The ASX released a public consultation paper in November 2018 proposing a raft of changes to the ASX Listing Rules and associated Guidance Notes.
Notably, ASX had been flagging the removal of the 20 cent rule waiver (also known as the “2 cent waiver”) for some time, and as a result many in the industry expected this round of changes to be the death knell for the waiver. However, the proposed changes explicitly chose to defer the removal of the 2 cent waiver to a later date, meaning it will continue to be available for the time being, albeit with an uncertain future.
It was not all good news for backdoor fanatics though, with ASX making further amendments to ASX Guidance Note 12 – Significant Changes to Activities (GN 12), effectively clamping down on money that may otherwise pass from the listed entity to a proposed target.
All in all, executing backdoors will be more difficult as a result of the proposed changes, but not because of the reasons that were anticipated.
2 cent waiver – for whom the bell is yet to toll
In June 2018, the ASX flagged the potential removal of the 2 cent waiver (introduced in September 2014 for listed entities undertaking back door listings), with the expectation that this round of changes would see the ASX revert to strict adherence to the minimum 20 cent issue price. However, ASX has decided to defer any consultation on the removal of the 2 cent waiver and the “minimum option exercise price” for back door listings to a future date.
The ASX has also provided updated commentary on when a 2 cent waiver will be appropriate. In particular, the ASX has stated that, where a pre-emptive capital raising (discussed in greater detail below) involves an issue to existing security holders via a pro rata offer, under a security purchase plan or some other form of broad-based offer, ASX is unlikely to have any concerns, regardless of the price at which it occurs. However, where the capital raising takes the form of a placement of securities to related parties, promoters, professional advisers involved in the transaction, or their family, friends and associates, at less than 2 cents each, ASX is likely to deny an application for a 2 cent waiver.
Not that we were holding our breath, but the proposed changes missed a golden opportunity to apply ASX’s escrow regime equally to 2 cent raisings, as it does to 20 cent raisings. Instead, the current two speed status quo will be maintained, whereby escrow applies to any proposed uplift in a 20 cent raising, but uplift in a 2 cent raising is prohibited.
All in all, the decision to defer the removal of the 2 cent waiver is a positive one for shareholders in shell entities, as it facilitates entities undertaking a back door listing without the need for large consolidation ratios that crunch the number of shares held by existing shareholders.
Pre-emptive capital raisings and loans – a new limit to foreplay
GN 12, in its current form, restricts entities’ ability to undertake pre-emptive capital raisings prior to undertaking a re-compliance raising (being a smaller raising undertaken ahead of, and often at a discount to, a prospectus offer), and sets out that this should only occur to the extent necessary to progress the transaction to re-compliance. Consistent with ASX’s comments in relation to the 2 cent waiver, ASX sets out that such pre-emptive raisings should be undertaken in circumstances that are fair to new and existing shareholders, and by way of a broad based offer, rather than by way of a placement to select parties.
There is also a proposed new section in GN 12 covering “pre-emptive loans”, being situations where a listed entity that is proposing a significant transaction, such as a backdoor listing, lends money to a target (including subscribing for debt securities issued by another entity) ahead of the transaction completing.
To the extent than an entity enters into a pre-emptive loan before notifying ASX of the potential re-compliance transaction, ASX expects the entity to disclose the full details of the loan in the notification for release to market under Listing Rule 11.1 (in the transaction announcement itself, subject to Listing Rule 3.1). Where an entity enters into a pre-emptive loan after notifying of a significant transaction, ASX expects the entity to release a standalone announcement, containing the full details of the loan, immediately upon the entity entering into the loan.
If the amount of the loan is material and the transaction is one where ASX has exercised, or may exercise, its discretions under Listing Rule 11.1.2 or 11.1.3, and the entity has not announced the terms of the loan, ASX will make enquiries of the entity and is likely to publish these queries and the entity’s response to the market.
If ASX forms the view that the loan is being used as a means of passing across some of the consideration for the transaction ahead of its approval under Listing Rule 11.1.2 or re-compliance under Listing Rule 11.1.3, ASX will regard this as a serious breach of the Listing Rules and take remedial action, which may include requiring that the loan be unwound.
The proposed changes to GN 12 do not currently provide definitive guidance on whether a pre-emptive capital raising can be undertaken in order to make a pre-emptive loan. What is certain though, is that restricting listed company directors’ ability to apply an entity’s funds as they see fit to secure new investment opportunities, can only reduce the competitiveness of listed entity’s looking to make transformational acquisitions. If left as proposed, this will have a negative impact on shareholder value and is likely to lead to more listed entity’s languishing in suspension, pending removal.
ASX has also made changes that will require more cohesive disclosure of fees and benefits passing to lead managers (for more on this change, please click here), and proposes to relax the requirement to obtain restriction deeds from unrelated seed capitalists (more from us on this to come shortly).
Finally, in respect of the casting of the escrow net, advisers should be aware that ASX has introduced some new concepts in the most recent changes, including assessing whether issues have been made to “friends, family and associates” of professional advisers, or to “quasi-promoters”, being helpfully defined as “consultants who perform a quasi-promoter role.”
How ASX intends to define such terms as “friends” or “quasi-promoters” in practice is yet to be tested, but the changes highlight the need for fulsome diligence in respect of an entity’s spread and escrow registers. Readers should also not take it personally if they’re defriended in the lead-up to a backdoor.
The ASX is seeking submissions on the proposed amendments by 1 March 2019, with the accepted changes to have effect from 1 July 2019. Any persons wanting to make submissions in respect of the consultation paper, or to discuss how the proposed changes might affect their plans or LinkedIn profiles moving forward, are welcome to contact us.
Read the ASX Public Consultation paper: Simplifying, clarifying and enhancing the integrity and efficiency of the ASX listing rules
 A summary of the key proposed amendments can be found as an annexure to this paper.
 As it allows entities to re-comply with a public offer price of 2 cents or more.
 For example, a seed capitalist who acquires shares at 10 cents prior to a 20 cent IPO raising, will receive escrow in respect of 50% of the shares subscribed for. However, a seed capitalist who acquires shares at 1 cent prior to a 2 cent backdoor raising, will not only receive escrow in respect of 50% of their shares, but in order for the listed entity to receive the waiver, the shares must also be subject to a consolidation so that the effective issue price of the seed becomes at least 2 cents. Such a consolidation will lead to an backdoor raising issue price of 4 cents.
 Enquiries may include:
- when the loan is expected to be repaid;
- what due diligence the entity has undertaken to satisfy itself of the borrower’s capacity to repay the loan;
- for what purposes can the borrower use the proceeds of the loan and what (if any) safeguards the entity has put in place to ensure that the borrower does not use the loan for other purposes; and
- what (if any) safeguards has the entity put in place to ensure that the loan will be repaid in full if the transaction ultimately does not proceed.
For more information, please contact: