In 2023, NZX began a consultation of its Major and Related Party Transactions Guidance Note (Guidance Note) with the aim of updating the Guidance Note so that it reflects current market practice, and to better align the guidance with the changes that were made to the NZX Listing Rules (Rules) as part of the 2018 Rule review.
Overall, the changes to the Guidance Note emphasise that the policy behind the Rules that govern major transactions or Material Transactions with Related Parties (Rules 5.1 and 5.2) (Transaction) represent a fundamental governance protection for shareholders. Therefore, reflecting this, the application of the rules has become more strict and waivers from them are extremely unlikely. The amendments provide further guidance on the assessment of transactions under the Rules and the expectations as to how the Rules should be interpreted and followed if a transaction falls under the category of being a major or related party transaction.
We have summarised in this article the key changes to the Guidance Note. The amended Guidance Note can be found here and the mark up to the prior version can be found here. The guidance note became effective on 18 December 2023.
Key amendments of the Guidance Note
We set out below the key amendments that are in relation to areas that are relevant to both major and related party transactions.
Renewals, amendments and variations of a major or related party transaction
Under the amended Guidance Note, the renewal of a major or related party transaction will only require approval if the renewal itself is a major transaction or in the case of a related party transaction, is a Material Transaction under the Rules. However, the renewal will not require approval if the notice of meeting for the original transaction provided an appropriate level of disclosure regarding the renewal and the approval resolution specifically empowers the renewal.
Variations or amendments of a Transaction will require shareholder approval unless the variation or amendment is of a minor or administrative nature (i.e. does not change the fundamental or essential terms of the transaction). This means that even if the variation or amendment would not trigger the relevant threshold, approval must be sought. Further, if an Issuer wishes to effect an administrative or minor variation or amendment in the context of a renewal, shareholder approval will not be required for those purposes.
NZX review and approval for a major or related party transaction
Documents to be submitted to NZ RegCo for review must include the notice of meeting, explanatory notes, proxy form and any other documents to be sent to shareholders with the notice of meeting (such as any Appraisal Report).
To comply with Rule 7.8.2 (Notice of Meeting requirements), NZX will expect the notice of meeting to include a reasonable level of detail about the Transaction. In addition to existing content guidance, the Guidance Note has been amended to include the below details.
For the notice of meeting of a major transaction under Rule 5.1:
- in assessing the financial effect of the transaction, it will be helpful to shareholders if the financial information is presented in pro-forma format. If the transaction is an acquisition of a business, summary financial statements are expected to be provided (or full financial statements, if available). The notice should also clarify whether information is presented under standards other than NZ GAAP.
- where a third-party report was prepared to support the transaction (for example third party valuations, or property valuations) which is relied upon by the Issuer to assess the transaction, the Issuer should make the report, or a summary of the report, publicly available for shareholders. If the report is not to be made public, the Issuer should sufficiently explain what third party report has been obtained and why it, or a summary, is not made publicly available. Where a summary report is made available, it should include sufficient information to explain the third party report such as an outline of the valuation range for the subject of the transaction, together with the key assumptions and risks underpinning the valuation.
- provide whether there are any break fees that apply and a description of the break fees.
- provide details on how the Issuer will fund the transaction.
For the notice of meeting of a Material Transaction with Related Parties under Rule 5.2:
- identify the Related Parties and why the Issuer considers that a Material Transaction with those Related Parties is appropriate.
- provide an explanation as to why an Appraisal Report was required and, if appropriate, a summary of the report’s conclusions.
- provide an assessment of the financial effect of the transaction on the Issuer and on the interests of Financial Product holders.
- in the case of an acquisition, include details of how the Issuer intends to pay for the acquisition;
- in the case of a disposal, include details of what the Issuer intends to do with the proceeds of the disposal.
- set out the timetable for implementing the transaction.
- include a prominent statement that the transaction requires shareholder holder approval under the Rules (or the Companies Act or Takeovers Code if applicable) and therefore may not proceed if that approval is not forthcoming.
- include a statement that NZX takes no responsibility for the contents of the notice, in the form required by NZX.
Waiver of a major or related party transaction
NZX has emphasised in the amended Guidance Note that waivers from Rule 5.1.1 and Rule 5.2.1 will be very rare. In particular, waivers from a transaction that would significantly change the nature of the Issuer’s business under Rule 5.1.1(a) are extremely unlikely and any waiver from a transaction that achieves the Gross Value threshold under Rule 5.1.1(b) is likely to be granted only in very limited circumstances. Examples of the circumstances were long term cash contracts (e.g when an Issuer enters into a multi-year arrangement where it is receiving cash under a contract in excess of 50% of the Issuer’s Average Market Capitalization) in the ordinary course of business, and in circumstances where the Issuer had suffered a significant decline in market capitalisation.
In relation to major transactions, NZX clarifies in the amended Guidance Note that certain historical waivers do not have precedent value. Specifically, those granted due to written confirmation of majority shareholder support for the transaction, the requirement to seek shareholder approval would prejudice the Issuer’s ability to participate in a competitive process to acquire an asset, and the requirement to seek shareholder approval would prejudice the Issuer’s negotiation position in a bi-lateral negotiation.
Information to support waiver application
Under the amended Guidance Note, in addition to the information required under the previous Guidance Note, the Issuer must also explain why the relevant Transaction does not offend the policy of Rule 5.1.1 or Rule 5.2.1 (as applicable), and:
- why the waiver relief is in the best interests of the Issuer, and for a major transaction, of the Issuer’s shareholders as a whole and for a related party transaction, of the shareholders who are not precluded from voting on the transaction; and
- why the Transaction is in the best interests of the Issuer and the Issuer’s shareholders as a whole. In particular for a related party transaction, the Issuer must also explain why the transaction is in the best interests of the shareholders who are not precluded from voting on the transaction.
For a related party transaction, the amended Guidance Note now also requires that the Issuer must establish (as applicable):
- the basis on which the agreed consideration for the transaction has been determined to support the view taken by the non-interested Directors, including where applicable whether third-party validation of the proposed consideration has been obtained.
- that the Related Party has not been in a position to exercise undue influence over the Issuer’s decision to enter into the transaction.
Further, the amended Guidance Note states for a related party transaction, that the Issuer should also clearly explain what information will be released to market about the Material Transaction and that it would be useful to provide a draft announcement for background information.
Standard conditions to waiver
The amended Guidance Note has also bolstered the standard conditions that apply to waivers from Rule 5.1.1 and 5.2.1. We set out in the table below, all of the standard conditions that NZX will likely apply when granting a waiver under each Rule under the amended Guidance Note. The waiver decision will set out facts of the application and grounds for the decision unless the affected Issuer establishes satisfactory grounds for maintaining confidentiality, or NZX elects at its sole discretion not to publish the decision. Further, Issuers should submit draft certification (required as set out in the table) to NZX when applying for a waiver and NZ RegCo will release the certificate at the time the waiver decision is announced to the market.
Major transaction under Rule 5.1.1 |
Related party transaction under Rule 5.2.1 |
|---|---|
| (a) The non-interested directors of the Issuer certify to NZX that: i. the transaction and the granting of the waiver is in the best interests of the Issuer and the Issuer’s shareholders as a whole; and ii. the transaction does not significantly change the nature of the Issuer’s business, and is in the ordinary course of the Issuer’s business; (b) The directors providing the certificate will be required to include in the certificate a summary of the core grounds on which each of the certifications under limb (a) above are made; (c) The non-interested directors of the Issuer certify that the transaction is not a major transaction under the Companies Act 1993; and (d) The waiver, its conditions and implications being disclosed in the Issuer’s next annual report. |
(a) The non-interested directors of the Issuer certifying that the terms of the Material Transaction have been entered into, and negotiated, on an arm’s length commercial basis; (b) The non-interested directors of the Issuer certifying that the Issuer was not influenced to enter into the Material Transaction by the Related Party; (c) The non-interested directors of the Issuer certifying that the granting of the waiver is in the best interests of: i. the Issuer; and ii. the Issuer’s shareholders who are not precluded from voting under the Rules; (d) The non-interested directors of the Issuer certifying that the entry into the Material Transaction is in the best interests of: i. the Issuer; ii. all of the Issuer’s shareholders; and iii. the Issuer’s shareholders who are not precluded from voting under the Rules; (e) The non-interested directors must include in the certificate a summary of the core grounds for the certifications given under each limb of conditions (a), (b), (c), and (d), described above; and (f) The waiver, its conditions and implications being disclosed in the Issuer’s next annual report. |
Other key updates
We have further set out in the table below, the rest of the key updates that apply to a major or related party transaction.
Subject |
Summary of update |
|---|---|
Major transactions |
|
| Charge transactions |
Clarification that both the granting of a charge, and the exercise of a charge by a charge-holder that allows the charge-holder to realise a security interest, are excluded from the operation of Rule 5.1.1. However, a charge cannot be viewed in isolation, as a charge may arise in the context of an obligation (such as a guarantee or indemnity) which may itself be a major transaction for the purposes of Rule 5.1.1. |
| Related series of transactions |
For factors that may be used to determine a related series of transactions:
|
| Where the entry into and completion of one transaction can subsequently lead to further transactions that are seemingly related but were not previously contemplated, NZX considers that the transactions are not a series of related transactions. | |
| Significant change to nature of Issuer’s business |
Relevant factors that should be considered when determining whether the nature of an Issuer’s existing business activities have significantly changed include:
|
| Clarification that an asset acquisition or disposal, including in respect of a business that is vertically integrated or aligned to the Issuer’s industry sector, may give rise to a significant change in the Issuer’s business under Rule 5.1.1(a), as demonstrated by the examples in the Guidance Note. | |
| Calculation of gross value |
When calculating the Gross Value of assets, where the relevant assets are not valued in the Issuer’s most recent financial statements, this must be based on the market value and the Issuer must have a reasonable basis for the assessment of the Gross Value of the relevant assets. For a disposal of assets, an Issuer should refer to the gross asset value in its own financial statements, and for an acquisition, an Issuer should refer to the counterparty’s financial statements (if the counterparty is also an Issuer). Otherwise, the Issuer should assess the market value of the assets in each case. In general, the “market value” of the asset will be the price agreed between the Issuer and the counterparty. In the case of a share acquisition of entity that has assets and liabilities, the Gross Value will be the market value of the entity. The Gross Value should be calculated without double counting, and without adding external transaction costs to the asset value (including related equity or debt funding and bona fide third party costs). Further worked examples have been included on the above. |
Related party transactions |
|
| Definition of Material Transaction and related series of transactions |
Noted that in assessing situations where the Issuer enters into a guarantee, indemnity, underwriting, or similar obligation, or gives any security that could reach the threshold of becoming a Material Transaction, ‘similar obligations’ does not include warranties such as those given under a subscription or sale and purchase agreement. |
| Clarification that where transactions involve various aspects or components that fall under different paragraphs of the definition of Material Transaction, the different components should not be aggregated together when considering whether a transaction falls within the definition of a Material Transaction. | |
|
Clarification that a transaction with a number of components that fall within different limbs of the Material Transaction definition (e.g. acquisition and issuance), where a Related Party is not a direct party to the transaction (or series of transactions) within one limb of the definition (e.g. it is not a party to the issuance), that component of the transaction (the issuance) will not be a Material Transaction with a Related Party for the purposes of Rule 5.2. Further this will mean that where a Related Party is a direct party to one of a related series of transactions that fall within one limb of the Material Transaction definition, that the transactions in the series should be assessed in aggregate against the relevant limb of the Material Transaction definition, regardless of whether the Related Party is a direct party to every transaction in the series to which the limb of the definition applies. This is a change to the prior Guidance from NZX, in that Related Party involvement in one of series of transactions within a limb of the Material Transaction definition taints the series. |
|
| Value metrics | Guidance provided as to how the different value metrics used in the definition of a Material Transaction should be assessed including the Aggregate Net Value, net tangible asset value, market value and gross cost. |
| Underwriting and sub-underwriting transactions |
Stated that in general sub-underwriting arrangements will not be captured by Rule 5.2.1 given that there is typically no contractual nexus between the Related Party and the Issuer. However, there may be circumstances where despite the lack of a contractual relationship or direct benefit, the direct involvement of Related Party could nevertheless trigger Rule 5.2.1, such as due to it having a significant level of involvement in the design or negotiation of the transaction. |
|
Noted that the carve-out in Rule 5.2.2(b) relating to pro-rata issuances does not extend to the involvement by a Related Party as an underwriter. |
|
| Determining a direct party | Clarification that the key (but not necessarily the only) factor that will be taken into account by NZX in determining whether a Related Party is a direct party to a transaction is whether there is a direct contractual nexus between the Issuer and a Related Party (or some other direct benefit conferred on a Related Party by the Issuer). Other relevant factors will be whether the Related Party has had a significant level of involvement in the design or negotiation of the transaction and whether the Related Party is receiving payments or benefits directly from the Issuer as a result of the transactions. |
| Relationship between Rule 4.5 and paragraph (b) of the definition of Material Transaction | Noted that when calculating whether a placement under Rule 4.5 is a Material Transaction, Related Party involvement is considered on an aggregate basis for all Related Parties that are participating. |
