Final governance-related Listing Rules amendments

In our October 2013 edition of Acumen, we reported on the proposed update to the third edition of the Corporate Governance Principles & Recommendations and, in particular, to ASX's consultation paper on proposed governance-related amendments to the Listing Rules and associated changes to Guidance Note 9.

On 21 February 2014, ASIC released a supplementary consultation paper entitled Proposed Governance-Related Listing Rule Amendments (Supplementary Consultation Paper). The Supplementary Consultation Paper also included proposals for new non-governance related Listing Rule amendments. The deadline for comments on the Supplementary Consultation Paper closed on 28 March 2014.

On 6 May 2014, ASX issued a response to the Supplementary Consultation Paper (Supplementary Consultation Response) along with the final version of its governance-related Listing Rule amendments (Final Amendments).

The Final Amendments are intended to come into effect on 1 July 2014, subject to receipt of the necessary regulatory approvals under the Corporations Act. Annual reporting-related amendments will apply in relation to financial periods ending on or after 30 June 2015 (although entities may choose to adopt these rules in respect of earlier financial periods.¹

Initial Consultation

On 16 August 2013, ASX released for public comment a consultation paper entitled Proposed Changes to ASX Listing Rules and Guidance Note 9: Corporate Governance Disclosures (August 2013 Consultation Paper).

Most of the proposed Listing Rule amendments were intended to implement and complement the then proposed updates by the ASX Corporate Governance Council to the third edition of its Corporate Governance Principles & Recommendations, which was released on 27 March 2014 (Principles and Recommendations). However, ASX also sought feedback on other proposed governance-related changes to its Listing Rules. These included the introduction of a new Listing Rule 3.19B, requiring continuous disclosure of on-market purchases of securities on behalf of employees or directors or their related parties under an employee incentive scheme. They also included amendments to a number of Listing Rules that currently apply to 'associates', extending their reach to "related parties". They also proposed amendments to Listing Rule 4.10.3 requiring a listed entity to prepare an annual corporate governance statement disclosing the extent to which it has followed the Principles and Recommendations and, if a recommendation is not followed for any part of the reporting period, the entity must state its reasons for not following the recommendation and what (if any) alternative governance practices it adopted in lieu of the recommendation during that reporting period.

Supplementary Consultation

Following consultation on the proposed amendments, ASX released the Supplementary Consultation Paper advising that ASX is intending to proceed with the governance-related changes originally consulted on in August 2013, subject to modifications.

ASX reported that generally speaking, submissions received mostly supported the changes proposed by ASX to complement and give effect to the updates to the Principles and Recommendations. However, there was considerable opposition to the introduction of Listing Rule 3.19B and the extension to 'related parties' of the various Listing Rules that currently apply to 'associates'.

Final Governance-Related Amendments

The key modifications to the governance-related changes originally consulted on in August 2013 arising from the Final Amendments are set out below.

Withdrawal of Listing Rule 3.19B and introduction of Listing Rule 4.10.22

In the proposed amendments set out in the Supplementary Consultation Paper, ASX decided not to proceed with the introduction of Listing Rule 3.19B and proposed a new Listing Rule 4.10.22.

The Final Amendments include the new Listing Rule 4.10.22, which requires a listed entity to include in its annual report, as a one-off annual disclosure covering the whole of the reporting period, all on-market purchases of securities under an employee incentive scheme.

Paragraph (c) to Listing Rule 4.10.22 proposed in the Supplementary Consultation Paper has been removed from the Final Amendments. Paragraph (c) would have required an entity to include specific disclosure in relation to securities purchased on behalf of, or allocated to, a director or a related party of a director. This has been removed in recognition of the fact that such information should already have been disclosed to the market under Listing Rule 3.19A in an Appendix 3Y. In most cases, it should also be included in the entity's annual remuneration report.

The Final Amendments also include a new note in the definition of 'employee incentive scheme' confirming that the fact that an employee incentive scheme may also provide for the participation of consultants and contractors, as well as employees and non-executive directors, does not prevent it from being an employee incentive scheme for the purposes of the Listing Rules.

In the Supplementary Consultation Response, ASX has also indicated that it intends reviewing Appendices 3X, 3Y and 3Z in the near term.

Definition of Associates

In its August 2013 Consultation Paper, ASX proposed the extension to "related parties" of various Listing Rules that currently only apply to 'associates'.

In the proposed amendments set out in the Supplementary Consultation Paper, ASX decided not to proceed with the proposed change that would deem a related party of a director or officer to be their associate. The Final Amendments include a provision (proposed in the Supplementary Consultation Paper) to the effect that a related party of a director or officer of the entity or of a child entity is to be taken to be an associate of the director or officer unless the contrary is established.

The note to the definition of 'associate' states that one way in which it may be established that a related party of a director or officer is not their associate is for the director, officer or related party in question to give a statutory declaration or some other form of certification to the entity to that effect. We expect this will be subject to ASX's usual discretions as to whether this evidence is acceptable.

Final Non-Governance Related Amendments

In its Supplementary Consultation Paper, ASX also proposed new changes to non-governance related Listing Rules. Key changes to non-governance related Listing Rules adopted in the Final Amendments include:

In relation to the latter exception, ASX has confirmed that where an entity has discretion to issue new securities or purchase them on market, then the entity must obtain security holder approval at the time of grant of the option or right. ASX does not consider it appropriate to defer security holder approval until the entity has made a decision that it will satisfy the holder's entitlement by issuing new securities, rather than acquiring them on market.

• Listing Rule 10.12 Exception 4A - A new Exception 4A has been added to ensure that the grant of options or other rights to acquire securities under an employee incentive scheme, where the securities to be acquired on the exercise of the option or in satisfaction of the rights are required by the terms of the scheme to be purchased on market (as referred to in Listing Rule 10.15B) are also excluded from the requirement to receive security holder approval under Listing Rule 10.11.
• Listing Rule 10.17- Listing Rule 10.17 has been amended to clarify the meaning of 'directors' fees' for the purpose of the rule governing the total aggregate directors' fees payable to non-executive directors (NED) without security holder approval. In short, this cap amount will include all fees payable by the entity or any child entity (including for attending and participating in any board or committee meetings) and includes superannuation contributions and salary sacrifice amounts. It does not include reimbursement of genuine out-of-pocket expenses, genuine 'special exertion' fees payable under the company's constitution or securities issued to a non-executive director under Listing Rule 10.11 or 10.14 with the approval of security holders.
• Listing Rule 14.2 - Several amendments to proxy forms have been made including allowing a security holder to direct their proxy to abstain from voting and removing the requirement for the 'chairman's box' in a proxy form. Currently the ASX Listing Rules require a security holder to tick to authorise the Chair to vote on a resolution if the Chair becomes the security holder's proxy. However, the proxy form will need to include a statement as to how the Chair intends to vote undirected proxies. ASX has also added a note confirming that a proxy form may include an acknowledgement that the Chair's intention is expressed at a particular point in time and that, in exceptional circumstances, the Chair's intention may change. ASX would expect an immediate announcement stating the fact of, and explaining the reason for, any change in the Chair's intention.

References to 'market price' - ASX is proposing to delete the definition of market price and to replace it throughout the Listing Rules, as appropriate, with references to "closing market price" (to be defined by reference to the ASX closing price) or "volume weighted average market price" (to be defined by reference to both the ASX and Chi-X markets)

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¹ If an entity wishes to early adopt the changes in Listing Rules 4.7 and 4.10.3, it must early adopt both rules and report against the third edition of the ASX Corporate Governance Council Corporate Governance Principles & Recommendations.  ASX states they are designed to operate as a package.

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