The Australian Securities Exchange (ASX) has advised Moly Mines Limited (Moly) that it would invoke its power of absolute discretion to refuse Moly’s application for re-admission to the official list of the ASX.
The Listing Rules provide that ASX has the absolute discretion as to whether it will grant or refuse an entity admission to list on the ASX, without giving any reasons, and may grant admission on any conditions1. This discretionary power may be invoked even if the prescribed listing conditions are otherwise satisfied.
It is a power that, historically, has rarely been, but ASX has used it for the second time in recent months after it refused the initial public offering of music streaming service Guvera Limited in June, amid concerns about its level of debt and losses, relative to its revenue.
The Moly decision coincides with ASX’s recent announcement that the listing rules, and corresponding guidance (Guidance Note 1), will be amended with effect from 19 December 2016 (New Admission Rules) to bolster its discretionary veto power (in addition to making other amendments to the listing criteria, which are discussed in our previous alert.
ASX’s recent moves give a strong signal that it is committed to ensuring the integrity of its exchange, allowing only high calibre entities and rigorously guarding it from entities even tarnished by associations of impropriety.
Moly is majority owned by Hanlong Mining Investment Pty Limited ACN 139 410 709 (Hanlong Mining), the Australian subsidiary of Chinese Hanlong Group. Hanlong Group founder and mafia boss, Liu Han, was executed by firing squad in China in 2015 after being found guilty of a suite of crimes including murder, running illegal casinos and selling firearms. Earlier this year, the former managing director of Hanlong Mining, Steven Xiao, was found guilty of insider trading and was sentenced to 8 years and 3 months in jail, the largest sentence in Australian history. Hanlong Mining’s former vice-president, Calvin (Bo Shi) Zhu was also sentenced to two years and three months in jail for insider trading.
Moly has said that ASX expressed concern about its corporate governance, with key areas relating to the structure and ownership of the Hanlong Group, the past activities of persons previously involved with Hanlong Group, and the direct or indirect influence that those persons may have over decisions of the Hanlong Group and therefore over Moly. Despite proposals by Moly to put in place mechanisms to protect against any such influence, evidently ASX’s concerns were not sufficiently allayed.
ASX sees the setting and enforcing of appropriate listing standards as integral to the quality and integrity of, and the trust and confidence that investors have in, ASX’s market. That trust and confidence helps to reduce the risk premium that investors require to invest in ASX listed entities, and facilitates more efficient discovery and access to capital. As such, maintaining listing standards is a key service that ASX provides which is central to a well-functioning market.
A well-functioning market in turn provides listed companies with access to capital to fund business expansion and innovation, and provides investors with the confidence to pursue investment opportunities for wealth creation. Ultimately this supports the Australian economy.
This overarching broad discretionary power will remain unchanged under the New Admission Rules. However ASX is clarifying the introduction to the Listing Rules and Guidance Note 1 to emphasise its absolute discretion and confirm that in exercising its discretion ASX takes into account the reputation, integrity and efficiency of its market, in addition to the principles on which the Listing Rules are based.
Notably, the introduction to the Listing Rules is being amended to explicitly state that listed entities and their officers are expected to comply with the general law, in addition to complying with their obligations under the Listing Rules and maintaining high standards of corporate integrity and accountability. That ASX felt the need for this to be said, prominently, in the Listing Rules themselves is interesting and timely in light of the Moly decision. It also follows the general trend of ASX to heighten the standards of listed company directors with the 1 January 2012 introduction of the ‘good fame and character’ requirements for directors as a precondition to listing.
Guidance Note 1 will also be amended to provide additional examples of when ASX may exercise its discretion not to admit an entity to the official list and of circumstances that may indicate that an applicant does not have an acceptable structure and operations for a listed entity (which is one of the listing conditions).
The additional examples of where ASX may exercise its discretion include where ASX has concerns that the applicant’s structure, business, financial condition, governance arrangements, board or management may not be suitable for an entity listed on ASX; and ASX otherwise has concerns that admitting the applicant to the official list may put at risk the reputation of the ASX market as one of quality and integrity. The full list of examples are set out in Note 1.
The additional examples of where an applicant may not have a structure and operations that are appropriate for a listed entity include where the applicant’s proposed business is little more than a concept or idea; and where ASX has concerns that the applicant may not be solvent or have enough working capital to achieve its stated business objectives after it completes its initial public offering. The full list of examples are set out in Note 2.
These additional examples should provide potential listing applicants with a clearer idea at an early stage about where there may be a issue.
Potential applicants are advised to have an initial discussion with ASX, and ASX may suggest to the applicant that it seek in-principle advice from ASX about a matter, prior to lodging a listing application. ASX will not give in-principle advice on whether it will exercise its discretion not to admit an entity to the official list. It will only express a preliminary view on that matter based on the information provided by the applicant and, regardless of the view expressed, retains its absolute discretion not to admit the applicant to the official list, which it can exercise at any time.
For advice about a potential initial listing, re-listing or back-door listing, please contact a member of HopgoodGanim Lawyers Corporate Advisory & Governance team.
1 Listing Rule 1.19: Admission to the official list, and the category of an entity’s admission, is in ASX’s absolute discretion. ASX may admit an entity on any conditions it thinks appropriate. ASX may grant or refuse admission without given any reasons.