvement in a $2.5 billion placement – the same failure which has launched the ACCC criminal cartel case against the bank.  The amendments remove any ambiguity over disclosure requirements and may reduce the possibility of underwriting giving rise to ‘unacceptable circumstances’ (affecting control) or misrepresentation prosecutions.

Another interesting addition is the expansion of reporting requirements for high risk entities (i.e. mining exploration and oil and gas entities and start-ups) or those admitted under the asset test that are currently required to lodge quarterly cash flow reports.

Cash-flow reports will now need to be accompanied by activities reports detailing ‘use of funds’.  As these entities frequently capital raise (and typically have high cash-burn), the additional reporting obligation is intended to encourage transparency and market integrity (and more frequent related party disclosures).

beware of the regulator

In our post Hayne Royal Commission regulatory environment, the expansion of the ASX’s monitoring and enforcement powers in the new rulebook are unsurprising. The ASX in its absolute discretion can investigate compliance failures and exercise various enforcement powers for breaches of the listing rules.

Chapter 18 of the ASX LRs expressly expanded the ASX’s powers to include, requiring companies to disclose information to the ASX, the requirement to verify information under oath, to cancel or reverse a transaction, a power to delist companies or impose escrow periods on securities.  The ASX has also added LR18.8A, to publically censure companies for egregious breaches, similar to the LSE and SEHK.

Practically, ongoing compliance with the rules will be critical, particularly when entering into M&A transactions or capital raisings. Listed entities should consider the following:

  • Beware of the censure power – negative press on the ASX can harm investor confidence and hurt share prices at critical moments;
  • Seek waivers of listing rules where possible – the ASX can grant waivers for certain rules which are often used to get around timetabling issues in raisings and corporate transactions;
  • Don’t be afraid of disclosure, particularly for risky transactions – it is better to disclose first than have to deal with a transaction reversal later;
  • Employ advisors who know the rules and ensure that your Board and C-suite are familiar with the listing rules in the event a quick response is necessary to avoid enforcement action.

For companies considering IPO, the ASX will have complete discretion to refuse admission even if all of the criteria are met. Considering recent IPO tragedies such as  WeWork, Lyft,  Uber and Latitude Finance – this pre-existing muscle may be flexed a little more often.

Now, more than ever, listed entitles will need to ensure that they have competent advisors and take proactive steps to avoid interference and public reprimand by regulatory authorities.

If you have any questions or concerns about listing or your future compliance abilities, our Corporate team can assist you.