SUBMISSIONS ON NZX LISTING RULE REVIEW

Transcription

1 SUBMISSIONS ON NZX LISTING RULE REVIEW 25 NOVEMBER / /

2 CHAPMAN TRIPP SUBMISSIONS ON NZX LISTING RULE REVIEW 1 We have set out a response to each of the questions posed by NZX in its NZX Listing Rule Review Discussion Paper in the following pages. As a general comment, we note that we strongly support NZX s review and its objectives. 2 One of our key submissions is that we believe the best way to deliver the desired flexibility and reduced compliance costs for smaller issuers is by providing appropriate flexibility in the rules themselves, rather than creating two categories of listings. The flexibility in the rules can be supplemented with additional recommendations and commentary in the Corporate Governance Code. We have generally prepared our submissions on the basis that a single set of rules will be applied to all issuers of course, if NZX proceeds with implementing two listing categories, we will have further submissions in due course as to how the rules should most appropriately apply across those categories. 3 We have prepared our submissions following discussion with the leading investment banks active in the New Zealand market as well as a range of listed issuers. While we expect that most of those investment banks, and issuers, will have provided their own submissions (or responded to NZX s survey) so we do not want to speak on their behalf, we found these discussions useful to shape our own thinking even (or perhaps especially) where there were differing views. We would welcome the opportunity to attend further workshops with NZX and other key stakeholders to discuss these important changes to New Zealand s capital markets. 4 Please contact us should you wish to discuss our submissions and the reasoning behind them. PAGE 1

3 Part One Context to review 1 Do you agree with the objectives of the review? If not, why not? 2 Do you agree with the proposed timetable and process for review? If not, why not? Yes. Yes. Part Two Structure of updated rules 3 Do you agree that NZX should retain the current requirements under the Listing Rules, subject to addressing drafting issues, as the basis for the updated rules? 4 Do you agree that NZX should adopt a modular approach to updated rules? If not, why not? Yes, we support retaining the NZX Main Board Listing Rules as the drafting base for the updated rules. Yes, we agree with taking a modular approach to the updated rules. We believe that a number of the sections of the NZX Main Board Listing Rules could usefully be split up and reordered into sections that dealt with more specific topics. We also agree with NZX s comments that a modular structure would make it easier to apply the rules to different types of financial products. Part Two Current approach to differential standards 5 Do you agree with NZX s preferred approach of delivering an updated market structure via a single rule set with differential standards for equity issuers? If not, why not? Yes, we agree with this approach. The transition to a single rule set should be a compulsory move, so that issuers cannot choose to remain on the NXT or NZAX for an extended period of time. Instead, those markets should be shut down as promptly as possible following implementation of the revised rule set. PAGE 2

4 Part Two Options for approaching differentiation 6 Do you agree that NZX should have differential requirements for equity issuers? We believe the best way to deliver the desired flexibility and reduced compliance costs for smaller issuers is by providing appropriate flexibility in the rules themselves, rather than creating two categories of listings. The flexibility in the rules can be supplemented with additional recommendations and commentary in the Corporate Governance Code. We see three key risks in having different listing categories: Investors, particularly those from offshore who may be less familiar with the NZX and retail investors, will find the distinction between the two categories confusing and avoid investing entirely or will not understand the difference (leading to a risk of expectations not matching reality when it comes to the rules applying to certain issuers). This risk is reduced if a single set of rules applies on a mandatory basis, with any deviations from best practice identified through corporate governance disclosures. We believe that most of the issuers currently on the NZX Main Board would want to be premium issuers, as we expect that standard issuers will be seen as second class by investors (whether or not any particular issuer is well governed or not), as the proposed branding is unduly negative. If there are restrictive eligibility criteria or additional administrative steps required for a premium issuer, there is a risk that listing will be less attractive for issuers that would have qualified for the NZX Main Board but which would not qualify as premium issuers for whatever reason (for example, if index inclusion was required to be a premium issuer ). Creating two listing categories may divide issuers, similar to the current three equity market structure. Some investors may choose not to invest in standard issuers as a point of principle, or include restrictions in investment mandates to the same effect. A single set of rules applying to all issuers will encourage investors to consider each issuer on their own merits, rather than prejudging standard issuers. This was a topic that we discussed at length with the investment banks we consulted with, and we believe there was a shared view that shifting to two listing categories would not deliver the desired results for the NZX. PAGE 3

5 7 What criteria should be used to determine whether differential requirements should apply (e.g. options 1 or 2 above or something else)? 8 What do you consider is an appropriate cut off to be considered a smaller issuer? As noted above, we do not believe that NZX should use separate equity listing categories. If NZX were to proceed with this, we would encourage that any requirements be self selected, so that an issuer can always choose to meet the higher standards if desired. Larger issuers will naturally choose to comply with the higher standard. As noted above, we do not believe that NZX should use separate equity listing categories. Part Two Branding 9 What branding should NZX use for separate equity listing categories? As noted above, we do not believe that NZX should use separate equity listing categories. Part Two Debt and funds 10 Do you agree that it is appropriate to have separate rule settings for debt and funds? Yes. PAGE 4

6 11 Do you have any feedback on how to promote and facilitate the listing of funds, including MIS structures? Given New Zealand funds are generally required to be licensed under the FMCA, we believe that it is important that the rules do not impose requirements on funds that differ significantly from those which are imposed under the FMCA or require amendments to be made to the governing documents of funds a costly and time consuming process. As such, we suggest that NZX limit eligibility for funds to rely on specific fund rules to those which are New Zealand registered MIS with a licensed manager or, in the case of funds governed by foreign law, are otherwise subject to requirements that NZX is satisfied are appropriate to provide unitholder protection. This could be considered when applications for listing are made by funds subject to foreign law. The rules should be drafted with flexibility in mind to cover differing structures equity, unit trusts, proportionate schemes and joint ventures. The goal of the rules in relation to funds should be achieve a similar regime to that which applies to externally managed listed property trusts. In particular, it is important that the rules regulate the fund itself, and not the manager. We also note that there may be funds that have been designated as other managed investment schemes by a specific or class FMA designation. In these cases, the rules should facilitate the fund transitioning back to another type of financial product, such as equity securities. PAGE 5

7 12 Do you have any feedback on how to promote and develop NZX's listed debt market? We believe that many of the key measures to further developing NZX s debt market have been raised in the NZX consultation paper, and we strongly support the suggestions proposed (as discussed further below). This includes removing unnecessary compliance costs (such as standard waiver applications), minimising review time on same class offers, and considering the establishment of a wholesale debt market. We have found that listing costs (both initial and ongoing) have also been a real concern for our clients when considering whether to list their debt. This is particularly the case for rated issuers that already have access to institutional investors for their unlisted debt. Given the proposals regarding a new wholesale debt market and the focus on increasing volumes generally, it would be useful to review NZX s debt listing fees at the same time. As a broader point, we also encourage NZX to continue to consider substantive measures targeted at increasing the number of high quality debt issuers on the NZX. For instance, this could include simplified measures for issuers with existing bond quotations on a recognised global exchange (and corresponding continuous disclosure requirements) to have further issuances of the same class listed on the NZX. While we appreciate that measures such as this will also require some law reform to be effective, measures such as this would send a message to issuers that NZX open to diversification and global participation. PAGE 6

8 13 What steps should NZX take to promote and facilitate the issuing of green bonds in New Zealand? (a) In addition, should NZX have a role: certifying green bond issuers, certifying certifiers of green bond programmes, or should NZX leave this to external bodies and standards? We support NZX s intention to facilitate green bonds in New Zealand. The green bond market continues to develop internationally, and there is some variation in the approaches taken (although the ICMA Green Bond Principles are widely recognised). We suggest that, at this stage, the key benefit that NZX can provide will be a platform that (1) clearly shows the certification obtained (together with a link) and (2) allows any ongoing reporting to be disclosed in accordance with that certification or the terms of the bonds. This latter point could be achieved by guidance regarding consistent disclosure through MAP. We do not think that NZX should necessarily have a role in certifying green bond programmes (or certifiers), as these are expected to continue to develop over time and it is not clear there is any market failure in this regard (i.e. investors are focused on the credibility of the certifier). One option to facilitate this would be to attach a tag or identifier to green bond issuances that links to certification description, with the ability to remove that tag/identifier if the bonds later ceased to be certified. Issuers would also be under an obligation to inform NZX and the market if they ceased to be certified. The above approaches, together with NZX s proposed guidance on good corporate governance practices, would together assist investors to make socially responsible decisions. Part Two Depository receipts and other financial products 14 Do you think that depository receipts should be introduced? If so/not, why/why not? 15 If so, what are the key shareholder protections which should be introduced? Yes. Introducing rules to accommodate depository receipts is a sensible step. Even if there is not currently demand for depository receipts, having the option available may encourage foreign issuers to investigate an NZX listing of such receipts in the future. We expect that broadly similar shareholder protections to those that are required on other international exchanges around the management of the depository should be implemented. We understand that other exchanges tend to deal with these matters through the more detailed operational rules or requirements, rather than implementing these in the main listing rules. PAGE 7

9 16 Please provide feedback on demand for equity futures and options and measures to promote this aspect of the market. 17 Are there any other financial products which NZX's rules should seek to specifically cater for? We do not have any particular feedback on this question. No. In particular, we do not support any suggestion that NZX should cater to initial coin offerings or crypto-currencies generally, given the reputational risks to other issuers involved. Part Three - Eligibility for listing 18 Do you agree with our proposal to no longer review and approve constitutions for new listings? 19 Do you agree with our proposals to: (a) Reduce the spread requirement to 300 holders for Premium Issuers? (b) Reduce the free float requirement to 20% for Premium Issuers? Yes. This will streamline the application for listing. Yes. We agree with this proposal as it would bring NZX in line with international precedent and believe it has support generally from investment banks. PAGE 8

10 20 Should NZX amend the current minimum holding sizes outlined in Appendix 2 of the Listing Rules? If so, how? 21 Should NZX introduce additional eligibility requirements for Premium Issuers? (a) If so, what requirements should we introduce? The minimum holding sizes for equity are unrealistically low and based around a minimum market value of $250. As such, for consistency, and reflecting inflation since the minimum holding sizes were first set, we suggest the minimum holding size be simplified to be a fixed dollar amount, such as $1,000. This would assist issuers in managing registry costs associated with small holdings. We encourage NZX to introduce a system similar to the ASX where issuers receive a formal listing decision that generally includes various conditions that must be satisfied before listing (and any special rules or requirements that apply to the specific issuer. We also encourage NZX to consider more readily imposing issuer (or industry) specific conditions to listing, which would be more practicable with a formal listing decision. This would support a more flexible set of base rules, with NZX being able to impose additional conditions as and when appropriate. For example, we suggest removing the current mining issuer reporting requirements from the rules, and NZX could instead impose these as a condition where appropriate. This would provide NZX with greater flexibility to adapt to future changes in the types of issuer that are listing. Part Three - Director appointment and rotation 22 Do you have any suggestions on amendments to the minimum director and director rotation requirements under the rules? Yes, see our comments below in relation to the retirement of Managing Directors. PAGE 9

11 23 Should Managing Directors and directors appointed by shareholders with constitutional power be excluded from the director rotation requirements? Yes. It is appropriate that directors appointed by shareholders with constitutional power be excluded from the director rotation requirements as no purpose would be served in such directors being required to rotate (as the shareholder in question could simply use their constitutional power to reappoint the director). The rules could be amended to clarify that the number of directors exempt from rotation as a result of appointment by shareholders with constitutional power must not exceed the number of directors that those shareholders are entitled to appoint at the time of the meeting (as currently drafted the rules could be interpreted in such a way that directors appointed by a shareholder under the constitution are forever exempt from rotation, which we do not believe is the intent behind the rule). We believe that Managing Directors should either be: subject to the same rotation requirements as other directors, reflecting that the board seat held by a Managing Director is distinct from his or her executive role and therefore shareholders should receive the same regular opportunity to consider their board performance and vote on their appointment as other directors; or exempt entirely from the requirement to retire by rotation, reflecting that the special insight a Managing Director can bring to the board table by virtue of his or her executive role, and therefore he or she should not be at risk of being removed as a director for so long as the board considers it appropriate to have the Managing Director on the board. In either case, we support removing the five year term of appointment under Listing Rule as the current position creates ambiguity and it is not clear what policy goal is advanced by this arbitrary term. In our experience, the board simply reappoints the Managing Director at the end of a five year term, and little is achieved by Listing Rule We also note that shareholders do not generally have the power to vote on the appointment of a Chief Executive Officer. PAGE 10

12 Part Three - New Zealand resident directors 24 Do you agree NZX should align its NZ residential director requirement with legislation i.e. a requirement to have at least one NZ resident director? Yes. We agree that this would be an appropriate change to make, as it would avoid imposing extra requirements on New Zealand incorporated companies, while requiring offshore incorporated companies to meet an appropriate minimum requirement. Part Three - Director independence and the associated person test 25 Should NZX retain a requirement to have a minimum number of independent directors within its mandatory rules or, alternatively, introduce a comply or explain recommendation (potentially for majority independence) within the NZX Corporate Governance Code? We believe that NZX should introduce a comply or explain requirement for majority independence into the NZX Corporate Governance Code. This reflects that larger issuers generally already have majority independent boards (as outlined in our Corporate Governance Trends and Insights publication) and provides flexibility for other board composition choices to be made if considered appropriate. We also note that independent directors are an important source of checks and balances in relation to the governance of smaller companies in particular. As such, we support retaining a requirement for issuers to have two independent directors. We discussed director independence with the investment banks, and there was a strong preference for a minimum number of independent directors to be retained. PAGE 11

13 26 If you support inclusion within the NZX Corporate Governance Code, should NZX recommend that boards are majority independent (noting that companies will be able to explain why they may not meet such a recommendation)? Yes - see our comments above. (a) If not, should NZX retain the current minimum independence requirements within the rules? If not, why not? 27 Do you agree that NZX should move to a more principles based test of independence? 28 If not, should NZX delete Listing Rules 1.8.3, and in their entirety? Yes. Additional commentary around the factors that are likely to make someone non-independent (e.g. length of time on the board and other relationships with the issuer, board or providers of professional services to the issuer) could then be included in the commentary to explain the more principles based test. We agree that NZX should delete Listing Rule 1.8.3, and in their entirety, as these Listing Rules are complicated, drafted in a confusing manner and do not add much to the general test in Listing Rule NZX could publish guidance to clarify the application of Listing Rule to the situations which are currently captured by these rules (and, in particular, situations where association would or would not be likely to be found by NZX). PAGE 12

14 Part Three - Audit requirements 29 Do the auditor rotation requirements within the Listing Rules achieve outcomes that could not be met by auditing standards? (i.e. are these valued by investors) 30 If submitters support retention of these requirements, should NZX make any further amendments to respond to the current XRB proposals for example, to ensure greater alignment with Australia? 31 Should the additional audit committee requirements within the Listing Rules (i.e. to have an audit committee, its composition and role) be moved into the NZX Corporate Governance Code? Why/why not? We do not perceive the five year lead audit partner rotation requirement as generally being problematic, but our view is that this would be more appropriately addressed through the accounting standards and aligned with international requirements (i.e. a seven year time on period prior to rotation of key audit partners, with different cooling off periods depending on the role of the key audit partner). Yes, we support changes to audit rotation to align with international requirements in the event that these were to be retained within the rules. As outlined above, this would require extending the rotation period to seven years, and may require introduction of cooling off periods to mirror the XRB proposals. We also note that current XRB proposals also address a break in service, which the rules currently do not. We support NZX introducing more flexibility within the rules, and this would be an example of where it is appropriate to follow the approach of the ASX and shift the audit committee requirements to the NZX Corporate Governance Code on a comply or explain basis. This would provide flexibility for smaller issuers in particular to set up the most appropriate committee structure, which may involve only two directors forming the audit committee or the whole board acting as audit committee. The Code could usefully contain commentary identifying these as alternatives that may be appropriate for some issuers as it does for remuneration committees in Recommendation 3.4 of the Code. PAGE 13

15 Part Three - Disclosure and reporting 32 Should NZX make any amendments to the current disclosure requirements within the rules? We agree with NZX s comments regarding Listing Rule This Rule should be clarified to identify the specific documents that need to be disclosed. In particular, this should include notices of meeting, proxy forms, shareholder newsletters, updates or other communications sent to all shareholders, or a class of shareholders (but should not include dividend statements or transfer statements). We also support issuers taking a consistent approach to the disclosure of meeting materials. As such, we support introducing a requirement for the presentations and speeches at meetings to be released prior to commencement of the meeting (as per the ASX) and the results to be released within one business day of the meeting (currently, Listing Rule (c) only requires nonconfirmation of a proposal by a meeting to be released). Of course, these would remain subject to the general obligation to disclose material information immediately. PAGE 14

16 33 Should NZX update the content requirements for periodic reports? Broadly, the content requirements for periodic reports work well and we confirmed this view with the investment banks that we discussed this with. However, there are a number of changes that we believe would improve the consistency or ease of preparation of these reports. In particular: The annual report is required to include all information required in a preliminary announcement. This includes the table set out at the end of Appendix 1 that must be released with the preliminary results announcement in the prescribed form. Market practice is not to repeat this in the annual report. Listing Rule (d) should be amended to exclude the application of paragraph 1.2 of Part A of Appendix 1, as this information is not useful to repeat for investors, and market practice is not to do so. Market practice is varied as to whether the names and holdings of the holders having the 20 largest holdings of Quoted Equity Securities includes those who hold through NZCSD or whether NZCSD is simply listed as a single holder. Our view is that the correct interpretation of the current rule is that NZCSD should be listed as a single holder. However, rule (b) should be amended to require issuers to look through NZCSD, as this would provide more useful information to investors. It is unclear precisely what is required for the details of the reporting period and the previous corresponding period which must be included in the preliminary results announcements and half year report. This can be interpreted as simply requiring details of the dates comprising the two periods, or as requiring details of the financial results for each of those periods. We suggest this requirement is removed, as it is unclear what it adds to the remaining requirements in Appendix 1. There is a degree of uncertainty as to what details are required to be included in results announcements and half year reports for dividends which are paid in the period, but which do not relate to the period, and which are declared after the period but which relate to the period. We suggest that Appendix 1 is clarified to require disclosure of dividends that have been declared and which relate to the period (for ordinary dividends), regardless of when they are paid, and for any special dividends declared within the period. PAGE 15

17 34 What additional tools should NZX consider introducing to assist issuers to meet their disclosure obligations under the rules? We believe a focus on continued issuer education and the release of further guidance notes and practice notes to address topical issues is important. PAGE 16

18 Part Three - Shareholder voting rights 35 Should NZX reduce the current headroom for further issues to 15%? Why/why not? No. We believe that NZX should retain the current headroom at 20%. Issuers must have appropriate flexibility to raise capital without requiring a costly and time consuming shareholder approval process. Retaining the headroom at 20% would ensure that NZX is competitive, and comparable, with other international exchanges. While we support alignment with the ASX on certain governance and other requirements, we believe this an area where NZX can differentiate itself by continuing to provide greater flexibility to issuers. In addition to the precedents cited by NZX, we note that the NYSE and NASDAQ also use 20% as their thresholds. The same class offer regime has also mitigated the potential disadvantage to retail investors, as it is now practical for brokers to bid into bookbuilds on behalf of their clients without concerns about on sale restrictions applying. It is important to bear in mind that while a pro rata method may be the fairest method of raising capital (and should therefore be the default option for issuers), there are circumstances in which it is necessary or appropriate to undertake a placement. One of these is where the capital is required more quickly than can be raised under a pro rata offer. While an accelerated entitlement offer may be a fairer alternative to raise capital quickly for some issuers, it is not a panacea as whether an accelerated entitlement offer is appropriate will depend on the register composition of the issuer (e.g. if there is a low proportion of institutional investors to participate in the accelerated institutional offer, there is little point in undertaking an accelerated entitlement offer). Recognising that pro rata offers should be the default for issuers, we support removing the current exception for share purchase plans in the rules. Instead, issuers should either be encouraged to undertake pro rata offers, or any alternative should count against their placement capacity (subject to the other exceptions in the rules). The timetable benefits of a share purchase plan are limited compared to a rights issue, and there is no longer any other regulatory advantage to undertaking a share purchase plan (as was the case under the Securities Act 1978). This was another topic that we discussed at length with the investment banks. Our comments above reflect that discussion, but we note that there were differing, and finely balanced, views on this topic. PAGE 17

19 36 Do you agree that the major transactions approval requirement should apply to a broad range of transactions which might affect a company? (e.g. acquisitions or disposals, leases, borrowing, lending, issues of securities) 37 Do you have any comments on how transaction might be defined in the rules in order to capture the appropriate transactions? Yes, we agree with this general proposition. The current carve outs for takeovers, arm s length transactions entered into with banks and cash issues should be retained. We suggest that NZX simply uses the term transaction and then notes the specific types of transaction that are included (e.g. leases, borrowing, lending or the issue of securities). PAGE 18

20 38 Should NZX reduce the threshold for shareholder approval of major transactions to 25% of the size of a transaction? 39 How should NZX measure the size of a transaction? We have combined our comments on a change to 25% and how the size should be measured as these topics are interrelated. While this may be an area of importance to institutional investors, we believe that it is important for the health of New Zealand s capital markets that issuers are not unduly constrained from entering into transactions that, while they may be significant in size, can be fairly described as routine or complimentary to the existing business of the issuer. In competitive processes, requiring shareholder approval will be seen as a negative by the vendor (as it reduces transaction certainty and will likely increase the timetable for settlement to occur). By lowering the threshold, there is a risk that NZX issuers would be less successful in such processes (which makes listing on the NZX less attractive). From a valuation perspective, we believe that it is more appropriate for the size of a transaction to be measured against the issuer s enterprise value (i.e. market capitalisation plus debt, less cash), rather than market capitalisation. This better reflects the underlying value of an issuer and would be more appropriate for those issuers who have significant amounts of debt funding in particular, where simply measuring market capitalisation does not provide an appropriate guide as to the significance of a transaction. NZX could provide further guidance as to how enterprise value should be calculated, but we expect that this could be done by reference to the issuer s most recently published financial statements, with adjustments made for any material changes of which the issuer is aware since that date. In order to fund significant acquisitions, issuers will typically need to either secure debt funding (in which case the lenders will closely scrutinise the proposed transaction) or equity funding (in which case the requirements in the rules for the issue of equity securities will need to be met, which provides shareholders with the ability to veto a transaction by not supporting a rights issue or other type of capital raising). We also note that the ASX does not measure the size of a transaction relative to the market capitalisation of an issuer at all instead, the focus is on the relative size of the assets, equity interests, annual revenue, EBITDA or annual profit before tax. We do not support NZX moving to measuring the relative size of revenue, EBITDA or annual profit before tax for acquisitions, as these can be volatile (i.e. affected by unusual or one-off events) or difficult to measure for private companies. We discussed this with the investment banks, who generally supported a shift away from a measure based on market capitalisation alone. PAGE 19

21 As such, if the current method of measuring the size of the transaction (market capitalisation) is retained, we support retaining the threshold at 50%. If NZX moves towards using enterprise value, then we believe that a reduction to 25% would have less of an impact on those issuers that may otherwise struggle to be competitive. We also support retaining the current test in relation to a change in the essential nature of the issuer. We believe this sufficiently addresses any change in strategy of the issuer. PAGE 20

22 40 Should NZX make any amendments to the related party transaction thresholds? Yes the application of the related party rules to leases should be clarified. We think a useful distinction can be drawn between finance and operating leases as NZ IAS 17 currently does. For a finance lease (such as for aircraft), the issuer recognises an asset (with a corresponding liability) on their balance sheet, while with an operating lease (such as for premises) the rent payments are currently recognised as an expense. Due to a change in accounting standards, under NZ IFRS 16 from 1 January 2019 virtually all leases will have to be recognised on balance sheet and so we have considered this in our thinking below. For an operating lease, such as a lease of premises, as the issuer is not (presently) recognising any asset on its balance sheet, for Listing Rule purposes we suggest it would make more sense to treat the lease as the provision of services and apply the threshold in Listing Rule 9.2.2(e). For a finance lease (or virtually all leases from 1 January 2019), for the purposes of Listing Rule 9.2.2(a) rather than assess the net value of the underlying asset, we would suggest that the value of the "right-of-use" asset that has to be recognised on the issuer's balance sheet should be used for assessing the threshold in that Listing Rule (and the annual rental for that lease should be separately assessed under Listing Rule 9.2.2(e)). The value of the "right-of-use" for a leased asset is based upon the present value of the lease payments taking into account certain adjustments - under NZ IAS 17 this is the lower of the fair value of the leased property and the present value of the lease payments. The value of the right-of-use is also the appropriate metric for assessing the obligation incurred by the Issuer for the purposes of Listing Rule 9.2.2(c). The most elegant way to deal with this is likely to be by inserting a footnote or new rule explaining how the value of a lease should be assessed for the purposes of these rules. We also note that Listing Rule 9.2.1(a) and Listing Rule both refer to a related series of transactions when determining whether a transaction is caught by the related party thresholds. This can result in undesirable outcomes where a related party is party to a transaction that is not, in and of itself, material, but forms part of a series of transactions that fall within the definition of a Material Transaction. For example, if a related party is sub-underwriting a capital raising, and the capital raising itself is a Material Transaction, the related party requirements would apply, regardless of the relative size of the related party s subunderwriter commitment (i.e. even where it would not be a Material Transaction on a standalone basis). As such, the concept of a related series of transactions should only apply to the transactions to which a related party is actually a party. PAGE 21

23 Part Three - Standard issuers eligibility for listing 41 Do you agree with the proposal for a spread requirement of 100 holders and free float requirement of 20% for Standard Issuers? 42 Should there be any other eligibility requirements for Standard Issuers, including a minimum market capitalisation? As noted above, we do not believe that NZX should use separate equity listing categories. However, we suggest that if an issuer s estimated market capitalisation is below a certain threshold (e.g. $100m), spread requirements should be reduced. The rules should also be amended to look through custodial arrangements when considering whether spread requirements have been met. As noted above, we do not believe that NZX should use separate equity listing categories. Part Three - Standard issuers governance 43 Do you agree with the proposal to allow more flexibility in governance requirements for Standard Issuers? Why/why not? 44 What should the minimum governance requirements be for Standard Issuers? 45 Should Standard Issuers be required to report against the NZX Corporate Governance Code or a tailored version of this? As noted above, we do not believe that NZX should use separate equity listing categories. See our comments above. Yes, we believe that all issuers should be required to report against the NZX Corporate Governance Code. PAGE 22

24 Part Three - Standard issuers reporting and disclosure 46 Should NZX allow more relaxed time frames for periodic reporting obligations under the rules? 47 Should NZX introduce quarterly cash flow reporting for Standard Issuers? Should this apply to apply to all new Standard Issuers (or a subset) and for how long? 48 Should NZX require reporting of Key Operating Metrics for Standard Issuers? Should this apply to apply to all new Standard Issuers (or a subset) and for how long? 49 Should NZX make any other amendments to the reporting and disclosure requirements for Standard Issuers? As noted above, we do not believe that NZX should use separate equity listing categories. We do not support differential time frames for periodic reporting obligations and suggest that all issuers be required to report on the same timeframe. Yes. We believe that quarterly cash flow reporting should be introduced for issuers that have negative operating cash flow in order to provide investors with more up to date information in relation to the cash position of these issuers. The quarterly cash flow report for the half year and full year should be combined with the preliminary results announcements for those periods in order to minimise the periodic reporting obligations that apply to those issuers. We discussed quarterly reporting with the investment banks, and concluded that cash flow reporting would be useful in the circumstances outlined above. On the other hand, key operating metrics were not well supported. We also support removing the specific reporting requirements that apply to mining issuers from the rules if quarterly cash flow reporting is introduced for all issuers. As outlined earlier, we believe that NZX should be more ready to impose specific listing conditions, which, for mining issuers, could include a requirement to report in accordance with JORC rather than trying to accommodate every scenario in the base rules. No. NZX should continue to encourage issuers to report operational data on a regular basis as it currently does in its continuous disclosure guidance, but we do not support formalising this into key operating metric reporting. The issue is that these key operating metrics are not particularly flexible and may result in information that is not helpful to the market being required to be disclosed (e.g. a 10% variation in the key operating metric) and it is hard to see that these would add much to the general continuous disclosure requirements if the information is actually material. No. PAGE 23

25 Part Three - Standard issuers shareholder voting rights 50 For which types of transactions should shareholder approval be required for Standard Issuers? 51 What should the relevant approval thresholds be? 52 Do you agree NZX should allow a pre break regime in relation to shareholder approval requirements for Standard Issuers? As noted above, we do not believe that NZX should use separate equity listing categories. As such, we support the thresholds for shareholder approval being the same as outlined in our submissions above. We have taken into account that our proposed position would apply to all issuers equally and not just premium issuers when making our comments. See above. We suggest that all issuers be permitted to use a pre break regime for material transactions, related party transactions or the issue of shares. This would provide issuers with greater flexibility to undertake transactions without necessarily having to incur the expense of seeking shareholder approval. However, we note that a pre break regime will not necessarily solve the issues that lower shareholder approval thresholds may cause as a pre break regime still introduces uncertainty into competitive transaction processes and is not well understood offshore. As a matter of corporate governance, we believe that most larger issuers would still choose to seek shareholder approval where practicable. The pre break regime is not carte blanche for issuers to undertake any transaction NZX must still approve the form of pre break announcement, which provides an element of independent oversight into whether the regime is being misused. In addition, the 5% threshold to call a special meeting is not unduly onerous on those shareholders who oppose a transaction. PAGE 24

26 Part Three - Debt issuers eligibility 53 Do you agree NZX should remove current spread and free float requirements for debt issuers? Who/why not? 54 What steps should NZX take to improve liquidity in its Debt Market, particularly for perpetual and longer dated instruments? We strongly support the proposal to remove the current spread and free float requirements for debt issuers. Debt issues are typically traded considerably less than equity, with securities split across a larger number of different series with different maturities. The spread of any particular issuance is not an accurate indicator of liquidity or suitability for listing. For example, mum and dad investors commonly take a buy-and-hold approach, clouding the correlation between spread and liquidity, and also some large institutional investors informally act to make a market in securities they hold. Other factors are likely more relevant including capital factors and other incentives impacting actual or potential market makers. We would be happy to facilitate discussions on this between NZX and relevant industry working groups. The current spread requirements can be difficult to manage for issuances with a smaller principal amount or a large cornerstone investor. This is particularly apparent where the issuer has a number of other series of the same class on issue; it is clear that there is a market for the securities if investors were looking to trade, even if investors in the particular series may be taking a buy-and-hold approach. The need to apply for spread waivers, which terminate after six months, introduces uncertainty to issuers. Issuers cannot control secondary market trading, and if the bonds cease to be quoted the bonds may need to be repaid (either under their terms or as an investor relations matter). Although such a consequence is unlikely, it creates a reputational and (potentially) liquidity risk which it is unfair and counterproductive for issuers to manage or bear. To some extent, liquidity for longer dated instruments will always depend on market conditions and investor perception. Although much of this is outside NZX control, one aspect that NZX can support is encouraging more longer dated debt instruments to be listed (as discussed in the next question) to increase investor familiarity with the products. We note that this is a key focus both locally and internationally, and is by no means a phenomenon peculiar to the New Zealand market. As noted above, we would be happy to facilitate discussions on this between NZX and INFINZ or other relevant industry working groups. PAGE 25

27 55 What steps can NZX take to encourage listing of longer dated debt instruments? A key aspect to encouraging longer dated debt instruments is to remove potential uncertainties and barriers to listing, as is proposed throughout the NZX consultation paper and in these submissions. This approach should facilitate initial listings, which in turn will help continue to build markets in longer dated instruments and encourage further issuances. Consistent with the general thrust of the FMCA that the best protection for investors comes from strong capital markets a market with a high barrier to entry but dwindling participation is more likely to lead, in practice, to narrower retail choices, less liquidity, and adverse selection. PAGE 26

28 56 Should NZX list wholesale debt instruments? If so, what steps should be taken to facilitate the listing of wholesale debt instruments? We support the idea of listing wholesale debt instruments. Wholesale markets are, and will continue to be, an important part of funding for many issuers. Providing a local listing venue for such issuances, that is consistent with established international benchmarks, will assist issuers and provide a centralised, easily accessible platform for institutional investors. Developing a wholesale listed market should also increase the possibility of New Zealand linking in with the global markets for trading euro medium term notes, and ultimately participate in the development of the emerging Asian market as a legitimate competitor to the Reg S (European/European wholesale debt) market. A current hurdle is that international EMTN and Kauri issuances are documented on a wholesale-only basis. In order to list such an issuance on the NZX, it would typically need to be extended to retail investors, which also introduces New Zealand product disclosure statement and other regulated offer requirements. The issuers that can typically issue in such wholesale markets are high quality and have full access to competitor international formats and markets. Imposing significant New Zealand requirements would significantly reduce the NZX market s attractiveness to such issuers. In order to facilitate the introduction of a wholesale market, NZX should consider modified documentation and disclosure requirements, adapted to institutional investor characteristics. Disclosure documentation in particular will need to follow international standards in order to access those markets, so NZX would need to minimise any specific requirements it may have for such documents. In such cases bonds are also likely to be constituted under deed polls or wholesale trust deeds (which do not require regulated supervisors). In addition, there should not be any prohibitions on including large minimum denominations or transfer amounts. NZX should also consider adopting a 12-month approval-inprinciple approach to bond programmes (similar to U.S. shelf and EMTN listings), to facilitate ongoing issuances under short form pricing supplements. This approach is adopted in a number of international markets, and minimises time to market while maintaining contact between the issuer and exchange. PAGE 27

29 57 What other amendments should NZX consider in relation to debt issuers? We agree with many of the other suggestions included in the NZX consultation paper in relation to debt, including the suggestion to reduce review time on same class offers, and allowing transfer restrictions for minimum holding sizes. Issuers should be able to include standard minimum holding sizes and multiples (for instance, $5,000 and multiples of $1,000 thereafter) without requiring a waiver or consent from NZX under Listing Rules and We would also suggest that Listing Rules 3.1.2(d) and (e) should be redrafted to clarify their intention. The current approach (with a class waiver granted to cure perceived ambiguity) is complex and requires issuers to disclose reliance on it in their annual reports. Listing Rule should be amended to allow a slight extension to the period between the closing date and the settlement date for bond issuances, where issuing 5 business days after the closing date would lead to a maturity date falling on a non-business day (with the extension to the first following day on which the corresponding maturity date would be a business day). This would not materially disadvantage investors, and would ensure that investors do not effectively miss one or two days of interest as a result of the maturity date falling on a non-business day (all of which is disclosed in the bond terms). There should also be a further review of provisions applicable to Convertible Debt Securities. For instance, Listing Rule (which provides that routine payments of interest do not need to be notified) should extend to Convertible Debt Securities that pay fixed or floating rates of interest. The rules relating to the deemed market price of securities into which Convertible Debt Securities convert (such as Listing Rule 7.3.5, and 8.1.3) should also be clarified, to ensure they work consistently with the various mechanisms used to determine conversion price in bond terms. Part Three - Debt issuers - governance 58 What amendments should NZX make to the rules to the current debt governance arrangements? We agree that the debt governance rules should be updated to allow issuers to use a deed poll (or similar document) where they are not otherwise required by law to use a trust deed, without requiring a waiver from NZX. We have discussed Listing Rule and in relation to the above question. PAGE 28

30 Part Three - Debt issuers disclosure and reporting 59 Should NZX make any amendments to the disclosure and reporting requirements for debt issuers? We would suggest a more targeted approach to requiring disclosure of waivers in the reports of issuers. For instance, many waivers are only relevant at issue or for a limited time afterwards. It does not assist investors to later repeat this in an annual report. In many cases there will also be more appropriate alternative methods for disclosure of the relevant waivers, where relevant. For instance, for regulated offers the waivers are often included in the public Disclose register entry for the offer. In addition, matters such as general class waivers (such as the class waiver for Listing Rules 3.1.2(d) and (e)) that apply to all debt issuances, or a large section of the market, should not generally require individual disclosure (whether in the issuer s reports or otherwise) as they typically do not provide relevant information to investors. Part Three - Funds eligibility 60 What spread and free float requirements should be imposed for listed funds? Please also provide feedback on any necessary amendments to Appendix 2 under the Listing Rules for funds. 61 For those fund entities who are licensed and may wish to be listed, we seek feedback on areas of the Listing Rules which should supplement licensing requirements. We suggest removing spread and free float requirements entirely for listed funds. As NZX will be aware, a number of listed funds have very small spreads (e.g. as at 3 November the New Zealand Cash Fund had 38 holders and 99.18% of its units held by a single holder). We also suggest that the minimum holding size be set at the amount described in the product disclosure statement for the relevant fund (as different funds may wish to implement different minimum holding sizes), with any subsequent amendment to that minimum holding requiring the approval of NZX (so that it can be satisfied appropriate protections are in place to avoid small holders being disenfranchised by the change). Please see our comments on the other questions below. PAGE 29

31 62 A number of entities with fund qualities but with corporate structures are listed as equity issuers under the rules (for example, corporate property investment companies). Is this the most appropriate treatment of these vehicles or would bespoke rules be preferable? 63 Should a separate approach be taken to the listing/regulation of active and passive funds? Or open and closed ended funds? We are not aware that the current rules are causing any problems for these entities. No, although see our comments in relation to NTA reporting below. Part Three - Funds governance 64 What governance arrangements should NZX require for listed funds? Please explain appropriate distinctions for different structures. As noted above, we suggest that NZX limit eligibility for funds to rely on specific fund rules to those which are New Zealand registered MIS with a licensed manager or, in the case of funds governed by foreign law, are otherwise subject to requirements that NZX is satisfied are appropriate to provide unitholder protection. This could be considered when applications for listing are made by funds subject to foreign law. A change in manager or supervisor should require member/unitholder approval by ordinary resolution, as this may not always require approval of members/unitholders under the relevant governing document. PAGE 30

32 Part Three - Funds disclosure and reporting 65 What disclosure and reporting requirements should NZX require for listed funds? We do not believe additional periodic reporting requirements should apply under the rules, given the requirement to provide quarterly fund updates (although there should be an express requirement that these be disclosed to the market). It is important that any additional net tangible asset (or net asset value, as appears to be the more common terminology overseas) disclosures are cost effective and practical for listed funds to provide. In this respect, a distinction can be drawn between different types of funds. For example, where a fund is invested in other listed financial products, providing a daily NTA update may be relatively straightforward. On the other hand, if a fund is invested is illiquid or non-listed assets (such as property or private companies), providing a daily NTA update may be impracticable. In addition, daily updates will generally be based on the position at the close of previous day, which means that they will already be out of date even if published to the market the following day. As such, this is also an area that would lend itself to the imposition of specific listing conditions, where appropriate, for certain listed funds and investment companies. If regular NTA updates or other fund updates are provided to the market, we encourage NZX to amend the announcement platform so that such announcements do not appear in the regular list of announcements on the NZX and instead directly on the listed fund s issuer page or similar. This is because these announcements are unlikely to be of wider interest to the market and these daily updates already comprise a significant proportion of the releases to NZX (for reference, as at 12.45pm on 10 November, over half of the announcements to the NZX were regular fund updates). Part Three - Funds member / unitholder approvals 66 What member/unitholder approval requirements should NZX require for listed funds? A material change to the statement of investment policy and objectives or a change in manager or supervisor should require member/unitholder approval by ordinary resolution. The Financial Markets Conduct Act 2013 already contains detailed provisions relating to related party benefits, so we do not support introducing an overlay under the rules for related party transactions. PAGE 31

33 Part Three - Corporate action timetables 67 What amendments should be made to the current corporate action timetables under the rules? 68 Should the time frame under Listing Rule be reduced? If so, by how much? 69 Should NZX introduce a mandatory latest date for acceptances of DRP elections of the record date plus 1 business day to align with Australia? We support shortening the period during which a rights issue is required to be open to 10 trading days. This reflects the increased use of online applications for these processes. As market practice evolves in the future, there may be scope to shorten this period further. This reflects our discussions with the investment banks and the tension between a shorter offer period providing access to the proceeds quicker and reducing the market risk during the offer period, and ensuring that all eligible shareholders have an opportunity to participate (particularly given the current delays often experienced when mailing hard copy documents to, or from, the issuer). We suggest reducing the timeframe for announcing all corporate actions to 3 trading days. This should include both those specified in Listing Rule , as well the announcement prior to a rights issue. No, we do not support NZX prescribing requirements in relation to DRPs. If investors have concerns about the timing for an issuer s DRP, it is open to them to approach the issuer and request that they change it. Even if NZX were to prescribe requirements in relation to DRPs, we believe there are matters that should be higher on the priority list than a mandatory latest date for acceptances of DRP elections (such as the treatment of fractional entitlements to DRP shares and the way in which pricing of the DRP is set, both of which currently vary issuer by issuer). Part Three Reverse and backdoor listings 70 Do you agree with the proposals above in relation to reverse/backdoor listings? Why/why not? Yes, we agree with this proposal. The reduction in spread requirements may also assist with reducing reverse/backdoor listings. PAGE 32

34 71 Do you have any other feedback in relation to reverse/backdoor listings? 72 Should NZX facilitate the listing of SPACs/SPVs? What are the appropriate shareholder protections for these vehicles? Yes. Under the NXT Market Rules, NZX has the power to suspend an issuer immediately where they cease to have an operating business, and an issuer is delisted if they have been suspended for a six month period. We would encourage NZX to introduce similar rules to the main equity market as an investor protection mechanism to avoid trading in the shares of issuers with no operating business and those issuers eventually being removed from listing. Appropriate shareholder protections include requiring that the money raised by the SPAC/SPV be held in trust and that an acquisition be completed within an appropriate timeframe or else the money is returned to investors. We note that an SPAC/SPV may have features which appear to be similar to a managed investment scheme (prior to it acquiring an operating business), so it would be important to liaise with the FMA to ensure that a clear position was reached on whether such issuers were required to be licensed to provide certainty to the market. Part Three Overseas listed issuer settings 73 Do you agree with the proposals above in relation to settings for overseas listed issuers? Yes. We agree with NZX s proposed approach. PAGE 33

35 74 Do you have any other feedback in relation to settings for overseas listed issuers? From our experience in advising entities listed on both the NZX and ASX, the two issues that most commonly cause confusion are the requirement to complete separate prescribed forms for NZX and ASX (and whether these need to be released to both exchanges) and the obligations in relation to third party notices (e.g. substantial product holder notices). We encourage NZX to avoid requiring NZX Foreign Exempt issuers to release any NZX prescribed forms when undertaking a corporate action such as a dividend (i.e. they should instead be required to release the equivalent form from their home exchange). This would ease the administrative burden on such issuers as they would not need to prepare, or seek advice on, a different NZX specific form. NZX should introduce a requirement that issuers promptly release to NZX any equivalent to a substantial product holder notice that it receives from a third party or that has been released to its home exchange. We note that regulation 144 of the Financial Markets Conduct Regulations 2014 contains an exemption from New Zealand substantial product holder requirements in relation to overseas issuers with a secondary listing on a New Zealand licensed market. In order to align with NZX s proposed eligibility criteria for NZX Foreign Exempt issuers, NZX should request that MBIE amend this regulation to remove the requirement that issuers be incorporated outside of New Zealand. Part Three Other 75 Should NZX introduce any additional requirements in relation to the conduct of Annual Meetings? Yes. NZX should introduce a recommendation within the Code that Annual Meetings be held within five months of the balance date. This would bring forward the timing forward by a month from the Companies Act 1993, and may assist in making meetings more useful and timely. If Annual Meetings are to be brought forward, we also suggest that Recommendation 8.5 of the Code be amended so that it only refers to at least 28 days notice of the meeting being recommended where there is business other than the appointment of directors retiring at the meeting and auditor remuneration to be considered. We also note that while investors holding 5% or more of voting shares can require a board to call a shareholders meeting to consider a shareholder proposal, the Companies Act provides no timeframe within which that meeting must be called an omission that allows boards to prevaricate unless under threat of costly court action. We recommend NZX consider a rule specifying that a requisitioned meeting must be held within 30 business days. This would align more closely with Australian law. PAGE 34

36 76 What amendments should NZX make to Listing Rules 5.1 and 5.2? 77 Are any specific amendments needed to the rules to address requirements of cooperatives or other structures? We do not support poll voting being mandatory. In this respect, we note that Recommendation 8.4 of the Code is unsatisfactory as the text of the recommendation is unclear whether it is aimed at recommending against non-voting shares or differential voting rights attaching to shares or to the use of polls. If it is the former, then NZX may wish to enshrine this in the rules, whereas if it is the latter, the recommendation should be amended to clarify this. We also suggest that the Code be amended to recommend that postal or direct voting be allowed by issuers for all meetings. Although the recent rulings granted by NZX in relation to proxy form mitigate some of the risk of a proxy not attending a meeting, we believe that issuers should be offering (and encouraging) postal voting at all meetings. NZX should not be required to review and approve a notice of meeting as a result of shareholder proposals received under clause 9 of Schedule 1 to the Companies Act Given issuers are required to put these to the meeting, it is not necessary for NZX to review these proposals. Issuers may already face timetable issues where shareholder proposals are received, particularly when combined with a desire to comply with Recommendation 8.5 of the Code, so removing the requirement for NZX to review the notice of meeting would assist with managing these challenges. As noted earlier, we believe there should be a requirement to disclose the meeting materials prior to commencement of the meeting. We suggest that the requirement to provide a copy of the applicant s certificate of incorporation should be removed for New Zealand incorporated companies (given these are readily available from the Companies Office). No. PAGE 35

37 78 Do any of the key definitions under the rules need to be amended? 79 Please provide any feedback on other areas of the rules which you think should be amended and the reasons for requesting such amendments. Yes. The definition of Material Information does not match the definition in section 231 of the FMCA as it still refers to Quoted Securities and particular securities rather than Quoted Financial Products and particular financial products. The Listing Rules should be updated to use the same terminology as the FMCA (i.e. use financial products rather than securities ). Currently the rules use the terms executive officer, Senior Manager, Officer and authorised officer in different contexts but capturing broadly similar concepts. We support rationalising these terms to one or two terms and ensuring that these are defined. In our view, the NZX Derivatives Rules would also benefit from a general review. There are a number of points which remain unclear or potentially contradictory in them, particularly in respect of the role of Trading Participants in relation to their clients. For instance, the Rules provide that Trading Participants act as principal when dealing with other market participants, but also provide that their clients may owe direct obligations to Clearing Participants. Although it is possible to reconcile this, it would benefit from a clear statement as to the intended effect of these two provisions. As a general comment, we also think this opportunity should to taken to consolidate and streamline the Rules generally, given the numerous overlapping and somewhat inconsistent sets (including various participant rules, clearing rules and operating procedures) currently in place. Participants are often required to review multiple different sets of rules for each activity, and (as discussed above) resolving the interaction between them can leave considerable ambiguity. Although mainly an issue for legal advisers, in increases transaction costs and friction. We believe NZX should take this opportunity to create a modern, user friendly set of Rules that will reduce barriers to entry, as a corollary to the more substantive changes discussed in the NZX consultation paper. PAGE 36

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