NZX consults on revamped listing rules under a new market structure

Thursday 12 April 2018

Authors: Anna Buchly, Amon Nunns, Toby Sharpe and Jennifer Coote

​​​​​NZX has released an exposure draft of its proposed new listing rules for consultation, with a view to implementing the new rules towards the end of 2018 and bringing them into effect on 1 January 2019. This follows NZX’s consultation at the end of last year on a wide span of issues to reform and reinvigorate NZX’s capital markets, ranging from a consideration of the structure of NZX’s equity markets to specific listing rule settings. 

Key changes include:

  • consolidating the NXT and NZAX Markets into NZX’s Main Board;
  • introducing a concept of “constructive knowledge” to the continuous disclosure obligations;
  • decreasing the threshold for shareholder approval of issues of shares from 20 per cent to 15 per cent to align this with ASX’s requirements;
  • amending the major transaction approval requirements to include transactions which significantly change the nature or scale of the issuer‘s business; and
  • replacing the requirement to publish a separate half-year report with a preliminary announcement of half-year results.

Interested parties have until 8 June to review the exposure draft of the listing rules and make submissions on them. This is likely to be the last opportunity for interested parties to comment on matters relating to policy. Any further consultations are expected to be targeted at technical and operational issues arising from the drafting of the rules.

A copy of the exposure draft of the proposed new listing rules and accompanying consultation paper are available here.

Single market for equity issuers

The proposed new listing rules will result in a new look for NZX’s equity markets. As previously indicated (and strongly supported by respondents to NZX’s earlier consultation), the NXT and NZAX Markets will be scrapped, and existing listed issuers on those markets will be consolidated under a single equity market with NZX’s Main Board issuers. We are pleased to see that in keeping with Bell Gully’s (and a number of other respondents’) earlier submissions (here​), NZX has abandoned its proposal to follow the LSE and adopt “Premium” and “Standard” categories for issuers in favour of a single category of issuer on the single equity market board.  

All issuers will be given a six month grace period once the new rules come into effect, but will be required to transition to the new rules by no later than 1 July 2019 under the current timetable. These changes may require issuers to change their constitutions and NZX will be seeking feedback on the appropriate time frame for these changes to be made, given that this will require shareholder approval.

NZX is also seeking feedback on the appropriate transition arrangements for issuers currently listed on the NZAX and NXT Markets, as the change to a single market will have a more significant impact on these issuers.  

Updated rule format

NZX has retained the Main Board/Debt Market Listing Rules as a drafting base for the new rules. However, in an effort to modernise the listing rules, NZX has taken this opportunity to organise the listing rules into a more streamlined and simplified format. This has resulted in the main body of the listing rules (excluding appendices) being reduced from the current 156 pages to 75 pages and includes:

  • redrafting the rules into plain English; 
  • incorporating class rulings, waivers and practice notes into the updated rules;
  • making the rules more navigable, by using clearer headings and logical ordering; and
  • reordering the rules to prioritise the rules used most frequently.

Key rule changes for existing main board listed issuers

A number of the key changes see NZX looking to align the listing rules with the ASX Listing Rules. This reflects NZX’s general aim of seeking to align its policy settings with international markets where it makes sense to do so, provided the measures meet the needs of participants in New Zealand’s markets.

Concept of “constructive knowledge” introduced for continuous disclosure obligations

One of the biggest changes for Main Board listed issuers (which was not raised as a specific issue for discussion in NZX’s earlier consultation) is NZX’s decision to enhance issuers’ continuous disclosure obligations by requiring issuers to disclose material information to the market when either it becomes aware of the information or it “has, or ought reasonably to have, come into possession of the information”.

The test is based on the ASX’s continuous disclosure obligations and is limited to information which is, or ought reasonably to have, come into the possession of the issuer’s directors or senior managers in the course of the performance of their duties. It does not extend to other employees. A senior manager is a person who is not a director but occupies a position that allows that person to exercise significant influence over the management or administration of an issuer (such as a CEO or CFO).

Shareholder approval for further issues of securities

Another significant change for Main Board listed issuers is directed at giving shareholders a greater say over proposed transactions that could significantly dilute their shareholdings.

Currently, the listing rules permit the issue of up to 20 per cent of a class of security within a 12 month period without an issuer having to engage in a costly and time consuming shareholder approval process. The 20 per cent threshold has been in place since April 2009 and is generally considered by issuers to strike an appropriate balance. However, NZX has chosen to align itself with ASX and reduce this threshold to 15 per cent.

NZX also proposes to further limit offers made under a Share Purchase Plan to ensure that the number of shares issued under the plan do not exceed 5 per cent of the shares already on issue.

Major transaction approval requirements

We are pleased to see that NZX has abandoned its proposal to reduce the transaction threshold (from 50 per cent to 25 per cent​ of the “Average Market Capitalisation” of the issuer) for shareholder approval of major transactions under Listing Rule 9.1. Respondents’ feedback to date was that such a change would inadvertently capture ‘business as usual’ transactions. 

However, to address investor concerns in this area, NZX has amended current Listing Rule 9.1.1(a) (now Rule 5.1.1(a)) to capture approval for transactions which would “significantly change, either directly or indirectly, the nature or scale of the issuer‘s business” rather than those transactions that would “change the essential nature of the business of the issuer” under the current wording of the rule. 

The new wording is based on the equivalent ASX listing rule and therefore issuers should be able to draw on ASX guidance on what types of transactions fall within Rule 5.1.1(a). However, a key difference is that under the ASX listing rules the requirement for shareholder approval of such transactions is at the discretion of ASX. Under the NZX listing rules, issuers will be required to apply for a waiver if they are in doubt as to compliance. 

NZX is also proposing to update the definition of “Average Market Capitalisation” to reduce the potential for manipulation or aberration results.

No requirement for separate half-year reports

One change which is likely to be well-received by issuers, is the removal of the requirement for issuers to publish a separate half-year report. Instead, issuers will be required to publish a preliminary announcement (including certain financial statements) for their half year, as well as publish a preliminary announcement and an annual report for their full financial year.

Other notable changes/NZX decisions at a glance

NZX’s decisions on some other notable issues raised in its 2017 consultation are outlined in brief below.

Listing requirements​​​​
  • The minimum market capitalisation requirement will be increased from $5 million to $15 million (to ensure that companies are of a reasonable scale and have sufficient investor support to list).
  • The free float requirement has been reduced from 25 per cent​​ to 20 per cent​.
  • NZX has reduced the spread requirement from 500 to 300 unaffiliated security holders with a view to facilitating the listing of a greater number of issuers.
  • NZX has amended the current minimum holding sizes previously outlined in Appendix 2 of the Listing Rules to a simplified fixed dollar amount of $1,000.
  • NZX proposes to remove the requirement to seek NZX Regulation approval for offers made in reliance on the exclusion within clause 19 of schedule 1 of the Financial Markets Conduct Act 2013 (FMC Act).
Governance Requirements
  • NZX has retained a requirement for at least three directors as well as the minimum rotation and independence requirements. However, it has simplified the director rotation requirements so that these are easier to apply in practice.
  • The requirement for issuers to have two independent directors has been enhanced with a recommendation in the NZX Corporate Governance Code (NZX Code) that companies have a majority of independent directors. The NZX Code will also include factors to help assess independence.
  • Directors appointed by shareholders with constitutional power have been excluded from the director rotation requirements subject to certain conditions.
  • NZX has aligned its NZ residential director requirement with the Companies Act 1993 i.e., a requirement to have at least one NZ resident director (rather than two). NZX will also accept an Australian resident director to meet this requirement as under the Companies Act.
  • The audit committee requirements have been retained within the Listing Rules (including the auditor rotation requirements which are also addressed in auditing standards).
  • Further updates have been made to the NZX Code in support of the proposed listing rule changes.
Related party transactions
  • NZX has retained the current thresholds for approval of related party transactions but has made amendments to some aspects of the operation of this rule.
Associated Person test
  • NZX has aligned the "Associated Person" test with the test in the FMC Act – but has retained the same exceptions outlined in the current listing rules.


Additional changes for debt issuers

NZX is very keen to build on the recent strong growth that it has seen in its debt market, and to facilitate more listings it is proposing to remove the current spread and free float requirements for debt issuers. It will retain a small minimum market capitalisation requirement of $15 million.

This is likely to be welcomed by respondents. Debt issues are typically traded considerably less than equity issues, and so the spread of any particular issuance is not necessarily an accurate indicator of liquidity or suitability for listing. Further, these requirements do not work in relation to some offer structures.

As for equity issuers noted above, NZX also proposes to remove the requirement to seek NZX Regulation approval for debt offers made in reliance on the exclusion within clause 19 of schedule 1 of the FMC Act, given they are already primarily regulated under that Act. However, NZX will continue to request details in relation to proposed transactions for operational purposes.

The debt governance rules have been updated to align them with the governance requirements applicable to debt issuers in Part 4 of the FMC Act.

NZX is seeking further feedback on a proposal to introduce a framework for the listing (but not quotation) of wholesale debt. However, the proposal to provide a market for depositary receipts is not being followed-up on at this stage.

Funds

NZX has designed a regime which leverages the requirements for funds outlined in the FMC Act, rather than duplicating the FMC Act requirements in the NZX listing rules. Under this regime, investment entities will still be able to choose to list as general equity issuers if they prefer. Both equity and funds issuers will be listed on the NZX Main Board.

The same spread, free-float and minimum market capitalisation applicable to equity issuers will apply to funds. NZX is proposing a 15 per cent​ limit for new issues of units without unitholder approval for closed-ended funds, but open-ended funds will not be subject to a limit.

Periodic disclosure will be addressed by the fund update regime set out under the FMC Act. Continuous disclosure will also apply under the listing rules.

Overseas funds will also be able to take advantage of the Foreign Exempt issuer regime (discussed below).

New NZX foreign exempt regime

As expected, NZX has introduced new settings to facilitate the listing of overseas companies. The new NZX Foreign Exempt regime will retain a single standard for all issuers already listed on recognised exchanges overseas, regardless of whether they are incorporated in New Zealand or elsewhere, as Foreign Exempt issuers (renamed from the current term Overseas Listed Issuer). The Dual Listed Issuer regime will no longer operate.

A Foreign Exempt Issuer will be required to provide NZX with the same information and notices as required by its home exchange.

Changes for backdoor listings

A backdoor listing or reverse takeover effectively results in the listing of a privately held company or business by way of an acquisition by an existing NZX listed issuer in return for a new issue of shares in that NZX listed issuer. NZX intends to adopt an approach to such listings which is based broadly on ASX’s approach. This will allow NZX to:

  • require the issuer to re-apply for listing/quotation;
  • suspend quotation of its securities; and/or​
  • require a new profile to be prepared.

We would be happy to discuss these changes with you in more detail and assist you with your submissions. If that would be helpful, please get in touch with your usual Bell Gully contact or any of the partners in our capital markets team.


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

For more information
  • Anna Buchly

    Partner and Chair Auckland
  • Amon Nunns

    Partner Wellington
  • Toby Sharpe

    Partner Auckland
  • Jennifer Coote

    Senior Associate Auckland
Related areas of expertise
  • Corporate governance and advisory
  • Equity capital markets
  • Debt capital markets