New NZX Listing Rules implemented in May 2006

NZX has completed its 2005 review of the NZSX/NZDX Listing Rules. The 2006 amendments came into effect on 10 May 2006, with the exception of specific provisions relating to preliminary announcements and half-yearly reports which come into effect on 1 July 2006.

For the most part, the rule changes reflect clarifications of the existing Listing Rules and do not place any additional obligations on listed issuers.

The more significant amendments relate to the rules governing related parties and to the disclosure and information rules. In practice, NZX has stated that this latest round of rule changes should see a reduction in waiver applications to NZX, as well as reduce the overall compliance costs associated with disclosing material information.

Summary of key changes

Related party provisions

The related party and material transaction provisions in Section 9 of the Listing Rules have undergone a number of changes to further clarify the scope of the provisions and reduce the types of transactions falling under the regime. Some of the more significant changes are:

Clarification of the application of the de minimus exception for material transactions involving service contracts

Redrafting of the related party transaction rules now makes it clear that a service contract (regardless of its length and overall value) will be subject to the NZ$250,000 de minimus exception in each financial year of the contract;

Executive employment contracts no longer require NZX approval

Employment contracts entered into on an arm's length, commercial basis and approved by independent directors will no longer be considered a related party transaction so long as the appropriate disclosure is made;

Guidance on which "officers" are related parties

NZX has replaced references to "officer" with the term "executive officer" in the related party rules. The change is in response to a request to focus the related party rule on persons that are likely to exercise influence over an issuer such as the CEO or CFO. However to retain flexibility, no further definition has been given. Instead NZX will issue a guidance note on this issue;

New 10% threshold for substantial security holders in related party transactions

A person will no longer be deemed to be a related party solely because that person holds 5% of the voting securities in the issuer. In recognition that a 5% holding is unlikely to influence an issuer, the threshold has been increased to 10%;

All arm's length commercial bank transactions (where the bank is acting as principal) fall under the exception to related party transactions and major transactions

The Listing Rules have always provided an exception for banking transactions where the issuer has recourse to the credit risk of a bank. However, the rules now allow for loan transactions to fall within the general bank exception;

New common director, subsidiaries and joint venture exceptions

The addition of new exceptions for common directors and for transactions with subsidiaries and joint ventures (subject to strict criteria) should also assist in reducing the range of circumstances in which issuers are required to apply for waivers to the related party transactions.

Disclosure and information rules

The other main area affected by the rule changes is the provisions governing the timely disclosure of information, the content requirements of such disclosures and the form of disclosure. In brief, the main changes are:

Amalgamation of the disclosure requirements for acquisitions and dispositions with the continuous disclosure obligations

NZX has made changes to the structure of its disclosure obligations by removing the requirement for separate announcements of material changes. These are now covered by the general continuous disclosure obligations to ensure disclosure of all material information to the market. The footnotes to the continuous disclosure rules have been redrafted to retain the benchmarks which triggered notification under the previous regime and also list the content requirements for such notices.

Offering document required for major change of control or direction

Instead of an information memorandum, NZX (at its discretion) may now require an issuer to prepare a profile for major changes involving the controlling interest in an issuer; sale or purchase of a major part of an issuer's assets; or a change in direction of the business or activities of the issuer;

Changes in content for preliminary announcements, half-yearly reports and annual reports

NZX has removed specific content details from the rules for preliminary announcements and half-yearly reports and included these in Appendix 1. However these changes will not take effect until 1 July 2006. For annual reports, issuers now have the option to disclose details of waivers granted by providing a reference to the issuer's website;

Improvements in timing requirements for director nominations

The time between the closing date of nominations and the date of the annual meeting is now the only relevant period to consider. This is to overcome some of the problems issuers faced in setting the date of their annual meetings when notification of directors' nominations were included in the release of the preliminary full-year announcement.

Other notable changes

The 2006 amendments include a number of other changes including:

The removal of the overall 7% cap for employee equity issues over a five-year period

NZX is now satisfied with the 3% threshold per year for control over employee share schemes;

Minor changes to the rules governing the issues of pro rata offers of securities not exceeding $5,000 for each existing security holder

In particular:

• the rules have been extended to apply to beneficial owners of securities in line with the Securities Act (NZX Share and Unit Purchase Plans) Exemption Notice 2005;
• a new time limit of three months has been included for the placement of unsubscribed securities after the close of the original offer; and
• it is now up to the issuer (and not NZX as under the previous waiver regime) to decide whether to extend the offer to existing overseas security holders if the legal requirements of the overseas jurisdiction are too onerous for the issuer to extend the plan to that jurisdiction.

Pricing of equity securities

The rules governing the issue price limits for equity securities have been extended to cover the exercise prices of securities (such as options) that convert into voting securities.

Bell Gully's guide to the 2006 amendments to the NZX Listing Rules

If you would like a fuller analysis of the changes, Bell Gully has prepared a guide on the more substantive 2006 Listing Rule amendments. This guide is available online at www.bellgully.com. Alternatively, you can contact us for a printed version.

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.