After publishing its Consultation Paper and Response Paper with broad proposals to reform the Listings Requirements in light of international developments and make listing on the exchange more attractive, the JSE proposes to introduce a weighted voting share structure offering and amend its free float requirements and SPAC provisions.
Background
On 27 October 2022, the JSE Limited (JSE) proposed various amendments to its Listings Requirements (Listings Requirements). The proposed amendments are contained in two separate consultation documents: Consultation Paper Proposals and Financial Reporting Disclosures.
Consultation Paper Proposals
These proposals relate to:
- introducing and regulating the listing of companies with dual or weighted voting share structures and amending the current free float requirements and the assessment of free float. These proposals were outlined in a consultation paper (Consultation Paper) published in May 2022 and supported by a response paper (Response Paper) published in August 2022; and
- amending the JSE's current Special Purpose Acquisition Company (SPAC) offering, identified as a work-in-progress in the Consultation Paper.
We provided a bird's eye view of some of the identified works-in-progress and proposals in the Consultation Paper and the outcomes of the Response Paper, which can be accessed here.
Financial Reporting Disclosures
These proposed amendments relate to reworking the financial reporting disclosure provisions in the Listings Requirements to simplify the provisions in general and remove previous obligations such as the requirement to publish an abridged report in all instances. The proposals follow from the JSE's Cutting Red Tape project, in which the JSE considered removing the requirement to publish an abridged report when the issuer's annual financial statements are made publicly available electronically. During its consultation on this issue, the JSE also identified the need to simplify the financial reporting disclosure provisions, which has culminated in these latest proposals. We reported on the Cutting Red Tape project here and here.
Public comments on the proposed amendments in the Consultation Paper Proposals and Financial Reporting Disclosures must be submitted to the JSE by close of business on 30 November 2022.
This communique focuses on the proposed amendments in the Consultation Paper Proposals.
Weighted voting share structures
The JSE proposes to allow a company with a dual or weighted voting share structure to list on the JSE, provided the applicant complies with the relevant admission criteria and governance arrangements relating to weighted voting share structures.
The JSE has stated it will introduce its dual-class shares offering as "weighted voting shares". Key features of the proposals include the following:
- the introduction of the following new definitions:
- "weighted voting share structure", which is a share structure that gives certain shareholders voting rights disproportionate to their shareholding or any other structure that achieves a similar outcome. Typically, shares in one class carry one vote and shares in another class carry weighted votes;
- "weighted voting share", which is, in relation to a weighted voting share structure, a share that carries weighted votes but that otherwise has the same rights as an ordinary voting share;
- "ordinary voting share", which is, in relation to a weighted voting share structure, a share that carries one vote; and
- "enhanced voting process", which is a voting process in a general meeting of the applicant, where votes are cast on the basis that one weighted voting share is limited to one vote;
- an applicant with a weighted voting share structure seeking a listing must meet the Main Board listing entry criteria;
- the weighted voting shares will not be listed or traded on the JSE;
- each weighted voting share must not carry more than 20 votes and the ratio cannot be increased;
- the applicant must adopt the following governance arrangements:
- each weighted voting share must have automatic conversion provisions providing for its conversion into an ordinary voting share if it is sold or transferred to any person;
- each weighted voting share must have a sunset provision providing for its automatic conversion into an ordinary voting share once 10 years has elapsed from the listing date of the applicant issuer. The sunset provision can be extended if holders of ordinary voting shares agree to do so at a general meeting. The holders of weighted voting shares in respect of their entire shareholding in the applicant (i.e. both weighted voting shares and ordinary shares) may not participate in this vote;
- holders of weighted voting shares must hold at least 10% of the economic interest in the applicant on listing;
- holders of ordinary voting shares holding at least 10% of the total voting rights must have the ability to convene a general meeting;
- holders of weighted voting shares must undertake not to dispose of or transfer their entire shareholding (i.e. both weighted voting shares and ordinary shares on listing) for a period of 12 months from the listing date;
- the following matters must be voted on through the enhanced voting process (i.e. on the basis that one weighted voting share is limited to one vote): (i) variation of rights attaching to securities; (ii) the appointment and removal of auditors; (iii) the appointment and removal of independent non-executive directors; (iv) the remuneration policy and implementation report tabled at the annual general meeting of the applicant for separate non-binding advisory votes by shareholders; (v) reverse takeover; and (vi) removal of listing;
- the memorandum of incorporation (MOI) or constitutional documents of the applicant must limit the weighted voting shares to a maximum of 20 votes per share and must incorporate the above governance arrangements;
- the prospectus or pre-listing statement of the applicant must include detailed additional information relating to the weighted voting share structure;
- further issue of weighted voting shares is prohibited, except in the case of a rights issue, bonus issue, capitalisation issue, scrip dividend, consolidation or sub-division of securities. In each instance, this must be done in conjunction with ordinary voting shares; and
- while the JSE may grant a listing to an applicant with a weighted voting share structure (if it meets the required admission criteria), existing listed companies will not be able to issue "high or low voting securities".
Free float: new listings and free float assessment
Free float refers to the portion of a company's issued share capital in the hands of public investors, as opposed to connected parties such as associates, directors or shareholders holding interests of 10% or more or shareholders holding controlling interests. In the Consultation Paper, the JSE considered whether the current 20% free float threshold for a Main Board listing was appropriate, given market reforms in other jurisdictions that have lowered the threshold.
In respect of the free float assessment, under the current provisions in the Listings Requirements, any holdings of 10% or more of the securities in the issuer do not qualify as free float (in other words these securities are not regarded as being held by the public). Exemptions are available for institutional investors (fund managers and portfolio managers) holding 10% or more of the securities in the issuer to qualify to be part of free float, but the JSE has recognised that these exemptions are limited and complex. The JSE's initial aim was to explore avenues to allow institutional investors at or above the 10% threshold to qualify as part of free float. However, the JSE's assessment has widened, given its research into the free float assessment criteria of other exchanges, which do not exclude holdings of 10% or more from the free float, but do require a minimum number of shareholders to form part of the public spread.
Key features of the JSE's proposed amendments to the free float threshold and the free float assessment include the following:
- an applicant seeking to list on the Main Board must have 10% of each class of equity securities held by the public, representing at least 100 shareholders. That means that for new listings, there is a proposed reduction of the free float threshold from 20% to 10%, with the introduction of a minimum number of 100 shareholders to form part of the public spread;
- the securities held by the controlling shareholder/s (as defined in the Listings Requirements) will not be regarded as being held by the public (i.e. controlling shareholder/s are excluded from the free float);
- the 10% exclusion, in terms of which holdings of 10% or more of the securities in the issuer were not regarded as being held by the public, has been deleted. As a result, holders generally unrelated to the issuer or the board that hold securities between 10% and 35% would still qualify to be part of free float (i.e. these securities would be regarded as being held by the public); and
- the carve-outs relating to when institutional investors holding 10% or more of the securities in the issuer qualify to form part of free float have been deleted, given the proposed removal of the 10% exclusion entirely.
SPACs
The JSE has noted an uptake in SPAC listings internationally, particularly in the US, in 2020 and 2021, as Covid-19 market volatility has made traditional listings riskier. Although the JSE considers that its SPAC offering is accessible and flexible, it has identified the need to update the SPAC provisions in the Listings Requirements to align with those international markets where SPACs have flourished and make the offering more attractive to investors.
Key features of the JSE’s proposed amendments to the SPAC provisions relate to allowing a longer time period to acquire viable assets, expanding the concept of escrow, more bespoke disclosure and expanding SPAC admission criteria. These proposed amendments include the following:
- the period within which the SPAC must complete an acquisition of viable assets is extended from 24 months to 36 months, and the JSE's discretion to extend this period has been removed;
- a new definition of escrow, which expands the concept of escrow to include "other custodial arrangements" (to the satisfaction of the JSE), to give SPAC issuers more flexibility;
- expanded SPAC admission criteria relating to the following:
- the applicant must provide expanded detail on the operating industry in which the SPAC will seek viable assets;
- the applicant must provide expanded detail about the experience and expertise of its board of directors;
- in respect of board equity participation, where subscription by the board is at a nominal value, the interest held by the board of directors must not exceed 20% of the applicant's issued share capital on listing;
- in respect of conflicts of interest, the applicant must specifically disclose: (i) commercial interests (other than remuneration which is dealt with elsewhere) of directors and their associates in the acquisition of viable assets, as well as potential conflicts of interest between the applicant and the board (and their associates); and (ii) proposed governance measures to identify, avoid and/or manage these potential conflicts of interest;
- a redemption right (to be included in the SPAC's MOI), subject to specified conditions, must be afforded to those shareholders who voted against the acquisition of viable assets. They should be allowed to elect to redeem their securities and receive a pro-rata portion of the amount held in escrow, provided the acquisition of viable assets is approved within the prescribed (newly-proposed) 36-month period; and
- a provision clarifying that a SPAC may not adopt a dual or weighted voting share structure on listing; and
- more bespoke disclosure in the circular to shareholders on the acquisition of viable assets, including details relating to forecast information; experience and expertise of directors; conflicts of interest; corporate governance; and the redemption right mechanism.
The proposed amendments are still in their early stages. Although the market has indicated its broad support, the JSE is likely to receive robust public comment from market players on whether the proposals meet the needs of the market.
Copies of the Consultation Paper Proposals' Explanatory Memorandum and Amendment Schedule can be accessed by clicking on the following links: Consultation Paper Proposals: Explanatory Memorandum and Consultation Paper Proposals: Amendment Schedule.
This summary is not intended to, and does not, constitute legal advice, and may not be relied upon. For further information or tailored advice, please contact Madelein van der Walt or your usual Webber Wentzel contact.
