Reverse takeovers Shareholder approval requirements – Exposure draft listing rule amendments

Australian Stock Exchange (ASX) proposes to amend its Listing Rules requiring a bidder to seek shareholder approval for a reverse takeover. These proposed amendments will improve the investor protection framework while supporting the efficiency and competitiveness of Australian listed companies in the market for corporate control.

A complete public consultation process was followed to sought feedback on the proposed amendments. Additionally, multiple consultation meetings were conducted with interested stakeholders. While the stakeholders who looked at this proposal from an investor’s perspective supported the implementation of amendments, and suggested that shareholder approval should be necessary for issues of securities exceeding 20-50% of existing capital, shareholders looking at the proposal from the perspective of listed entities did not support proposed changes.

Gap in the regulatory framework for reverse takeovers

ASX sought submissions on whether there was a gap in the regulatory framework related to reverse takeovers that warranted a change from the status quo.

Investor and governance groups submitted that there was a gap in the regulatory framework, and a few respondents expressed reverse takeovers to be fundamentally unfair. On the contrary, other respondents commented that there is no gap in the regulatory framework.

Costs of a shareholder approval requirement

ASX sought submissions on the direct and indirect costs of imposing a shareholder approval requirement for reverse takeovers and whether this requirement would affect ASX listed bidders’ ability to compete effectively in the market for corporate control.

Many respondents indicated that although the likeliness of additional direct and indirect costs is there, it would not have the said material impact. On the contrary, some respondents expressed that the significant costs and inefficiencies would reduce ASX listed companies’ ability to compete effectively in the market.

ASX’s response to consultation feedback

ASX proposed to proceed with the consultation proposal to require shareholder approval for reverse takeovers (issues in excess of 100% of existing capital).

Additionally, ASX acknowledges that bidder shareholders should have a say on transactions in which they are the target and that the shareholders should not be subject to unlimited dilution as a result of reverse takeover.

ASX also acknowledges the views that a threshold based on increase in share capital could result in transactions being restructured to avoid the shareholder approval requirement.

Proposed listing rule amendments

  • Listing rule 7.2, exceptions 5 and 6
  • ASX proposes to amend Listing Rule 7.2, exceptions 5 and 6 so that they do not apply to issues under, or to fund, reverse takeovers. As per the amendment, an issue of shares under, or to fund, a reverse takeover will require approval under Listing Rule 7.1.

    ASX also proposes ancillary amendments to Listing Rule 7.2, exceptions 5 and 6 and the definition of takeover to simplify the drafting of those sections.

  • Equity securities
  • ASX will amend Listing Rule 7.1B to clarify that the number of equity securities to be issued to determine whether a transaction is a reverse takeover should be calculated in the same way as for other Listing Rule 7.1 calculations.

  • Application to trust schemes and foreign takeovers
  • Listing Rule 7.2, exceptions 5 and 6 only apply to takeover bids or schemes of arrangement under the Corporations Act. ASX has in the past granted a waiver to extend exceptions 5 and 6, however this waiver will not be granted if the entity is engaged in a reverse takeover of the foreign company or trust.

  • Application to Pro rata issues
  • Shareholder approval should not be required for a pro rata issue to fund a reverse takeover.

  • Content of notice of meeting
  • ASX proposes to amend Listing Rule 7.3.8 to require bidders to disclose information “in relation to the reverse takeover”.

  • Time within which securities must be issued
  • Currently, the time within which securities must be issued is 3 months. ASX proposes to extend the period from 3 months to 6 months.

  • Amendments to voting exclusion statements and ancillary definitions
  • ASX proposes to amend the voting exclusion so that the reverse takeover target and its associates would not be allowed to vote in favour of the resolution to approve the proposed issues under, or to fund, the reverse takeover.

  • Participation in the issue
  • ASX is proposing to replace the current reference in the voting exclusion for rule 7.1 to a person who “may participate” in the proposed issue with a person “who is expected to participate” in the proposed issue.

  • Voting against a proposal
  • ASX proposes to amend Listing Rule 14.11 to provide that the persons excluded from voting are only precluded from voting in favour of the resolution, not against the resolution.

May 20 2017