Equity capital markets in Australia: regulatory overview
A Q&A guide to Equity capital markets law in Australia.
The Q&A gives an overview of main equity markets/exchanges, regulators and legislation, listing requirements, offering structures, advisers, prospectus/offer document, marketing, bookbuilding, underwriting, timetables, stabilisation, tax, continuing obligations and de-listing.
To compare answers across multiple jurisdictions visit the Equity Capital Markets Country Q&A tool.
This Q&A is part of the PLC multi-jurisdictional guide to capital markets law. For a full list of jurisdictional Q&As visit www.practicallaw.com/capitalmarkets-mjg.
Main equity markets/exchanges
Main equity markets/exchanges
The Australian Securities Exchange (ASX) is the primary exchange in Australia (www.asx.com.au). There are also two small secondary exchanges:
The ASX provides an attractive exchange for foreign companies to list on, due to its position as a developed market in the Asia-Pacific region. As at October 2011 there were 127 foreign companies listed on ASX.
Chi-X Australia (Chi-X), a wholly-owned subsidiary of alternative trading operator, Chi-X Global Holdings, recently completed its 'soft launch' period and received approval from the Australian Securities and Investments Commission (ASIC) to introduce trading in all S&P Index/ASX 200 stocks and ASX-listed exchange traded funds from commencement of trading on 9 November 2011. Chi-X is intended to offer an alternative to trading on ASX using its low latency, high performance proven trading system. Its launch is intended to introduce to the Australian market innovative new order types, the potential for lower costs and a more efficient way to trade. Chi-X is a trading market only, and it is not possible for a company to list on Chi-X.
Market activity and deals
The initial public offering (IPO) market is still relatively slow. In the period 1 January 2011 to 15 November 2011, 93 organisations listed on the ASX compared to 103 for the 2010 financial year. Secondary capital raising activity has remained reasonably strong during 2011, although considerably lower than the record levels of 2009. Significant transactions in 2011 included:
GI Dynamics with A$311 million (IPO).
Bega Cheese with A$253 million (IPO).
Collins Foods with A$232 million (IPO).
Australia and New Zealand Banking Group with A$1.3 billion (placement).
West Australian Newspapers Holdings with A$1 billion (placement).
Growth Point Properties Australia with A$102 million (rights issue).
(As at 1 February 2012, US$1 was about A$0.94.)
A number of planned IPOs have been postponed during the last year, many before official launch, due to the uncertainty in the global financial markets.
Directors of companies seeking to list generally retain discretion to delay or withdraw the IPO at any time before allotment of securities. Therefore, the offer can be simply postponed by an announcement to the market and return of any application monies received.
There are two key regulators relating to ASX listed companies:
The ASX Listing Rules set out the requirements for admission to ASX and regulate the conduct of listed companies. ASX Limited is responsible for enforcement of these rules.
ASIC regulates offers of securities under the Corporations Act 2001 (Cth) (Corporations Act) and associated matters such as market conduct, insider trading and advertisements. The role of market supervision was transferred from ASX Limited to ASIC during 2010. ASIC has issued Market Integrity Rules, which govern the conduct of brokers and other participants who execute orders on ASX and Chi-X.
For an entity to be admitted to the official list of ASX and have its securities quoted on the ASX, it must satisfy the listing criteria set out in the ASX Listing Rules, which include the requirements summarised below. ASX Limited is responsible for determining whether the criteria have been met and whether a company is admitted to ASX. In addition, foreign companies that wish to list on ASX must register with ASIC as a foreign company.
Minimum size requirements
An entity seeking admission as an ASX listing must satisfy either the profit test or the assets test as set out below:
Profit test. The entity must have both:
aggregated profit from continuing operations for the last three full financial years of at least A$1 million; and
consolidated profit from continuing operations for the 12 months ending no later than two months before the application for admission of greater than A$400,000.
Assets test. The entity must have either:
net tangible assets of at least A$2 million after deducting the costs of fundraising; or
a market capitalisation of at least A$10 million.
The entity must also have a minimum level of working capital (see below, Trading records and accounts) and must have at least half of its total tangible assets in cash (or in a form readily convertible to cash) and have commitments to spend half of its cash.
Different thresholds apply in the case of an investment company. A foreign entity seeking a full ASX listing is subject to the same admission requirements that apply to an Australian entity, irrespective of whether it is listed on another stock exchange.
However, large international companies that are already listed on a recognised overseas securities exchange may be eligible to obtain a foreign exempt listing. To obtain a foreign exempt listing, the entity must have either:
Operating profit before income tax for each of the previous three financial years of at least A$200 million.
Net tangible assets of at least A$2 billion at the time of admission.
Trading record and accounts
There is a trading record requirement if an entity seeks admission under the profit test (but not if an entity is seeking admission under the assets test). To satisfy the profit test, the entity must both:
Be a going concern or a successor of a going concern.
Have the same main business activity as during the previous three full financial years.
The entity must also give ASX prescribed financial accounts and a balance sheet that have been audited or reviewed in the manner specified. This applies under both the assets and profit tests.
There is no working capital requirement if an entity is seeking admission under the profit test. To satisfy the assets test, the working capital must be at least A$1.5 million. If it is not, the working capital must be at least A$1.5 million if the entity's budgeted revenue for the first full financial year that ends after the listing was included in the working capital.
The prospectus or product disclosure statement (PDS) for the offer must also include a statement that the entity has sufficient working capital to carry out its stated objectives (or must provide ASX with a report from an independent expert to this effect).
Shares in public hands
To list on ASX, an entity must satisfy ASX's "spread" requirements, that is, there must be at least either:
500 shareholders, each holding a parcel of at least A$2,000 of shares.
400 shareholders, each holding a parcel of at least A$2,000 of shares, with at least 25% being held by persons who are not related parties of the company.
In either case, ASX escrowed securities (that is, securities subject to lock-up arrangements) are excluded. For a foreign exempt listing, a company must have at least 1,000 shareholders each holding a parcel of at least A$500 of shares.
An IPO is usually structured as one of the following:
Offer for subscription, that is an offer of new securities of the issuer.
Offer for sale, that is an offer of existing securities of selling shareholders (allowing existing shareholders to exit all or part or their holding).
A combination of the above.
An IPO can comprise offers to different types of investors (whether under an offer for subscription or sale), including one or more of the following:
Institutional offer. An offer to invited sophisticated or professional investors.
Retail offer. An offer to the public generally.
Broker firm offer. An offer to certain clients of brokers granted allocations of shares.
Priority offer. An offer available to certain persons on a priority basis (for example, to employees or holders of shares in a related entity).
An entity can also conduct a compliance listing, which comprises a listing without an offer of securities, such as a dual listing.
The main ways of structuring a subsequent equity offering include:
Private placement. A placement of securities to a relatively small number of select sophisticated (often institutional) investors.
Rights issue or entitlement offer. A pro rata offer of additional shares to existing shareholders.
Share purchase plan. An offer to existing shareholders of up to A$15,000 each of new securities at a discount to market price without brokerage fees or stamp duty. Share purchase plans are often offered to shareholders in conjunction with a private placement to institutional investors to limit the impact of their dilution.
Dividend reinvestment plan. An offer to existing shareholders to participate in a plan where new shares are issued instead of a dividend that would otherwise be payable in cash. Only shareholders who elect to participate in the plan receive new shares.
The principal steps involved in applying for an ASX listing of a company's shares include:
Any pre-IPO restructuring to ensure that the group is appropriately structured for a listing.
Due diligence including a formal due diligence committee process.
Preparing a prospectus and ancillary documents for the offer of shares and listing of the company on ASX.
Agreeing underwriting or offer management agreements.
Pre-marketing of the offer and pricing.
Lodging of the prospectus with ASIC.
Submission of an application for listing to ASX.
Allocation and issue of shares.
Admission to ASX and commencement of trading.
The procedure is the same for a foreign company seeking an ASX listing except that more limited requirements need to be satisfied for either:
A foreign exempt listing.
A foreign company that is not making an offer of shares at the same time as the application for admission (for example, on a dual listing).
As shares in most foreign companies cannot be settled electronically through ASX's Clearing House Electronic Subregister System (CHESS), foreign companies seeking a listing normally apply to have a form of depositary receipts known as CHESS Depositary Interests (CDIs) quoted on ASX instead of the company's shares or common stock.
Advisers: equity offering
The following advisers commonly feature on an IPO.
The lead investment bank is primarily responsible for managing the IPO process and co-ordinating the entity's other advisers. Its role can include the following, in some cases in conjunction with other banks:
Advising on the structuring of the offer including the size of the issue and the timing and pricing of the offer.
Advising on the entity's capital structure, board composition and corporate governance.
Publishing research on the entity through the bank's research function.
Assessing the likely level of demand for the entity's securities.
Advising on, and conducting marketing of, the offer including running road shows in conjunction with the issuer.
Underwriting or offer managing the offer.
The issuer's law firm's role is to:
Advise the company on the legal aspects of preparing for listing including matters such as, in the case of proprietary companies, converting to a public company, implementing any required pre-IPO reorganisation, appointing and removing directors, changing the company's constitution and directors' service contracts and preparing corporate governance policies.
Carry out the legal aspects of due diligence.
Assist the company in the preparation and verification of the prospectus or PDS.
Advise on underwriting or offer management arrangements.
The investment bank generally obtains separate legal advice. If there are selling shareholders, they may also be separately represented.
The role of the investigating accountant is to conduct financial due diligence and to provide a report on any historical, pro-forma or forecasted financial information for the prospectus or PDS.
The tax advisers (who are often also the legal or accounting advisers) are responsible for tax structuring advice relating to any reorganisation and tax advice for the IPO or equity offering.
Depending on the nature of the business, particular experts may be commissioned to provide reports for the prospectus or PDS (for example, a tenement report for an exploration or mining company).
The company's share registry manages the register of shareholders, processes applications for the IPO or equity offering and handles the share register on a continuing basis.
Communications and investor relations consultants
These consultants advise on public relations matters including dealing with the media and communications with shareholders.
For secondary equity offerings, some or all of the same advisers may be involved depending on the structure and size of the offering and whether a prospectus or other disclosure document is required.
The principal documents produced on an IPO include:
ASX compliant constitution for the issuer.
Due diligence planning memorandum.
Due diligence reports and sign-offs from advisers and the issuer.
Due diligence committee report.
Prospectus or PDS (and any supplementary prospectus or PDS) and application form.
Investigating accountant's report.
Underwriting or offer management agreement.
ASX listing application.
Board and shareholder resolutions to approve any reorganisation and IPO steps.
Corporate governance policies.
The documents produced on a secondary equity offering depend on the type of equity raising exercise undertaken. Certain types of equity raisings do not require a prospectus or other disclosure document (see Question 11) and many of the ancillary documents above are consequently not required.
Equity prospectus/main offering document
An entity must prepare one of the following disclosure documents for any offering of securities or financial products for issue or sale to investors in Australia, unless a specific exemption applies (see Question 11):
A prospectus, for securities such as shares.
A PDS, for financial products such as units in a managed investment scheme, for example a property trust.
Once prepared, the prospectus or PDS must be lodged with ASIC, but ASIC does not pre-vet prospectuses or PDS's before issue.
Exemptions are provided from the prospectus requirements of the Corporations Act for offers to certain classes of investors including:
Offers to sophisticated investors. An offer where one of the following applies:
the minimum amount payable for the shares on acceptance of the offer is at least A$500,000;
the amount payable by the investor for the shares when aggregated with the amount previously paid by the investor for other shares in the same class is at least A$500,000;
a qualified accountant certifies that the investor has either net assets of at least A$2.5 million, or gross income for each of the previous two financial years of at least A$250,000 per year;
the offer is made to a company or trust controlled by a person who meets any of the above requirements;
the offer is made through a financial services licensee who has given certain certifications as to the sophistication of the investors.
Offers to professional investors. An offer to "professional investors" within the meaning of the Corporations Act.
Rights issues or entitlement offers to existing shareholders. Provided that certain conditions are met, a listed company can make a pro rata offer under a rights issue or entitlement offer to its existing shareholders without the need to prepare a full prospectus. Rights issues are ordinarily made under a short-form offering document and issuers are required to issue a notice essentially confirming that the issuer has complied with its continuous disclosure and financial reporting obligations under the Corporations Act.
Share purchase plan offers. Provided that certain conditions are met, a listed company can make an offer to existing shareholders to acquire up to A$15,000 of shares each under a share purchase plan. The offer is made under a short-form offer document setting out the key terms of the offer.
Small-scale offerings. Personal offers that do not result in securities being issued to more than 20 investors, to raise no more than A$2 million in any 12-month period.
Offers to senior managers. An offer to senior managers of the company or of a related body corporate or to a family member or a body corporate controlled by the senior manager or such relative.
Bonus issues and dividend reinvestment plans. An offer of fully paid shares to existing shareholders under a dividend reinvestment plan or a bonus share plan.
Employee incentive plan offers. An offer to employees under an employee incentive plan. ASIC allows these offers without the preparation of a full prospectus, provided the plan complies with certain conditions and a short form offer document containing certain prescribed information is provided to employees and lodged with ASIC.
There are separate, but broadly similar, categories of exemptions for offering units in managed investment schemes.
Most of these exemptions can be aggregated, for example, to allow an offer of shares to sophisticated and professional investors and to certain members of senior management as part of a single capital raising.
In addition, if a company is seeking an ASX listing but is not simultaneously conducting an offer of shares, ASX may allow an information memorandum to be used for the listing instead of a prospectus. The information memorandum can in some circumstances contain more limited information than a prospectus, and is not subject to the prospectus liability regime.
The general test for the content of a prospectus is that it must contain all information that investors and their professional advisers would reasonably require to make an informed assessment of both:
The assets, liabilities, financial position and performance, profits and losses, and prospects of the issuer.
The rights and liabilities attaching to the shares.
This information is only required to the extent it is reasonable for investors and their professional advisers to expect to find the information in the prospectus and if this information is actually known, or in the circumstances ought reasonably to have been obtained if inquiries were made, by specified persons including the company, its directors and any underwriter.
In addition, the Corporations Act prescribes certain specific disclosures that must be included in a prospectus, including:
The terms and conditions of the offer.
Interests of, and fees and payments or benefits to, directors, underwriters, promoters and professional advisers.
The expiry date of the prospectus.
A statement that the securities have been admitted to quotation on the ASX or that such application has been made or will be made within seven days after the date of the prospectus.
A statement that a copy of the prospectus has been lodged with ASIC and that ASIC takes no responsibility for the content of the prospectus.
A prospectus ordinarily contains the following categories of information:
Details of the offer.
Board, management and governance.
Financials including investigating accountant's report.
Expert's report (where relevant).
Additional information including details of material contracts, summary of the constitution, directors' interests, share capital details, substantial shareholders and tax implications.
In 2011 ASIC issued updated guidance on its approach to deciding whether a prospectus or PDS satisfies the disclosure requirements under the Corporations Act in a "clear, concise and effective" manner.
A PDS must contain any information that might reasonably be expected to have a material influence on the decision of a reasonable person, as a retail client, as to whether to acquire the product, if it would be reasonable for such a person to expect to find the information in the PDS.
Some of the specific disclosure requirements for a PDS include:
The name and contact details of the issuer or seller.
Any significant benefits to which a holder of the product will or may become entitled.
Any significant risks.
The initial and ongoing costs of the product.
Information about any commission or other similar payments that will or may impact on the amount of a return to a holder.
Significant characteristics or features of the product or the rights, terms, conditions and obligations attaching to the product.
Information about the dispute resolution system that covers complaints by holders.
Significant tax implications.
The extent to which labour standards and environmental, social or ethical considerations are taken into account in the entity's investments.
In addition, the information included in a prospectus and a PDS must be "worded and presented in a clear, concise and effective manner".
The lead investment bank and lawyers are generally primarily responsible for the drafting of the prospectus or PDS, with input from the company and other advisers.
To ensure that the prospectus does not contain any misleading or deceptive statements or omit material required by the Corporations Act, a due diligence committee (DDC) is established, which runs a detailed due diligence process relating to the company and its business. The DDC usually consists of representatives from the company, the lawyers, the investment bank and the investigating accountant. The DDC delegates responsibility for undertaking due diligence investigations in particular areas to members of the committee and certain other advisers. At the end of this process, advisers provide sign-offs to the company and the other members of the DDC relating to their areas of responsibility, and the DDC as a whole provides a report to the company board about the content of the prospectus.
The DDC also co-ordinates verification of material statements in the prospectus by allocating responsibility to particular persons. The offer document is verified by cross-referencing all material statements and data to an independent source or, where future events are at issue, establishing that there are reasonable grounds for making the statement.
In addition to ensuring that the prospectus contains the information required by the Corporations Act, the DDC process is designed to maximise the availability of relevant defences under the Corporations Act relating to prospectus liability.
The persons potentially liable for the content of a prospectus or PDS include:
The offeror of the securities or financial products.
Each of the company's directors and proposed directors.
A person who is named in the prospectus with their consent as having made a statement that either:
is included in the prospectus (for example, an expert or other adviser that provides a report that is in the prospectus);
is the basis on which a statement made in the prospectus is made (for example, an information source on which an expert relies).
A person who contravenes, or is involved in the contravention of, the fundraising provisions.
A person involved in the preparation of a PDS who directly or indirectly caused the PDS to be defective or contributed to it being defective.
Persons who contravene or are involved in the contravention of the fundraising provisions of the Corporations Act relating to prospectuses are potentially subject to criminal and civil liability. The main provision dealing with breaches of the fundraising provisions (section 728(1)) provides that a person must not offer any securities under a prospectus if one of the following applies:
The prospectus or application form contains a misleading or deceptive statement.
The prospectus omits material that is required under the Corporations Act.
Since the prospectus was lodged, the person becomes aware of a new circumstance that would have been required to be disclosed in the prospectus if it had arisen before the prospectus was lodged, and the deficiency in the prospectus has not been remedied by a supplementary or replacement prospectus.
A person who suffers loss or damage as a result of a contravention of section 728(1) can recover the amount of the loss or damage from the persons listed above.
There are, however, a range of defences available, including:
The "due diligence defence", that is, that the person had made all enquiries that were reasonable in the circumstances.
Reasonable reliance on information provided by someone outside the organisation.
In certain limited circumstances, lack of knowledge that a statement was misleading or deceptive or that there was a material omission.
Marketing equity offerings
The Corporations Act imposes restrictions on advertising an equity offering before the lodgement of the prospectus or PDS with ASIC. This is particularly intended to protect retail investors by ensuring they only acquire securities or financial products on the basis of the full prospectus or PDS.
Before lodging a prospectus with ASIC, more stringent rules apply to marketing of offers of unlisted securities (such as on an IPO) than offers of securities in a class already listed on ASX.
Certain marketing activities are permitted on initial and secondary offerings to institutional investors, which can include:
Pre-marketing. The lead manager investment bank may contact a number of institutional investors to generate investor interest and identify concerns to be addressed by management on the road show.
Road shows. The lead manager investment bank may organise a series of meetings between the company and other investment bankers and institutional investors to generate interest for the equity offering.
Research reports. Affiliates of the lead manager or co-lead managers may publish research reports. These reports may be circulated to institutional investors on a strictly monitored basis before the offering. Other analysts unconnected with the offering may also prepare reports for their own clients.
A TV, radio and/or print advertising campaign may also be implemented, particularly on larger equity offerings, subject to the restrictions on advertising under the Corporations Act as modified by ASIC in particular cases.
A broker may have potential civil and criminal liability under the Corporations Act relating to the publication of research reports, including under the following provisions:
Misleading or deceptive conduct. Section 1041H of the Corporations Act provides that a person must not engage in conduct, in relation to securities, that is misleading or deceptive or is likely to mislead or deceive. A breach of this section can attract civil liability in relation to any person who suffers loss or damage as a result of the conduct.
Misleading or deceptive statements. Section 1041E of the Corporations Act prohibits a person from making a statement or disseminating information that is false in a material particular or materially misleading, and is likely to induce the disposal or acquisition of securities by other persons if, when the person makes the statement or disseminates the information, either the person:
does not care whether the statement or information is true or false;
knows or ought reasonably to have known that the statement or information is or was false in a material particular or materially misleading.
A breach of section 1041E of the Corporations Act is a criminal offence.
Brokers who are publishing research reports may seek to minimise their potential liability by a number of means, including limiting the distribution of their reports (for example only to professional or sophisticated investors) and by ensuring that their reports contain appropriate disclaimers.
Bookbuilds are commonly used, particularly on medium- to large-size floats, primarily to maximise the issue price in light of the proposed size of the offer. Bookbuilds can either be used:
At the beginning of the offer period (sometimes before lodging the prospectus with ASIC) to determine a fixed price, which is then specified in the prospectus.
At the end of the offer period. In this case, the company can issue a price range prospectus, with the final price determined through an institutional bookbuild at the end of the offer period.
The pricing for the retail offer can be fixed at the beginning of the process, or retail investors can apply on the basis of an indicative price range for the offer (which is usually subject to a fixed maximum price that retail investors are required to pay), with the final price determined by the institutional bookbuild.
Underwriting: equity offering
Under the underwriting agreement, the underwriting bank agrees to subscribe for all or part of any shortfall in applications under the offer, in return for an underwriting commission.
Typical terms of an underwriting agreement include:
Conditions precedent to the underwriting obligation such as lodging of the prospectus, provision of due diligence reports and sign-offs, and listing of the shares on ASX.
Obligations on the investment bank to lead manage the offer.
The obligation to underwrite (and related settlement obligations).
Obligations of the company to make the offer in compliance with law.
Payment of fees and expenses.
Representations and warranties by the company relating to matters including the accuracy of the prospectus.
An indemnity in favour of the underwriters.
Underwriting fees are ordinarily calculated as a percentage of the funds raised under the offer with the percentage varying according to the size and nature of the offering.
Timetable: equity offerings
The following is an indicative timetable for a typical IPO, "T" for this purpose is the date of listing on ASX:
T minus 5 months. Appoint IPO team, conduct initial pricing discussions. First DDC meeting. Management presentation to DDC, identification of key issues for due diligence, agreement on the scope of the due diligence work and commencement of investigations.
T minus 4 months. Commence prospectus or PDS drafting. Conduct pre-IPO reorganisation (if required).
T minus 3 months. Conduct due diligence. Continue prospectus or PDS drafting. Convert to public company (if required) and prepare an ASX compliant constitution and corporate governance policies.
T minus 2 months. Commence meeting with institutions. Verify prospectus or PDS and prepare due diligence reports. Prepare listing application. Negotiate underwriting arrangements.
T minus 5 weeks. Final pricing discussions, board approves prospectus and underwriting agreement, institutional road show commences, prospectus lodged with ASIC and listing application to ASX is made. ASIC "exposure period" of seven days during which applications cannot be accepted by the company.
T minus 4 weeks. Offer period and public marketing commences.
T minus 1 week. Offer closes.
T. Funds available to entity on the issue of securities. The company is listed and securities traded on ASX.
A bookbuild to determine pricing of the offer can be held at the beginning or end of the offer period.
The timetable for a secondary equity offering depends on the nature and size of the capital raising. For example, a private placement can be conducted very quickly with minimal formality whereas the ASX Listing Rules prescribe a timetable for a rights issue.
The Corporations Act generally prohibits a person from effecting or taking part in one or more transactions that have or are intended or likely to have the effect of either:
Creating an artificial price for trading in financial products on a financial market.
Maintaining the price of trading in financial products at an artificial level.
However, market stabilisation arrangements are permitted by ASIC in certain limited circumstances. This "permission" is granted by ASIC in the form of no-action letters. Market stabilisation arrangements are designed to insulate the open market price of new listings. This is done in an effort to increase investor confidence in the market for the newly issued securities.
Market stabilisation arrangements must comply with certain ASIC conditions set out in the no-action letter and:
Are limited to certain securities.
Are subject to limitations on pricing.
Can only be conducted for a period of up to 30 days after quotation in the new shares commences.
There are also disclosure requirements to ASX relating to these arrangements.
Despite the above "permission" granted by ASIC, the market stabilisation must not either:
Have the purpose of raising the price of the securities, except for the limited objective of stabilising the market in the securities.
Be undertaken with the intention of creating a false or misleading market or impression of trading.
Tax: equity issues
A number of tax issues can arise when issuing and listing equity securities, requiring specialist tax advice. For completeness, this answer focuses on issues arising following an IPO. However, the tax issues mentioned are relevant to the issuing and listing of equity securities. The potential tax issues include the following:
Revenue or capital. If an IPO involves an offer for sale, the determination of whether the seller holds the shares on revenue or capital account is important in determining the tax consequences to the seller shareholders.
Income tax planning. It is important for the seller/purchaser to structure ownership arrangements appropriately before issuing/acquiring equities. Non-resident sellers may be able to obtain relief under relevant tax treaties. However, the Australian Taxation Office is likely to aggressively pursue arrangements for which the dominant purpose is to avoid Australian tax.
Capital gains planning. If shares are held on capital account, pre-IPO planning may be able to maximise the cost base. Non-resident sellers can use tax exemptions for non-resident shareholders where the shares are not considered to be taxable Australian property.
Consolidation exit adjustments. Taxing events can arise where a company leaves a consolidated tax group. This can result in a capital gain arising to the head company of the remaining group.
Goods and services tax (GST). The issue and listing of equity securities are not subject to GST (since they constitute financial supplies for GST purposes). However, consideration must be given to whether the listing entity is entitled to claim GST credits on its IPO expenses, such as management/placement fees and legal fees. There are a number of special rules that apply in this area, for example, even where the listing entity is not entitled to claim full GST credits, it may still be entitled to claim 75% reduced input tax credits on certain expenses. Particular GST issues arise for non-residents seeking to list on ASX.
Employment-related securities issues. If shares or options held by employees are altered to implement the IPO, this can generate a tax point, unless rollover relief is available.
The ASX Listing Rules impose detailed continuing obligations for listed companies, including the following:
Financial reporting. ASX requires listed companies to publish prescribed financial reports on an annual, half-yearly and in some cases quarterly basis.
Continuous disclosure. Each listed entity must notify ASX immediately of any information concerning it that a reasonable person would expect to have a material effect on the price or value of its securities unless specified exceptions apply, such as for confidential negotiations concerning an incomplete proposal and information produced (for example, financial projections) for internal management purposes. The ASX Listing Rules also impose specific disclosure obligations such as on the issue of new securities and change of directors' interests.
Limitations on share issues. Listed companies are generally limited to issuing new shares equal to 15% of their issued share capital over a rolling 12-month period, unless shareholder approval is obtained or one of a number of specified exceptions applies.
Significant transactions. The ASX Listing Rules prescribe shareholder approval requirements for certain major acquisitions and disposals that would change the nature or scale of the company's activities.
Transactions with related parties. Shareholder approval requirements are prescribed for certain transactions between a company and its directors and other related parties including the issue of securities to related parties.
Corporate governance. ASX publishes best practice recommendations relating to the corporate governance of listed companies. While these guidelines are not mandatory, ASX applies an "if not, why not" approach, requiring companies to explain in their annual report why they have not complied with any of the best practice recommendations.
Shareholder voting restrictions. The ASX Listing Rules dictate voting exclusions that apply to interested parties for the approval of certain transactions. For example, if shareholder approval is sought for the issue of shares to a related party, the related party (and its associates) would be excluded from voting on the approval resolution.
An entity admitted as an ASX foreign exempt listing is not bound by most of the continuing obligations referred to in Question 21. However, it must:
Comply with the rules of its primary stock exchange.
Immediately provide to ASX in English all information that it is required to provide to its overseas exchange.
Foreign entities that have a full ASX listing must comply with all of the ASX Listing Rules in the same manner as an Australian company, subject to ASX's discretion to waive an individual company's compliance with an ASX Listing Rule. ASX occasionally exercises this waiver power for foreign companies to exempt them from compliance with particular ASX Listing Rules, where it is certain that the requirements of their overseas exchange are at least as stringent as those of ASX. For example, relief can be obtained from ASX in certain circumstances for foreign companies listed on ASX to file only the financial reports required by their home jurisdiction.
Issuers of CDIs are treated in the same manner as issuers of shares for these purposes.
The ASX Listing Rules have the effect of a contract under seal between the ASX and the listed company. A breach of the ASX Listing Rules can result in suspension of a company's securities from trading and/or the company's removal from the official list of ASX. Under the Corporations Act, ASX or a third party can apply to a court for orders requiring the listed company to comply with the ASX Listing Rules. The obligations of continuous disclosure under the ASX Listing Rules have the force of law in Australia and civil and criminal sanctions can apply for failure to make timely disclosure to the market.
Market abuse and insider dealing
The de-listing of an entity from ASX can be voluntary or compulsory. For voluntary de-listing, an entity can simply submit a request to ASX. However, ASX can impose conditions on the de-listing, such as a requirement to obtain shareholder approval.
Alternatively, ASX can remove an entity if it is preventing a fair and well-informed market. For example, ASX can remove an entity for breaching the ASX Listing Rules or failing to pay its annual listing fee.
From January to November 2011, 115 companies were de-listed from the ASX, mostly arising from acquisitions, voluntary requests and failures to pay the annual fee.
Developments in the equity market structure
Following the transfer of market supervision, ASIC is now considering certain regulatory reforms to address developments in the equity markets. ASIC has identified several trends that the equity market is currently experiencing, including:
An increase in market competitors and exchanges.
Greater complexity of market supervision due to the new multi-market structure.
Advancement in technology associated with trading, for example, high-speed trading, automated trading, data management, and multiple execution procedures and venues.
Fragmentation of markets which leads to loss of information in the process of price discovery.
ASIC's new proposals are directed towards addressing certain issues arising from the above trends and include:
New controls to curb extreme price movements and to require transparent cancellation arrangements in response to the "flash crash" of markets.
Enhanced controls for direct electronic access and algorithmic trading in response to the increasingly pervasive role of technology.
Formal obligations on market participants to deliver best execution to clients.
Minimum disclosure about order and trade information to promote efficient price formation on markets and reduce incentives for trading to shift to "dark pools".
Consolidation of market data across all execution venues to ensure whole of market transparency.
Market operator co-operation on trading halts and related matters.
Better regulatory data on orders and trades to ensure ASIC's market supervision keeps pace with market developments.
These changes are expected to be enforced through the ASIC Market Integrity Rules.