Amendments to the JSE Listings Requirements to cut red tape and achieve effective, fit-for-purpose regulations for financial markets have been approved. Madelein Burger, partner; Gopolang Kgaile, senior associate; and Nasrin Kharsany, senior knowledge lawyer at Webber Wentzel, unpack the requirements.
On 4 May 2022, the JSE Limited (JSE) announced that the Financial Sector Conduct Authority (FSCA) published its approval of amendments to the JSE Listings Requirements, which will be effective from 1 June 2022.
The amendments are the subject matter of the JSE’s “Cutting Red Tape” project, with the JSE aiming at achieving effective, fit for purpose regulations for existing listings. The approval of the amendments follows an extensive consultation process with the market and the public that kicked off in March 2021 after the JSE released a consultation paper on “cutting red tape aimed at effective and appropriate regulation”.
Key amendments relate to (i) the ordinary course of business exemption for certain transactions, intragroup share repurchases; capital raising by bookbuilds; (iii) allowing directors to follow a rights offer and other entitlements during a closed period; and (iv) the appointment of independent sponsors. Other amendments relate to the removal of the requirements for pro forma financial information in the case of a disposal by the issuer; revised listing particulars in the case of certain acquisition transactions; and updates to the guidelines on publication of information, to reflect current market practice that the JSE no longer requires publication of full financial results on SENS and to include preliminary reports as part of the reports that must be made available on the issuer’s website.
Key amendments related to the following aspects of the Listings Requirements:
The “ordinary course of business” exemption for category transactions and related-party transactions
The Listings Requirements currently provide certain exemptions from the requirements applicable to category transactions and related-party transactions, which include publication of a circular and/or shareholder approval of transactions. One of these exemptions applies to transactions in the ordinary course of business, where the transactions’ consideration is equal to or less than 10% of the issuer’s market capitalisation. The amendments increase the threshold from 10% to 30%, with the result that transactions that fall within the ordinary course of business will only require shareholders’ approval when they are categorised at or above 30%. Issuers will still be required to engage with the JSE to determine whether their transaction falls within the “ordinary course of business” exemption and the JSE will make the final determination. Ordinary course of business transactions, where the percentage ratio of the transaction is 5% or more (essentially Category 2 transactions) must be announced through SENS, and deal with the pertinent details of such transactions. The JSE believes the amendments will afford issuers more flexibility when conducting their business from a cost, timing and resources perspective and bring the JSE in line with the London Stock Exchange’s requirements, while also providing investors with an appropriate level of protection against abuse.
A new Listing Requirement has been included to exclude transactions with a director or any associate of a director from the “ordinary course of business” exemption. The JSE is of the view that this will enhance the integrity of the exemption and will afford issuers more clarity on what constitutes “ordinary course of business”. The consequence of this amendment is that these types of transactions will continue to be subject to the related party protections in the Listings Requirements and will not be subject to the broader ordinary course of business exemption.
Intragroup repurchases of securities
The Listings Requirements have been amended to remove the application of the repurchase provisions of Listings Requirements and the required shareholders’ approval on intragroup share repurchases by the issuer, provided the share repurchases are from wholly-owned subsidiaries; Schedule 14 share incentive schemes (share schemes controlled by the issuer to incentivise employees and approved by the JSE) and/or non-dilutive share schemes (share schemes controlled by the issuer to incentivise employees). The JSE states that any repurchase of securities must also comply with the provisions of sections 46 and 48 of the Companies Act, 2008. The stated rationale behind these amendments relate to the effect of an intragroup repurchase as described above being different from other repurchases because there is no money leakage form the issuer’s group and no impact upon the earnings per share, headline earnings and net asset value per share, nor any benefit of one shareholder over another. The JSE is of the view that it has no active regulatory role to play, other than through disclosure of the repurchases, which will be maintained. For disclosure purposes, additional Listings Requirements have been included as part of the amendments, to provide that any intragroup repurchase in the nature contemplated above must be announced on SENS and include pertinent details of the transaction.
Capital-raising through general issues of shares for cash (bookbuild process)
The Listings Requirements have been amended to allow related parties to participate in issues of shares for cash pursuant to general authorities, subject to certain conditions. Currently, the Listings Requirements prohibit related parties from participating under a general issue for cash authority, which can severely limit the benefits of a bookbuild by eliminating potential participants who could be interested in providing capital to the issuer (e.g. holders of more than 10% of the share capital). One of the most common capital-raising methods in the market is the bookbuild process, often on an accelerated basis, which allows issuers to achieve the best price at which to issue shares to shareholders and/or investors. However, related parties of the issuer could possibly influence the price at which shares may be issued during the bidding process, more so when they hold a material interest in the issuer. In order to balance the interests explained above, the amendments provide that related parties may only participate in a bookbuild capital-raising process by putting in a bid at (i) a maximum price at which they are prepared to take up shares; or (ii) book close price. If the related party elects to place a bid at a maximum price and the book closes at a higher price, the relevant party will be out of the book and not allocated shares. If the related party elects to place a bid at book close price, the related party will be able to take up shares once the final issue price has been determined on the completion of the bookbuild process. In this way, the related party will be only a price taker and not a price maker but will still be able to participate in the process. The amendments also provide that the shareholder resolution granting the general authority to issue shares for cash must expressly afford the ability to the issuer to participate in the general issue through the bookbuild process. Additionally, equity securities must be allocated equitably through the bookbuild and the measures to achieve equitable allocation must be disclosed in the SENS announcement launching the bookbuild.
Exercise of directors’ entitlements during closed periods
The Listings Requirements currently preclude directors, prescribed officers and company secretaries (excluded parties) from participating in a rights offer and other corporate actions during a closed period. A closed period is a timeframe from a relevant financial period end until the date on which the relevant preliminary, abridged, or provisional reports or interim and quarterly results of the issuer are published or any period where the issuer is trading under a cautionary announcement. The JSE recognises that not allowing excluded parties (who hold shares in the issuer) to participate could negatively impact the issuer’s ability to raise cash, since the excluded parties are often considered to be natural contributors of cash to the issuer. The Listings Requirements have been amended to remove the limitation on excluded parties following entitlements pursuant to a rights offer, capitalisation issues, scrip dividends and dividend reinvestments during a closed period. As part of the approved amendments, details on whether excluded parties will receive securities or follow their rights (in respect of a rights offer) must be disclosed. The corporate action timetables have also been amended to clarify that publication of the results announcement must include detail of the securities issued to excluded parties. The stated rationale behind these amendments are to bring the requirements in line with international practice and to contribute to more successful capital raising by issuers.
To align the provisions of the Listings Requirements and Practice Note 1/2003 (included in the main body of the Listings Requirements) relating to the appointment of sponsors and to clarify the events that require the appointment of an independent sponsor, the provisions in the Listings Requirements have been amended and those in the Practice Note have been deleted. Issuers will not be required to have an independent sponsor at all times, but rather in specific instances, and the independent sponsor will be required to attend to certain specified events and corporate actions (including events requiring shareholder approval except for excluded items; unbundlings not requiring shareholder approval; related party transactions; removal of listings; and rulings relating to the above items).
Changes from the draft proposal
The approved amendments are largely in line with those proposed for discussion in the Paper and formulated into draft amendments in August 2021 and revised draft amendments in February 2022, with incremental changes largely reflecting drafting and conceptual refinements following the public consultation process. However, two notable proposals outlined in the Paper were not adopted as part of the final amendments:
* Abridged reports: In the Paper, the JSE proposed to remove the requirement to publish an abridged report of the financial results on SENS when the issuer has published its audited annual financial statements. However, following the public consultation process, the JSE identified additional consequences that require further consideration (as may be deemed necessary). The proposal has also presented the JSE with an opportunity to clarify and simplify the terminology and guidance applicable to various formats of financial information. The JSE has determined that it will engage the market and public separately on the proposals relating to reporting formats, to avoid delaying the other amendments relating to the cutting red tape project. The abridged report provides no additional value when the annual financial statements and the short-form results announcements have already been published.
* Category 1 disposals and working capital statement: The Listings Requirements require that where the issuer enters into a Category 1 transaction, the circular requiring shareholders’ approval must include a statement as to working capital. The Paper proposed removing the requirements for the working capital statement to be included in the circular on Category 1 disposals where the consideration is paid in cash. Following the public consultation process, the JSE has not proceeded with this proposal and indicated that the disposal of an asset, even for cash, may have an impact on the issuer’s working capital, particularly if the cash proceeds from the disposal are earmarked for purposes other than working capital and therefore that the status quo should be retained.