Transaction Approval

Purpose

The purpose of the rules in relation to significant transactions is to ensure that shareholders of companies with equity securities listed are notified of certain key transactions and have the opportunity to vote on larger proposed transactions.  Transactions potentially include all agreements entered into by the listed company and its subsidiary undertakings.  However, the requirements do not usually apply to revenue transactions in the other course of business.

It includes the grant or acquisition of options and many transactions other than those of a revenue nature in the ordinary course of business.   It excludes the issue of securities or transactions which do not involve the acquisition or disposal of fixed assets or of subsidiary undertakings.  It excludes transactions between listed companies and its wholly owned subsidiaries.

The purpose of the rules is to cover transactions outside the ordinary course of a listed company’s business, which may change the security holders’ economic interest in the assets or liabilities of the company.  In assessing whether the transaction is such, the stock exchange will have regard to the size and incidence of similar transactions that the company has entered into.

Transactions Covered

A transaction is classified by its size relative to that of the company making it. The rules set out the class tests and how they are computed.  There is a gross assets test, a profits test, a consideration test and a gross capital test.  There are rules in relation to the application of the test and how it is to be calculated with reference to particular items.

A Class 3 transaction is one where all percentage ratios are less than 5%. A Class 2 transaction is one where any percentage ratio is between 5% and 25%.  A Class 1 transaction is where any percentage ratio is 25% or more.  A reverse takeover is where a listed company acquires an unlisted company where any percentage ratio is 100% or more, which would result in a fundamental change in the business or change in the board or voting control of the listed company.

The transaction is classified a Class 1 transaction (and not a reverse takeover). If none of the percentage ratios exceed  125%, the subject of the acquisition is a similar line of business to that of the acquiring company, the undertaking the subject of the acquisition complies with certain requirements, there is no change in the Board, control of the listed company or the voting control of the listed company.

An agreement or arrangement with a third party under which a listed company agrees to discharge liabilities, costs and expenses incurred by that party, whether or on a contingent basis which is exceptional under which the maximum liability is either unlimited or is equal to or exceeds 25% of the average of the listed company’s profits for the last three years is treated as a Class 1 transaction.

Certain types of transactions and indemnities are deemed not to be exceptional, for this purpose, including indemnities given in the ordinary course of in connection with sale and purchase agreements, in connection with placing of shares to directors and certain advisors arising out of services.

Transaction Issues

If a major subsidiary undertaking of a listed company issues shares capital for cash or in exchange for securities or to reduce indebtedness, the issue would dilute the listed company’s percentage interest in the subsidiary and the economic effect of the dilution is equivalent to the disposal of 25% or more of gross assets, it is to be treated as a Class 1 transaction.

Transactions completed 12 months before the date of the latest transaction must be aggregated if they are entered with the same entity or connected entities, involve the disposal or acquisition of securities or an interest in one particular company or together lead to substantial involvement in any business activity which did not previously form a significant part of the company’s principal activities.

If a listed company agrees the terms of a Class 3 transaction which involves an acquisition and consideration for the acquisition includes the issues of securities for which listing will be sought, the company must notify an information service as soon as possible after the terms of the acquisition are agreed.  Certain details are required to be provided.

If a listed company agrees to the terms of the Class 3 transaction of a type other than the above and releases details, it must also notify the information service no later than the release.  The notification must contain certain details.

Information Notified

A listed company must notify the information services as soon as possible after a Class 2 transaction is agreed.  This must include

• details of the transaction,
• description of the business carried on by or using the net assets of the subject of the transaction,
• consideration and value of gross assets the subject of the transaction,
• effect of the transaction including benefits expected to accrue,
• details of service contractors’ contracts
• proposed list of the directors of the listed company
• in the case of a disposal, the application of the sale proceeds.
• if securities are part of the consideration, a statement about whether they are to be sold or retained
• details of key individuals important to the business or company, the subject of the transaction.

A listed company must give the information service the details as soon as it becomes aware of any significant change affecting any matter contained in an earlier notification or where a significant new matter has arisen which would have required to be mentioned in the earlier notification if it had arisen at the time of preparation of that notification.

In relation to a Class 1 transaction, a listed company must comply with the Class 2 requirements for the transactions, send an explanatory circular to its shareholders and obtain their prior approval in a General Meeting and ensure that the agreement is conditional on approval being met.   If there is a material change in the terms of the transactions, the obligations must be complied with again.  This would include up to a 10% change in the consideration payable.

Information Issues

There are special requirements in relation to reverse takeovers, which may be deemed Class 1 transactions.  Where a listed company completes a reverse takeover, its listing will generally be cancelled, and the company would be  required to reapply for the listing of the securities and satisfy listing conditions.

A lifting of the suspension may be appropriate if information in relation to the reverse takeover is leaked. This may be, if there is insufficient information in the market about the proposed transaction and it is not possible to accurately assess the financial position and inform the market accordingly.

The rules are modified in respect of certain types of company.  For property companies, the calculation of gross assets and profits is modified to refer to the nature of the underlying assets.  There are other provisions specific to property companies. There are also specific provisions in respect of listed mineral companies and listed scientific research-based companies.

A listed company in severe financial difficulty may have no alternative but to dispose of a substantial part of its business in order to meet its ongoing working capital requirements or reduce liability.  Due to time constraints, it may not be able to prepare a circular and convene an extraordinary general meeting to obtain prior shareholder consent.

The  Stock exchange may modify the requirements to prepare a circular and obtain shareholder consent where it is satisfied; these circumstances apply.  Certain supporting information and proofs are required.  It must be shown that there is no time for shareholder approval, alternative methods of financing have been exhausted and that the company directors are issuing in the best interest of the company.

An announcement must be notified to the information service no later than the date, the terms of the disposal are agreed upon and must contain certain statements by the directors including statements that they believe that disposal is in the best interest of the company, is financially necessary and is sufficient to supply working capital requirements and that there is sufficient working capital for 12 months.

Where a company enters a joint venture and the company does not retain sole discretion as to the events which requires them to either purchase the partner’s stake or sell their own, the obligation might be immediately classified for the purposes of this rule.  If the consideration to be paid, is determined by future profitability of the joint venture or an independent valuation at the time of exercise, it is to be regarded as uncapped and may accordingly be a Class 1 transaction.

If the listed company does not retain sole discretion over the triggering event or if the listed company is making a choice to purchase or sell following an event which has been triggered by the joint venture partner, the purchase or sale must be classified when the discretion is exercised or when the choice to purchase or sell is made.

Related Party Transactions

The related party transaction rules apply to a company that has a primary listing of equity securities.  The purpose of the rules is to provide safeguards in relation to transactions and arrangements between listed companies and related parties so that related parties are prevented from taking advantage of their position.  The rules also cover transactions by subsidiary undertakings of listed companies.

A related party means any of the following:

• a party who is or was within twelve months a substantial shareholder,
• a person who is or was, within 12 months, a director, shadow director of the listed company or any other company in its group.
• a person exercising significant influence
• an associate of a related party of any of the above.

A related party transaction is a transaction other than one in the ordinary course of business between a listed company and a related party, an arrangement pursuant to which a listed company and a related party invest in or provide finance to another undertaking or buys or sells an asset or any other similar transaction or arrangement other than a revenue transaction in the ordinary course of business between a listed company and any other arrangements, the purpose and effect of which is to benefit a related party.

In deciding whether a transaction is a revenue transaction and/or in the ordinary course of business, the stock exchange will have regard to the size and incidence of the transaction and whether the terms of the transaction are unusual.

Certain types of transactions with the related parties are exempted, including

• certain small-sized transactions.
• transactions pursuant to agreements entered prior to the relationship.
• certain types of transactions in the ordinary course without unusual features.

If a listed company proposes to enter into a related party transaction, it must make a notification containing details required by the rule together with the name of the related party and details of the name and extent of the related party’s interest.  It must send a circular to its shareholders containing specified information.

It must obtain the approval of its shareholders for the transaction or pursuant to a clause making the transaction conditional.  It must also ensure that the related party does not vote on the relevant resolution and take all reasonable steps to ensure that the related parties’ associates do not vote on the relevant resolution.

The provisions apply to a novation or variation of an existing agreement whether or not the party was a related party at the time it was entered.

There is a modified rule for smaller related party transactions.  This applies where each of the percentage ratios is less than 5%, but one or more exceeds 25%.  In this case, the above requirements (requiring consent/approval) do not apply but the listing company must instead inform the stock exchange in writing of the proposed transaction, provide it with confirmation from an independent advisor acceptable to the exchange that the terms of the transaction are fair and reasonable as regards the shareholder of the listed company are concerned; and undertake in writing to include details in the next published annual accounts including, if relevant, the identity of the related party, the value of the consideration and the arrangement and all other relevant circumstances.

If a listed company enters transactions or arrangements with the same related party or any of its associates in any 12-month period, and the transactions have not been approved by the shareholders, then they must be aggregated.  If the percentage ratio is 5% or more for the aggregated transactions, then the general approval obligations apply in respect of the latest transaction or arrangements.  If they are less than 5%, the above smaller related party transaction rules apply.

Exceptions

The rules do not apply to

• transactions or arrangements where each of the applicable percentage ratios is less than 25%.  transactions agreed upon before the parties became related.
• issues of new securities and treasury shares.
• Employee share schemes and long-term incentive schemes include the receipt of an asset by a director of the company, its parent undertaking, or its subsidiary.
• the granting of an option or other right to a director of the company or a group company or the provision of a gift or loan to the trustees of an employee benefit trust to finance the provision of assets above in accordance with an employee share scheme or a long-term incentive scheme.

It does not apply to

• the grant of credit to a related party on normal commercial terms
• to a director for an amount and on terms no more favourable than those offered to employees of the group generally or
• by the related party on normal commercial terms and on an unsecured basis.
• a contract consisting of an indemnity to a director permissible under the Companies Act (limits directors’ ability to contract out of duties) or a permitted insurance contract.
• certain loans by a listed company or its subsidiaries, if specifically permitted under the Companies Act.

The rules do not apply to underwriting by a related party of all or any part of an issue of securities by the listed company if the consideration to be paid by the listed company for the underwriting is no more than the usual commercial undertaking consideration and is the same as that to be paid to other underwriters if any.  This does not apply to the extent that the related party is underwriting securities that it is entitled to take up under the issue of securities.

Exemption

A joint investment arrangement whereby a listed company or any of its subsidiaries and a related party each invest or provide finance to another undertaking or asset is exempted if the following conditions are satisfied.

• the amount invested or provided by the related party is no more than 25% of the amount invested or provided by the listed company or its subsidiary and
• the listed company has advised the stock exchange that the condition has been met and
• the investment advisor acceptable to a stock exchange has provided a written opinion stating that the terms and circumstances of the investment or provision of finance by the listed company or its undertaking are no less favourable than those applying to the investment or provision of the finance by the related party.  The opinion must be made before the investment is advanced.

A transaction or arrangement where each of the following conditions are  complied with is exempt: the party to the transaction arrangement is only  related because

• it is a substantial shareholder or its associate or
• is a person who is the director or shadow director or his associate

of a subsidiary undertaking (in each case) or subsidiary undertakings of that listed company that has if not more than one subsidiary undertaking contributed less than 10% of the profits and represent less than 10% of the assets of the listed company.

The subsidiary and each of the subsidiary undertakings must have been listed in the listed company’s group for a year.  The relevant period refers to accounts in respect of the preceding three years.

If the subsidiary undertaking and any of the subsidiary undertakings are themselves party to the transaction or arrangement or if securities in the subsidiary undertaking or the subsidiary undertakings or their assets are the subject of a transaction or arrangement, then the ratio of  consideration to market capitalisation of the listed company is less than 10%.

The figures to be used are the same as those used for the purpose of classifying profit, assets, and considerations for the Class 1, 2, and 3 transaction tests.