Update on NZX reforms to capital raising and flexibility

Brynn Gilbertson, Partner and Anna Buchly, Partner | Wednesday 17 December 2008

After considering submissions on the draft amendments to the Listing Rules of the NZSX/NZDX and NZAX markets (Listing Rules), NZX this week released a summary of its policy decisions.

On 15 December 2008, NZX released:

• An exposure draft (Exposure Draft) containing the summary of its policy decisions. Click to view NZX Exposure Draft.

• The form of proposed amendments (Proposed Amendments) to the Listing Rules. Click to view NZX Summary of Rule Changes.

For an earlier article on the draft amendments (New Rules) to the Listing Rules which the NZX released on 25 November 2008 in a consultation paper (Consultation Paper), click here.

Summary of the policy decisions

Pro-rata Rights Issues/Debt Issues

The proposed New Rule to permit a NZX listed issuer (Issuer) in compliance with its continuous disclosure obligations to be able to raise equity, on a pro-rata basis, from its existing shareholders and to raise debt using a Term Sheet Offering Document rather than an investment statement and prospectus will not be made until further progress is made in the legislative sphere.

The Exposure Draft noted clear support for the concept of a Term Sheet Offering Document in the submissions received on the Consultation Paper. NZX therefore highlights a number of indicative policy decisions which will be refined once the legislative changes are made:

• While the form of the Term Sheet Offering Document will be dependent on the legislative changes, NZX expressed a preference for a "certificate" signed by the directors that the Issuer had complied with its continuous disclosure obligations. This is a departure from the proposal in the Consultation Paper for a "warranty" to be signed by the CFO, CEO and the Board.

• The Term Sheet Offering Document would be available for renounceable rights issues.

• The legislative change should be consistent with the Trans-Tasman Mutual Recognition of Securities Offerings regime.

• The "risks" section of the Term Sheet Offering Document would be limited to those risks that are material to the particular security being offered.

• The liability regime attaching to the certificate and the availability of any defences will depend on the legislative changes, but NZX envisages that the Securities Act rather than the Listing Rules would govern the liability regime. NZX also notes that, under existing legislation, it is likely that liability for the warranty/certificate would be governed by the provisions in the Securities Act 1978 relating to advertisements which only extend to directors.

Rights Issues Timetable

The proposed New Rule to decrease the prescribed time period to complete a rights issue from six to three weeks will be adopted.

Per-shareholder capital offerings

• The proposed New Rule to extend the exemption under the Securities Act (NZX – Share and Unit Purchase Plans) Exemption Notice 2005 (SPP Exemption), which permits limited equity fundraising by Issuers without an investment statement and prospectus, from $5,000 to $25,000 per security holder in any 12 month period will be adopted. This will require a legislative change to that SPP Exemption.

• NZX notes that consideration should be given to extending the terms of the SPP Exemption to the issue of debt securities or hybrid debt/equity securities.

Private placements

• The proposed New Rule to increase the threshold for issues of securities by Issuers by way of private placements from 15% to 20% of the class or number of that Issuer's equity securities in any 12 month period (and from 20% to 25% for NZAX Issuers) will be adopted.

• Directors of the Issuer and associated persons of such directors or employees of the Issuer will also be able to participate in such private placements, subject to certain conditions being satisfied. These include requiring a board certificate that the participation of such persons in the issue is in the best interests of the Issuer and shareholders generally. NZX does not state which directors will be required to sign the certificate, but does state that not all directors will be required to sign it.

• A consequential amendment will also be made to the Related Parties provisions in respect of the director/employee component of such a private placement. See second bullet point under "Related Party Transactions – materiality" below.

Non-pro-rata issue of voting securities

• The proposed New Rule to remove the requirement to obtain NZX approval for non-pro-rata offers if the 90% VWAP test on the issue price of voting equity securities is not satisfied will be adopted.

• Directors will now need to certify they have made reasonable endeavours to get the best possible price for the issue of the securities if the issue price is less than 85% of the five day VWAP price for the securities. The certification will mirror the existing requirements of section 47 of the Companies Act 1993.

Remuneration of directors by stock

• The proposed New Rule to allow directors to be remunerated by the issue of securities, with shareholder approval, will be adopted.

• NZX will defer, until the next Listing Rule consultation round, consideration of a suggestion that payment of a unit trust manager's performance fee in units of that unit trust should be permitted.

Related Party transactions – materiality

• The proposed New Rule to increase the thresholds for entering into Related Party transactions from 5% of average market capitalisation to 10% for transactions and from 0.5% to 1% for the provision of services will be adopted.

• In response to submissions received on the Consultation Paper, a consequential change has been made to this New Rule in respect of private placements involving the participation of the directors (and their associated persons) or employees. It is now proposed that only the value of the securities being issued to such persons will be taken into account when deciding whether the private placement is a material transaction.

• NZX will not stipulate that a Related Party transaction is Material Information (requiring disclosure pursuant to the continuous disclosure obligations); it is for the issuer to make that evaluation.

• NZX is not considering increasing the de minimis value threshold for a material transaction which is currently $250,000.

Share buybacks and employee share schemes

The proposed New Rule to remove the restriction on the buyback of securities from employees will be adopted.

Financial assistance to employees

• The proposed New Rule to increase the threshold of permitted financial assistance to employees from 5% to 10% of an Issuer's average market capitalisation will be adopted.

• The NZX also noted that there appears to be support for abolishing the requirement to provide shareholders with a disclosure document regarding the provision of financial assistance under the Companies Act 1993. Instead, sufficient disclosure could be achieved by a number of electronic means including the NZX market announcements platform.

Minority shareholders and independent directors

NZX has decided to defer consideration of the controversial proposal in the Consultation Paper that only minority shareholders may vote on the remuneration, appointment or reappointment of independent directors. It was noted that considerable feedback was provided on this issue and NZX has stated that it will issue a response to those submissions before Christmas.

Appraisal Reports

NZX has also decided to defer consideration of the proposal to reduce the obligation to obtain an independent Appraisal Report under Listing Rules 4.5.8, 6.2.2 and 9.2.5 to an option to obtain such a report. Again, NZX is promising a response to the submissions received on that topic before Christmas.

NZX timetable

NZX has proposed the following timetable for making the changes to the Listing Rules:

• 22 December 2008: Deadline for receipt of submissions.
• 30 December 2008: New Rules submitted to the Minister of Commerce.
• Within 40 working days (i.e., by no later than 2 March 2009): New Rules to come into effect.

No timetable has been stipulated for implementation of the legislation which will be required to give full effect to some of the New Rules, although NZX is working closely with the Ministry for Economic Development to push through those legislative changes.

Conclusion

It appears that the majority of submissions on the consultation paper were supportive of the proposed New Rules. Consequently, with the notable exception of the proposal to enable a pro-rata Rights Issue or Debt Issue to be made by means of a Term Sheet Offering Document (which has been put on hold pending legislative changes) the Proposed Amendments reflect the substance of the proposed New Rules.

NZX and the CMD Taskforce are to be commended for the manner in which they sought to lead to policy discussion (and control the timetable) about issues which are critical to the short-to-medium term welfare of many NZX listed issuers and New Zealand capital markets activity generally.

Next steps

If you would like to discuss any aspect of the Exposure Draft or the Proposed Amendments, please contact any of the Bell Gully team listed below.

 

For further information, please contact your usual Bell Gully adviser or:

Auckland

Anna Buchly
Partner

Garry Downs
Partner

David Flacks
Partner

James Gibson
Partner

Brynn Gilbertson
Partner

Glenn Joblin
Partner

Gavin Macdonald
Partner

Haydn Wong
Partner

Wellington

Mark Freeman
Partner

Chris Gordon
Partner

Dean Oppenhuis
Partner