NZX is also seeking preliminary feedback on two alternative pathways to its markets (special purpose acquisition structures and dual class shares), in keeping with recommendations made in the Capital Markets 2029 report for the continued growth of New Zealand’s capital markets.
Submissions on the consultation paper close on 2 September, and NZX expects to have the amended listing rules in place by the end of 2022.
For the most part NZX found that its current listing rule settings for capital raising are working well. It also believes that overly prescriptive rules would not be beneficial given the important role played by boards in determining the best structure to use for a capital raising. However, NZX has identified a number of areas where it considers the rules require further refinement. In particular, NZX is keen to ensure that there are adequate measures to support more retail participation in offers, and to ensure fairness between retail and institutional investors.
This is a particular concern for NZX in light of the fact that in recent years the most common structure used by NZX issuers to raise capital has been a placement together with a share purchase plan (SPP). However, NZX believes that retail investors seem to have a strong preference for renounceable rights issues (i.e. an accelerated renounceable entitlement offers (AREO) or a traditional rights issue).
NZX has also taken into consideration recent changes proposed by ASX in relation to secondary capital raisings, which include proposed changes to address ‘inappropriate practices’ in relation to the allocation of securities in capital raisings as well as some disclosure proposals.
Key changes for offer structures
NZX’s proposed amendments relate to a range of offer structures, including placements, AREOs, accelerated non-renounceable entitlement offers (ANREOs) and SPPs as set out below.
Introduction of downside price protection for retail shareholders where there are different components or legs of an offer
Under combined placements and SPPs (and accelerated structures, such as AREOs and ANREOs), the institutional component of the offer is usually completed earlier in the process. This allows institutions to participate in pricing discussions in which retail investors are not included. The proposed new requirement would ensure that the price paid by retail investors cannot be higher than the price paid by institutions.
Allowing ANREOs as a permitted pro rata offer, with a 1:1 limit as an anti-dilution protection. (Currently ANREOs require shareholder approval or a waiver before they can proceed on NZX.)
This would bring NZX in line with ASX, where ANREOS have been the most common form of secondary raising structure since the beginning of 2021. ANREOs are also a regular feature in markets in Singapore, Hong Kong, the UK and the US.
Requiring a ‘liquidity event’ either in the form of a shortfall bookbuild or a rights quotation for a renounceable structure to ensure fairness for retail investors
The inclusion of a liquidity event for non-participating shareholders would allow investors the potential to realise some value if they elect not to take up their rights.
Removing the requirement to make an announcement five days prior to the record date for traditional rights offers so they more closely align with accelerated offers
NZX questions whether there is any justification for allowing a period for new investors to trade into the entitlement. On the other hand, it acknowledges that this five-day announcement requirement can be helpful for retail investors as it allows them to trade their underlying positions before the capital raising structure is implemented.
Requiring that the allocation policy for shortfalls from a pro rata offer must provide that in the first instance the shortfall will be offered to all holders who participated in the pro rata issue and indicated they wished to apply for more than their entitlement
ASX is currently consulting on a proposal to introduce a similar requirement into their rules.
The offer of the shortfall will be required to be made on a pro rata basis, based either on:
· the size of their existing holdings on the record date for the pro rata issue, or
· the number of the securities they have applied for in excess of their entitlement under the pro rata issue.
Increasing the limit for participation in SPPs from the current NZ$15,000 to NZ$50,000 to align with market practice, providing that scaling policies are pro rata
SPPs, while not pro rata structures, have increasingly been used to support retail participation in offers and can facilitate pro rata outcomes. NZX sees this as a positive trend as institutional investors can generally ensure they receive pro rata allocation through all offer structures.
Increasing the proportion of shares which can be issued outside of placement capacity under a SPP from 5% to 10% of the number of equity securities of the relevant class
This would be subject to the issuer meeting enhanced disclosure requirements. NZX believes these measures would support current market practice and will help to optimise pro rata outcomes for retail holders.
Introducing downside price protection for SPP participants against any offer announced together with the SPP
NZX believes that in volatile markets, additional downside price protection is helpful to SPP participants, particularly where there has been a long time between the placement and the SPP.
Only allowing the scaling of over subscriptions for an SPP by reference to holdings on the record date of the offer
NZX believes the current rationale for permitting scaling in accordance with the holdings at the closing date is not clear.
Increased disclosure obligations
In addition to the above changes, NZX is also proposing to enhance existing disclosure requirements so that there is more transparency on the decision making for capital raising structures and arrangements. This includes:
- Increased disclosure of underwriting arrangements through corporate action notices.
- Disclosure of a shortfall allocation policy within the offer document for a pro rata issue.
- Disclosure of scaling policies for SPPs, rights issues and accelerated offers.
- Requirements for placements to disclose:
- The details of the offer in a corporate action notice, including the purpose of the placement, and reason for conducting a placement rather than a pro rata rights issue or an SPP.
- Within the documentation relating to the offer (and the corporate action notice), whether existing shareholders will be entitled to participate in the offer, and if so, on what basis.
- Within 5 business days of the issue of shares under the placement, details of the approach the issuer took in identifying investors to participate in the placement and how it determined their allocations.
- The reasons why an ANREO structure was selected.
The disclosure changes proposed for corporate action notices are included in an exposure draft of the NZX Corporate Action Notice which accompanies the consultation paper.
In line with an ASX proposal, NZX is also considering introducing a mechanism for NZ RegCo to be able to request an allocation schedule where an issuer undertakes a placement, although this would not be for market release.
NZX notes in the consultation paper that, in accordance with recommendations in the Capital Markets 2029 report and recent international developments, it continues to seek alternative pathways for companies to list. Consequently, NZX is seeking preliminary feedback on whether to enable additional listing pathways to continue to develop the listed market in New Zealand.
NZX firstly wants feedback in relation to special purpose acquisition companies (SPACs). In New Zealand there is no specific regulatory framework for SPACs. However, they can be listed under the rules applying to all issuers of equity securities (and any additional requirements imposed by NZ RegCo).
Currently there is not a strong demand from promoters of SPAC listings in New Zealand, but the popularity of SPACs in the US and internationally has led NZX to seek guidance about whether to introduce specific investor protections for SPACs in case of future demand, as well as guidance about what investor protections are needed for SPACs to be successful in the New Zealand market.
In the international context some examples of investor protections in relation to SPACs are:
Specific allocation of funds raised
In the US at least 90% of the funds raised in the SPAC’s IPO must remain deposited in an escrow account allocated to:
· enable investment in the target company;
· pay the shareholders proportional interest in a SPAC in case they decide to exit their investment; and
· refund investors in the event of a SPAC liquidation.
Approval of business combination
This occurs after the IPO. Once the company search process is conducted and chosen, the business must be formally approved.
A key feature of most SPAC regimes. This gives investors the option to elect to seek reimbursement during the business combination process.
If a SPAC’s term expires without a business combination being carried out, the managers must return the funds from the escrow account to the shareholders and delist the SPAC.
This entails SPAC and IPO documents, in addition to other disclosure duties, showing:
· risk factors specifically arising from the SPAC structure;
· remuneration and benefits granted to sponsors and their stakeholders;
· funds’ source that will support SPAC maintenance before the business combination;
· the main characteristics of an escrow account; and
· the data and conditions for exercising the warrants issued by the SPAC.
2. Dual class shares
NZX also examined the state of regulation in relation to the issuance of dual class shares. Currently, these structures can be listed in theory through NZX listing rule 1.10 subject to compliance with relevant rules and other requirements as may be imposed by NZ RegCo. However, there are no specific prescriptive requirements.
The consultation paper covers the international context and highlights the fact that the SGX and HKeX have recently amended their rules to permit such structures. Dual class structures are also permitted on the NYSE and NASDAQ.
Largely because of these international developments, NZX is seeking feedback into whether they should introduce a specific regime for dual class issuers and, if so, what investor protections would be necessary.
We encourage all interested parties to participate in this consultation. In addition to the consultation paper, NZX has released exposure drafts of the proposed amendments to the NZX Listing Rules and the NZX Corporate Action Notice for feedback. Further details on the consultation are available on the NZX website.
If you have any questions about the matters raised in this consultation please get in touch with the contacts listed or your usual Bell Gully adviser.