Submission on NZX Listing Rule Review Discussion Paper dated 27 September November 2017

Transcription

1 Submission on NZX Listing Rule Review Discussion Paper dated 27 September November 2017

2 INTRODUCTION & EXECUTIVE SUMMARY 1 We welcome the opportunity to participate in the NZX listing rule review. 2 We support making market compliance more: Accessible; Simple; Cost effective; and Principle based. 3 We also support using recommendations and a comply or explain approach where appropriate. This recognises that not all issuers are the same and enables Boards to determine the settings most appropriate for an issuer at each stage in its cycle. 4 Our comments in respect of some of the specific questions asked in the Discussion Paper are set out in the appendix attached. 2

3 APPENDIX Part 1 Context to Review 2. Do you agree with the proposed timetable and process for review? If not, why not? (page 6) The timeframe for review of the exposure draft is tight. A longer period will enable more considered feedback to be given. We also think a second review of the draft rules would be useful. Part 2 Proposed structure of updated rules Market Structure 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? (page 8) We agree the listing rules are generally operating effectively for Main Board issuers and the current requirements should be retained subject to addressing specific issues. We support streamlining and simplifying the rules including by adopting a modular format. 4. Do you agree that NZX should adopt a modular approach to updated rules? If not, why not? (page 8) See above. Differential standards for equity issuers 7. What criteria should be used to determine whether differential requirements should apply (e.g. options 1 or 2 above or something else)? (page 11) We do not have a strong view on the options but note: If mandated eligibility is adopted there should be a sufficient transition period to enable an issuer to become compliant. While this will depend on the additional compliance obligations of a premium (or equivalent) listing, if it involves things like having additional independent directors, or an audit committee with suitably qualified members, time will be needed for selection and appointment. Selection criteria should also not result in an issuer moving in and out of a listing category regularly. If self-selection is adopted there may be a risk large cap standard issuers benefit from lower compliance obligations vs. premium issuers. Requiring shareholder approval to move between categories will add cost, uncertainty and delay. 3

4 Part 3 Specific Rules Settings Equity Premium Issuers 22. Do you have any suggestions on amendments to the minimum director and director rotation requirements under the rules? (page 16) In our experience the director rotation requirements are unnecessarily complex, do not deliver uniform rotation cycles and result in directors standing for re-election more (or less) often than initially intended. This is even more so for issuers with managing directors who are counted in the 1/3 rd calculation some years but not others, depending on where they are in their own 5 year rotation cycles. Adopting ASX s approach of requiring directors to stand for re-election at least once every 3 years is, in our view, a much simpler way of achieving the desired outcome. 23. Should Managing Directors and directors appointed by shareholders with constitutional power be excluded from the director rotation requirements? Why/why not? (page 16) As noted above, the current director rotation requirements are unnecessarily complex. Requiring managing directors to stand for reelection, and their treatment in those and off years, adds to this complexity. We favour adopting ASX s approach for director rotation which does not require managing directors to stand for re-election. 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? (page 18) While it may be appropriate to mandate a lower minimum number (e.g. current rules), we think it better to adopt a comply or explain approach if a higher threshold is introduced. This aligns with ASX s approach and recognises there may be issuers for whom it is not necessarily inappropriate to have a higher number of non-independent directors. 27. Do you agree that NZX should move to a more principles based test of independence? (page 18) We agree a principle based overarching test, supported by clear guidance, will work better. We also agree the definition of Associated Person should be streamlined and simplified to enable easy application and provide appropriate outcomes. 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)? (page 18) 4

5 We support simplifying and removing duplication in the listing rules. Given auditor rotation requirements are set out the auditing standards, and these cover listed issuers, we do not consider the rules also need to cover rotation or impose more frequent rotation requirements. However, we think it useful to retain commentary in the NZX Corporate Governance Code around issuers complying with the auditor rotation requirements set out in the standard. 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? (page 18) We support using recommendations and a comply or explain approach where appropriate. Moving additional audit committee requirements into the NZX Corporate Governance Code recognises not all issuers are the same and enables Boards to determine the settings most appropriate for an issuer at each stage in its cycle. There may, however, be a threshold at which having an audit committee is a mandatory requirement (e.g. on becoming a premium listed issuer). This approach will more closely align with ASX s approach. 32. Should NZX make any amendments to the current disclosure requirements within the rules? (page 19) We agree requiring all communications sent to shareholders to be released to the market leads to information of limited interest/value being disseminated via MAP. It is also currently unclear whether notice sent to only some shareholders at any point in time (e.g. an investor welcome letter) is captured. At a minimum we suggest excluding material that is informational, marketing related or sent to only some shareholders. We also think it useful for the listing rules to reflect guidance already issued, including by noting that material information needs to be released over MAP before being made publicly available unless NZX markets are closed - in which case it can be made publicly available provided a release is loaded before MAP open the next trading day. 33. Should NZX update the content requirements for periodic reports? (page 19) The annual/interim results and report requirements could be more clearly grouped and set out (e.g. simple lists/checklists for each). Any duplication should also be removed (or at least it made clear information need be disclosed in one document only) especially given a number of issuers release their periodic results and report together. 34. What additional tools should NZX consider introducing to assist issuers to meet their disclosure obligations under the rules? (page 19) Having tools to help issuers manage their periodic reporting obligations would be helpful. This could range from moving rule 10.4 and Appendix 1 requirements into simple checklists to simple automated planning tools to support interim and year end reporting (the obligations are the same 5

6 each period, just the dates change). 35. Should NZX reduce the current headroom for further issues to 15%? Why/why not? (page 21) We are not aware of any issues with the current threshold and therefore think it should be retained particularly with a move to a single equity market. 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) (page 21) Given the cost, delay and uncertainty introduced by approval processes in our view they should be reserved for transactions which change the essential nature of an issuer s business. This is conceptually different to setting a threshold based on the size of a single transaction (or series of linked or related transactions). It forces a focus on outcomes rather than a particular term (like price) of a particular transaction. It provides shareholders with protection that the underlying nature of the business in which they initially invested does not change without their approval. It also avoids capturing transactions which should not, and would not be expected to, be subject to the uncertainty, delay and cost of approval processes (see our response to question 38 below). If the concept of transaction approval is retained we do not think the approval requirements should apply to a broad range of transactions. It needs to be very clear which transactions are captured and which are not so regulatory/compliance costs are minimised. This is particularly so where shareholder approval must be obtained if the threshold is met. We do not think using a broad definition and capturing a broad range of transactions will achieve this. Shareholder approval thresholds for the issue of equity securities are already set out in the rules. We do not think they need to be duplicated, with differing tests, under the major transaction requirements. We also think shareholder approval processes would be challenging in practice in respect of borrowing. Markets can change quickly and issuers need to respond and adapt (e.g. to take advantage of attractive terms). Overlaying a shareholder approval process would make this difficult unless some sort of standing/annual approval was obtained. As this would need to relatively high level, it is hard to see the value it would add from a shareholder perspective so would simply add unnecessary cost and uncertainty for issuers. There are also questions as to what would happen if approval was not obtained especially if it was sought to refinance existing debt - and whether the mechanism could be gamed by a shareholder/ shareholder block to achieve outcomes more favourable to them (e.g. forcing an alternative capital raising like a discounted equity issue). It is unclear from the Discussion Paper what the rationale is for having shareholder approval of a broad range of transactions is, and no evidence is provided as to where this has been an issue. 6

7 37. Do you have any comments on how transaction might be defined in the rules in order to capture the appropriate transactions? (page 21) See our comments to question 36 above. 38. Should NZX reduce the threshold for shareholder approval of major transactions to 25% of the size of a transaction? (page 21) As noted above, in our view approval processes should be reserved for transactions which change the essential nature of an issuer s business. It is unclear from the Discussion Paper what the rationale is for halving the transaction threshold and no evidence is provided as to where this has been an issue. Lowering the threshold will introduce unnecessary cost, uncertainty and delay in respect of transactions which do not change the essential nature of an issuer s business, including low value transactions shareholders would expect to be made by an issuer on a business as usual basis. This will particularly be the case where shareholder approval is required for a broad range of transactions. For example: Chorus engages third party service providers to support the building and maintenance of its network. Chorus, like all businesses, runs competitive procurement processes in respect of these services from time to time. Chorus asset value is ~$4.4b and its market capitalisation ~$1.7b. Under the proposal approval will be required for transactions ~$425m or 10% of its asset base. If after running a competitive process, Chorus selected four providers to provide services over a five year period on the following basis, shareholder approval would be required (assuming they are a series of linked or related transactions): 1 provider at $30m p.a.; 2 providers at $25m p.a.; and 1 provider at $15m p.a. This effectively means a $15m p.a. business as usual contract would require shareholder approval (~1.5% of Chorus FY17 annual revenue and 0.34% of its assets). This obliviously has transaction impacts (cost, delay, uncertainty) which are hard to justify. It may also lead to other unintended consequences: While we would not expect shareholders to be provided with the range of options available and choose what they considered the best option (but to choose between approving the option put to them or not), a sound case for the proposal would need to be put to them. This would likely require commercially sensitive terms to be referenced. While this may be appropriate in a merger/acquisition scenario, it may lead to poorer outcomes in a repetitive, business as usual, contracting situation: The highest price this time may set the lowest price 7

8 Debt Other benchmark the next time the services are tendered. The delay, uncertainty, cost and disclosure aspects could have chilling effect on provider participation particularly for lower value transactions. Using an average market cap measure also involves assessing a transaction against a moving number which is not certain until the transaction is entered into. Issuers therefore need to adopt a conservative approach. In practice therefore the current 50% threshold is lower, and will be lower than 25% if that threshold is introduced. 39. How should NZX measure the size of a transaction? (page 21) As noted above we think approval processes should be reserved for transactions which change the essential nature of an issuer s business. Moving away from a fixed threshold (like a percentage of transaction size) requires more sophistication and complexity. Although not perfect, a threshold based on the size of a transaction provides a simple and workable mechanism where the threshold is set at an appropriate level and an appropriate range of transactions are caught. A simple measure also reduces compliance costs and uncertainty and is therefore our preference provided the transaction threshold and range are set so that they capture only those transactions which would change the essential nature of an issuer s business. As noted above, using an average market cap measure involves assessing a transaction against a moving number. We therefore think it better to assess transactions on a gross asset (consolidated group) basis to give better certainty and more closely align with the Companies Act. 56. Should NZX list wholesale debt instruments? If so, what steps should be taken to facilitate the listing of wholesale debt instruments? (page 26) We think NZX should introduce a wholesale platform. To facilitate listings: It would need to be easy for issuers to use (including listing/quoting securities; compliance) and cost effective. The platform would need to be sufficiently recognised by investors (including international investors). 75. Should NZX introduce any additional requirements in relation to the conduct of Annual Meetings? (page 32) Although we think the requirements set out in the NZX Corporate Governance Code and Companies Act generally strike an appropriate balance improvements could be made around things like requiring auditor fees to be approved. While we appreciate this is not an NZX listing rule requirement the current review may be a timely point for these sorts of issues to be explored with MBIE. 8

9 Mandating that notices of meeting must be on a website 28 days before a meeting may lead to an issuer having to choose between breaching the listing rules (vs explaining why ) or including a shareholder proposal in the notice. 76. What amendments should NZX make to Listings Rules 5.1 and 5.2? (page 32) We do not think advertisements should need to be submitted to NZX. 79. Please provide any feedback on other areas of the rules which you think should be amended and the reasons for requesting such amendments. (page 32) We think shareholder proposals should be excluded from NZX review under LR 6.1.2(d). Issuers have no control over the timing, content or substance of those proposals. 9