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JSE proposes amendments to listings requirements

Webber Wentzel partner Riyaad Cruywagen looks at envisaged enhancements to the process of listing a business, capital raising through the issue of ordinary shares, and directors’ participation in a rights offer during a closed period.

NOMPU SIZIBA: The JSE has released a consultation paper on proposed changes to the listings requirements that would apply to listed companies. This is in order to cut red tape and achieve a more effective fit-for-purpose set of regulations for financial markets.

Well, to take us through some of the detail I’m joined on the line by Riyaad Cruywagen. He’s a partner at Webber Wentzel. Thanks very much for joining us, Riyaad. Market players have often spoken about how onerous it is to be listed on the JSE, with some companies having delisted in recent years. What have been some of the shortcomings of the JSE, do you think?

RIYAAD CRUYWAGEN: I think it’s not a shortcoming of the JSE itself as a regulatory body. I think it’s just that, because you’re in an environment that deals with public funds, the regulations are quite strict and onerous and to actually comply with them is quite costly. You need to have your legal advisors, your sponsors, and sort of the size of the board is determined by the listings requirements, and so on and so forth. It just becomes very, very expensive, and I think that’s what’s resulted in people moving away from the market a little bit.

NOMPU SIZIBA: Now in these new listings regulations proposals, a number of proposals have been put forward, a key one being around the enhancement of the ordinary course of business. What does that speak to, and where are they looking to create efficiencies there?

RIYAAD CRUYWAGEN: To me that’s one of the most interesting amendments, and it actually goes back to your question of why people have been moving away. To call a shareholders’ meeting, which is one of the main regulatory oversight tools to get shareholders to approve of the text in a particular transaction or …… [1:52] can be quite expensive, and listed companies already have one once a year. If you have something else that needs to be tacked on, this is essentially a doubling up of costs.

What this amendment actually says is that, if you’re concluding a transaction in the ordinary course of business, and it’s something that you do on a day-to-day basis, you don’t have to categorise the transaction, which is essentially assessing the value of the transaction relative to the listed company; and if it’s big enough you need shareholder approval. That leads to a doubling up on costs; you have to send a shareholder circular out which is a pretty thick, sometimes, and technical document, which is expensive to produce.

And so the new rule, if it actually ever comes into effect, will say that if you’re entering into a time that’s in the ordinary course of business, you won’t need shareholder approval, and therefore you won’t need this shareholder circular. It’s essentially saying to the issuers look, we know you have a business, concentrate on your business and, while you’re doing things that are sort of day to day, we’re not going to bother you.

So I think it is sensible. I think the efficiency will be management not wasting time on doing circulars trying to get shareholders all aligned, and just focusing on their day-to-day business.

NOMPU SIZIBA: I suppose those kinds of details that they’re doing in the course of their business, those are details that they could then furnish the market in, say, their annual report or in their annual financial reports.

RIYAAD CRUYWAGEN: Yes, one hundred percent. Philosophically I have to sit there and think these directors, to a certain extent, are appointed each and every year, and shareholders do and should trust them, in a way, to run the business. This amendment would say, well, go ahead and run your business, this is nothing strange. You are not selling all of the assets and now we need oversight. You’re just doing what you’re appointed to do. So continue.

NOMPU SIZIBA: Indeed. What about in the area of related companies buying and selling shares to each other? What are the rules currently and how are they proposing that they change going forward?

RIYAAD CRUYWAGEN: I think this is a pretty helpful amendment in that the way the rules currently work is that if you’re doing a repurchase of shares, sort of pro rata to everyone, then you wouldn’t need shareholder approval. But if, for example, you’re acquiring shares from related companies, so subsidiaries, you would need shareholder approval. And the new rule is trying to do away with a repurchase or required shareholder approval for a repurchase from a subsidiary or from a share scheme.

Again, I think it’s a sensible approach because the intention there, or the harm that the listening requirement is actually trying to prevent, is value leakages – your buying from one shareholder to the detriment of the others. In this scenario we are just buying from your subsidiaries or from a share scheme, or to keep the shares for future use. There’s no actual value leakage. It’s not to the detriment of any of the shareholders. So I think it’s one of those amendments that makes sense and always would have made sense. And it goes back to the first point of why people believe and why they say it’s onerous. I think a lot of these amendments go into looking at the way the rules currently are, and say: How can we streamline the process when we’re not actually giving up terribly much in terms of leaving the system open to abuse? There’s an interplay between the listings requirements and the Companies Act. And just because there’s no protection or there is less protection following amendments to the listing requirements doesn’t mean that there’s nothing. There is protection in the Companies Act – particularly, for example, in the form of repurchases.

NOMPU SIZIBA: Now I see there is a move to change the rules when it comes to capital raising through the issue of ordinary shares. What’s the suggestion there?

RIYAAD CRUYWAGEN: Okay. Usually every year a company gets a general authority to issue shares for cash, and there are particular parameters for that. There’s a maximum discount at which you can issue those shares. You can’t issue more than 30% of the current issued share capital. And crucially, related parties can’t participate in the issuance. Those are the current rules. What we were trying to move to, or what the JSE is trying to move towards, is to allow related parties to participate. That would be, for example, your shareholders who own more than 10% of the shares.

I think this is a very helpful proposed amendment. It comes from a lot of what happened during Covid because, if you think about it, the people who really have skin in the game are your biggest shareholders who are trying to keep this thing going. You sit in a difficult situation where the company needs to raise capital and the person with the most skin in the game is precluded from the system. The way that the Companies Act works on shares starts to get a bit technical in terms of when you’re making an offer to the public and when not, to fall outside of making an offer to the public, which then requires a sort of complicated process. You actually need to issue shares to your biggest shareholders, or rather to institutional investors.

This amendment is not only helpful in the sense that it allows you to raise funds from those who are most likely to give you the money, it also aligns the listings requirements with the Companies Act a little bit more so that you don’t have this weird situation where the listings requirements preclude you from doing something that the Companies Act actually facilitates.

NOMPU SIZIBA: And what are the proposals around directors’ participation in a rights offer during a closed period? And, while you’re at it, explain to us what a ‘closed period’ means.

RIYAAD CRUYWAGEN: A closed period is essentially any time in which there is price-sensitive information. So what it’s trying to avoid is a director, for example, knows how the company’s doing from a financial perspective, or knows about a deal coming down the line or a sale or something like that, and trading with price-sensitive or inside information that the market doesn’t have. So it tries to level the playing field.

In terms of their participation in rights offers, it’s the same concept as allowing related parties to participate in a general authority to issue shares for cash. These directors, again, are people who are most aligned with the company, and who are likely to take up the rights offer. It’s just to ease the process, to allow them to participate. And for an issuer, for the listed company to raise funds as quickly and easily as possible.

NOMPU SIZIBA: Now, in making companies’ lives easier and relaxing the rules, how will the JCE be able to ensure that there’s no jiggery-pokery going forward, because we know that there’ve been a lot of corporate scandals already? So how do they get the balance right between making it more efficient for companies to be listed on the JSE, while ensuring that there are not funny things happening beneath the surface?

RIYAAD CRUYWAGEN: A very good question. I think they are walking a tightrope, so to speak, because on the one hand, as you said, people are saying the rules are too onerous, and on the other hand they are a regulator and are trying to look after the interests of my and your money and the public’s money. But there is a backstop to all of these things which is quite helpful. If you think about the amendment to the ordinary course of business carve-out [10:28], which we spoke about earlier, you still have to go to the JSE and say, oh, this is in the ordinary course of business. You have to demonstrate it to them. They’re not just going to take your word for it. So there’s a little bit of a regulatory oversight there. It’s not like you can just do what you like.

For intra-group repurchases, the Companies Act, depending on whom you buying shares from and the percentage of shares that are actually being repurchased, that will require shareholders’ approval. The general authority to issue shares for cash with the related parties – I think that that is a helpful mechanism. Just generally, I think shareholders will be in favour of that.

But in the actual resolution where you ask shareholders to approve it – as I said earlier, you get these resolutions every year – you have to specifically say in the resolution that related parties will be able to participate. So at that point shareholders actually have a say. So it’s not every issuer who has a general authority will be able to enable its related parties to participate. Shareholders will have needed to have signed off.

So I must say I think that all of the amendments there or the proposals were well thought out, and there is a backstop. I don’t see much room for getting through the back door and trying to abuse the system with the way these things are turned.

I cringe each time that there are proposed amendments, because actually the JSE has said, look, we’re putting our best foot forward here. These are some of the proposals that we think would make the market’s life just a little bit easier. There’s a consultation process where everyone will respond and cry and say this is a potential loophole, or this isn’t that helpful, actually. Following that process, we’ll actually get proposed amendments. And I think from there we’ll consult again and eventually get to rules that we can all be happy with.

NOMPU SIZIBA: It does sound like quite a process that you’ve outlined for us, but when do you think these proposals would actually kick in? And do you think that they would be sufficient for companies to stay listed, as well as to entice new ones to come on board?

RIYAAD CRUYWAGEN: I can’t say how long it will take. This is a very new process from the JSE, to be honest. It’s sort of first putting their proposals out to the market. I think it will be some time before we actually see the amendments coming across.

As for whether they can keep companies listed, I think it will help, certainly. For example, in the ordinary course of business, it really is a most interesting one to hear. I know of many issuers that really struggle because the way that you categorise transactions makes it very difficult for you sometimes to proceed and just do business in the ordinary course.

If the rules did not change, I would sit and maybe wonder whether this listing achieves everything that is such an impediment to our business. Something like that will go a long way to keeping people interested in remaining on that stage.

As for enticing new ones, I think time will tell. It’s one of those things where with Covid we are still trying to get the economy to revive, to try and list a company, and ongoing regulations ultimately add a massive cost to that. So I think that’s sort of a broader ‘where are we going with the economy’ question.

NOMPU SIZIBA: That was Riyaad Cruywagen, a partner at Webber Wentzel.

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