ASX Listing Rules – Guidance Note 11 Update

Introduction

On 8 October 2021, the Australian Securities Exchange (ASX) amended the ASX Listing Rules Guidance Note 11 (Guidance Note 11) regarding restricted securities and voluntary escrow. Guidance Note 11 outlines, among other things, the ASX’s escrow requirements for ‘restricted securities’, cash formula relief, permitted transfers of restricted securities and notification obligations regarding restricted securities and securities subject to voluntary escrow.

‘Restricted securities’ are securities that are subject to ASX’s escrow requirements. These ‘restricted securities’ are defined as securities issued in the circumstances set out in Appendix 9B of the ASX Listing Rules and securities that, in the ASX’s opinion, are to be treated as restricted securities. An entity with restricted securities on issue must, at ASX’s discretion, either enter into a deed with the holder of the restricted securities and each controller in the form set out in Appendix 9A or in such other form that ASX requires, or give a notice in writing to the holder of the restricted securities in the form set out in Appendix 9C or in such other form that ASX requires.

Restricted securities are excluded from the definition of ‘free float’ and do not count towards the 20% minimum free float requirement for an entity to be admitted to the official list. Similarly, restricted securities do not count towards the ASX’s minimum spread requirement, which requires an entity to be admitted to have at least 300 non-affiliated security holders who each hold a parcel of the entity’s main class of securities (that are not restricted securities or subject to voluntary escrow), with a value of at least $2,000.

Below are some of the notable amendments to Guidance Note 11.

Transactions entered into to avoid or reduce escrow

ASX states in Guidance Note 11 as amended that there have been situations whereby an entity applying for admission to the official list or undertaking a re-compliance listing enters into a transaction with the holder of securities in the entity to avoid the application of escrow. One situation included an entity, ahead of its admission or re-admission, entering into a buy-back of securities that would ordinarily be subject to ASX-imposed escrow following its admission or re-admission, which had the effect of cashing out and avoiding the application of escrow to those securities.

In those circumstances ASX will likely require the entity to reverse the buy-back and require the holder to subscribe for new securities in the entity to replace the securities bought. These new securities will be deemed as restricted securities and escrow will be applied.

ASX will direct a holder for new securities to apply the cash formula in accordance with the price they paid for the securities that were bought back, in the instance where the price paid by the entity is higher than the price paid for the securities that were bought back. In the event where the price paid by the holder for new securities is lower than the price paid for the bought-back securities, ASX will direct the entity to apply the cash formula based on the price they paid for the new securities. If the securities that were bought back would have been subject to a 12-month escrow period from the date of issue, the ASX will direct the entity to start the escrow period from the date of issue of the new securities, instead of the date of issue of the securities bought back. If the entity is unable to comply with the ASX’s requests, the ASX will most likely reject the entity’s application for admission or re-admission to the official list.

‘Controllers’ of discretionary trusts

The recent amendments in Guidance Note 11 now provide a definition of ‘controller’ in the context of discretionary trusts. If a holder of restricted securities holds these securities on their own account, they will be the ‘controller’ of those securities. Similarly, if a holder of restricted securities holds these securities in the capacity of a nominee, trustee or as a fiduciary on behalf of a beneficiary or beneficiaries, each beneficiary will be considered a ‘controller’ of these securities. In the circumstances of a holder of restricted securities holding these securities as a trustee of a discretionary trust where there are no fixed beneficiaries, the trustee and any person with the power to remove, appoint and control the trustee is a ‘controller’ of those securities. Lastly, any other person who (including those in the ASX’s opinion) controls, or has a significant economic interest, in restricted securities is a ‘controller’ of those securities.

Evidence to claim cash formula relief

‘Cash formula relief’ refers to the relief of qualifying securities for holders who have paid cash for their fully paid ordinary securities from escrow on a proportion of those securities equal to the proportion of the initial public offering price (IPO) price paid for them. For instance, if a qualifying holder has paid one quarter of the IPO price for their securities, one quarter of these securities will be released from escrow.

Guidance Note 11 now states that in order to substantiate the cash amounts actually paid to the entity for the securities, the ASX will require the holder seeking to claim cash formula relief to produce satisfactory evidence of financial records. Evidence to substantiate the cash amounts paid includes application forms, bank statements and other documents recording evidence of the receipt of cash.

Restriction notices imposed on greenmailers

There will sometimes be circumstances where an entity undertaking a new or re-compliance listing encounters a security holder (who holds restricted securities) that refuses to enter into a restriction deed relating to those securities and threatens to interrupt the listing until their securities are bought out.

The entity generally can either arrange for one or more parties to purchase and receive a transfer of those securities and have the purchasers enter into restriction deeds as transferees of restricted securities or arrange for one or more security holders who have freely transferable securities to voluntarily substitute their securities as restricted securities and ultimately enter into a restriction deed for the same number of securities and escrow period.

Guidance Note 11 provides that if neither of these options is able to be arranged, the entity is entitled to apply to ASX for approval to have the escrow restrictions for those securities applied through a restriction notice instead of a restriction deed. This notice effectively informs the holder of restricted securities that those securities are subject to escrow for a particular escrow period, along with the obligations imposed on the holder regarding those securities during that period.

ASX advice to entities

Additionally, throughout the recent AGM season, we have noticed that ASX has been taking the position that listed entities which have not yet updated the applicable provisions in their constitutions with respect to the two-tier escrow regime that ASX introduced in December 2019 (via ASX Listing Rule 15.12), will be required to do so at their next AGM (whether this be an AGM held in early 2022 pursuant to ASIC’s relief, which extends the deadline by which companies with a balance date of 30 June 2021 must hold their AGM by to 31 January 2022, or their regular 2022 AGM).

In this regard, an entity’s constitution must provide for each of the following:

15.12.1 A holder of restricted securities must not dispose of, or agree or offer to dispose of, the securities during the escrow period applicable to those securities except as permitted by the listing rules or ASX.

15.12.2 If the restricted securities are in the same class as quoted securities, the holder will be taken to have agreed in writing that the restricted securities are to be kept on the entity’s issuer sponsored subregister and are to have a holding lock applied for the duration of the escrow period applicable to those  securities.

15.12.3 The entity will refuse to acknowledge any disposal (including, without limitation, to register any transfer) of restricted securities during the escrow period applicable to those securities except as permitted by the listing rules or ASX.

15.12.4 A holder of restricted securities will not be entitled to participate in any return of capital on those securities during the escrow period applicable to those securities except as permitted by the listing rules or ASX.

15.12.5 If a holder of restricted securities breaches a restriction deed or a provision of the entity’s constitution restricting a disposal of those securities, the holder will not be entitled to any dividend or distribution, or to exercise any voting rights, in respect of those securities for so long as the breach continues.

Conclusion

While there have been no significant amendments to the most recent update of Guidance Note 11, the abovementioned changes ensure not only that the ASX escrow requirements are now more regulated, but also assist entities to understand how these requirements apply to re-compliance listings and voluntary escrow arrangements.

Queries

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Disclaimer

This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.