Changes to the escrow regime

On 1 December 2019¹, a suite of ASX Listing Rule reforms will come into effect, with significant changes to both the ASX Listing Rules and the Guidance Notes.  Following a consultation process, on 10 October 2019 the ASX released it’s ‘Consultation Response’, outlining the finalised changes which will be implemented.  A copy of the changes can be accessed here.

One of the changes entities must be aware of, and which may require alteration to the entity’s constitution, are the changes with respect to escrow.

What is an escrow regime?

The ASX’s escrow regime is a set of rules which regulate how shares in certain listed companies have restrictions placed on them, preventing the share holder from selling the shares until a certain time period has elapsed.  This time period is referred to as the period of escrow.² The escrow regime helps protect the integrity of the market.

What is the current regime?

The rules with respect to restricted securities are found in chapter 9 of the Listing Rules, with listing rule 15.12 outlining what must be included in an entity’s constitution. 

Whether securities are treated as restricted securities, and therefore requiring an escrow period, is determined on a case-by-case basis by the ASX.³

Exceptions to requiring a period of escrow

The changes provide clarity with respect to how the escrow regime operates.  For example, as a general rule, restrictions do not apply to securities issued by the following entities before admission:

• An entity that is admitted under the profit test in listing rule 1.2;
• An entity that has a track record of profitability or revenue acceptable to ASX; or
• An entity that, in the opinion of ASX, has a substantial proportion of its assets as tangible assets or assets with a readily ascertainable value.

Currently, the concept of ‘a track record of profitability or revenue acceptable to ASX’ is unclear.  The amendments to Guidance Note 11 provide clarification in this respect by including an explanation of what the ASX will examine to determine if the exception applies.

There is also a change with respect to what an entity’s constitution must provide for. Pursuant to the current listing rule 15.12, the entity’s constitution must provide for each of the following:

• 15.12.1  Restricted securities cannot be disposed of during the escrow period except as permitted by the listing rules or ASX;
• 15.12.2  The entity will refuse to acknowledge a disposal (including registering a transfer) of restricted securities during the escrow period except as permitted by the listing rules or ASX; and
• 15.12.3  During a breach of the listing rules relating to restricted securities, or a breach of a restriction agreement, the holder oft the restricted securities is not entitled to any dividend or distribution, or voting rights, in respect of the restricted securities.

Under the new regime, for so long as it has any restricted securities on issue, an entity’s constitution must provide for each of the following:

• 15.12.1 A holder of restricted securities must not dispose of, or agree or offer to dispose of, the securities during the escrow period applicable to those securities except as permitted by the listing rules or ASX.
• 15.12.2 If the restricted securities are in the same class as quoted securities, the holder will be taken to have agreed in writing that the restricted securities are to be kept on the entity’s issuer sponsored subregister and are to have a holding lock applied for the duration of the escrow period applicable to those  securities.
• 15.12.3 The entity will refuse to acknowledge any disposal (including, without limitation, to register any transfer) of restricted securities during the escrow period applicable to those securities except as permitted by the listing rules or ASX.
• 15.12.4 A holder of restricted securities will not be entitled to participate in any return of capital on those securities during the escrow period applicable to those securities except as permitted by the listing rules or ASX.
• 15.12.5 If a holder of  restricted securities breaches a  restriction deed or a provision of the entity’s constitution restricting a  disposal of those securities, the holder will not be entitled to any dividend or distribution, or to exercise any voting rights, in respect of those  securities for so long as the breach continues.

These changes to rule 15.12 apply to entitles admitted to the official list, or which issue restricted securities, on or after 1 December 2019.  Entities which are already admitted to the official list and issued restricted securities before 1 December 2019 must comply with the current requirements of rule 15.12.

ASX Guidance Note 11 Restricted Securities and Voluntary Escrow (accessible here) which will come into effect on 1 December 2019, provides guidance with respect to the new escrow requirements.

Lavan recommends that any entities which may be affected by the proposed changes, seek advice with respect to how to implement the changes and ensure ongoing compliance with the ASX requirements.