An experienced, practical and forward-looking company secretary can be vital to ensuring a smooth transition into the listed environment. The world for the company secretary of a newly listed entity can be daunting, as they seek to achieve the following:
- ensure that the entity has governance practices in place that are appropriate for a listed entity and that achieve good governance outcomes
- support an often newly constituted board of directors, with each director bringing different expectations and varying levels of prior listed entity experience, requiring the company secretary to draw on their soft skills to understand what is required for each director to perform their role effectively
- assist and educate the executive leadership team in building a constructive relationship with the board and understand the enhanced compliance and reporting requirements
- understand the needs of the entity’s investors and potential investors
- monitor share price volatility and media reports
- build good working relationships with the entity’s key advisers and regulators
IPO related matters/escrowed securities
As a first step, the company secretary should review and understand ASX’s ‘Admission Decision’ letter, as this will include information that is specific to the entity regarding the conditions applicable to its admission to ASX and any requested Listing Rule waivers that have been granted by ASX.
Second, it would be prudent for the company secretary to prepare an annual calendar of events, including all ASX reporting deadlines relevant to the entity, release dates for restricted securities and the entity’s annual general meeting deadline. Not all matters that the company secretary deals with can be anticipated, however, there are a number of key deliverables that can be managed ahead of time to avoid unnecessary stress. For example, the company secretary should forward plan for the major financial calendar year events, such as the release of the entity’s first half and full year financial results, the release of the annual report and inaugural annual general meeting, as well as the release of quarterly reports and payment of the entity’s first dividend, if applicable.
The company secretary should forward plan for the major financial calendar year events, such as the release of the entity’s first half and full year financial results.
Often as a condition of admission to ASX, or as a requirement of the IPO’s lead broker, certain securities issued prior to the IPO are made subject to a trading restriction for a specified period (the ‘escrow period’). The rationale for the escrow period is to protect the integrity of the market, to allow for the value of assets or services sold to an entity to become apparent and for the market price of the entity’s securities to adjust before the vendor receives full consideration.1 The escrow period is frequently tied to the future release of results for the entity and/or the entity’s trading price compared to the offer price at the time of IPO.
A calendar of upcoming events is helpful when it comes to tracking the end of the escrow period, as under the Listing Rules, disclosure of any forthcoming release of securities from escrow must be advised to the market by the entity not less than ten business days before those securities are released from escrow.2 This Listing Rule is occasionally inadvertently overlooked and in such circumstances, ASX may direct that the securities are not to be released from escrow until the expiration of the ten business day period, commencing from the date of release of the announcement. This could have serious implications for the entity from a contractual law perspective3 and if the delay in releasing the securities causes a securityholder loss, for example, the entity’s security price may decrease during the period.
One of the most daunting aspects of becoming a listed entity is adjusting to the transparency that comes with ASX’s continuous disclosure regime. For entities used to operating in private, the continuous disclosure rules, as well as the expectation from new investors of increased visibility and detailed reporting, can present a steep learning curve.
Understanding which information is ‘market sensitive’, how much information needs to be disclosed and when, or when an exception to disclose applies, can be a difficult area to navigate for newly constituted boards and management teams. Often, in the case of management teams that comprise the founders of the business, there may not be any previous listed entity experience, making the learning curve even steeper.
Generally, an entity (or its legal advisers) will have prepared a suite of corporate governance documents as part of ASX’s admission requirements, including a continuous disclosure policy. However, the practical implementation of these documents can cause frustration and confusion once the entity has listed and the documents are being applied in practice. Disclosure can be a grey area, which requires practical experience and a thorough understanding of the rules.
Understanding which information is market sensitive for the entity
Have a discussion with the key decision-makers around the time of listing about what constitutes market sensitive information for the entity, from both a qualitative and quantitative perspective: this will be different for each entity. It is helpful to run through a number of hypothetical scenarios that are applicable to the specific circumstances of the entity. In many cases disclosure decisions will need to be made with speed and there may not be time for extensive debate and discussion. As such, it is often helpful to discuss possible disclosure issues ahead of time.
Have a discussion with the key decision-makers… about what constitutes market sensitive information for the entity, from both a qualitative and quantitative perspective.
Understanding which information must be disclosed
ASX is not only focussed on the timely disclosure of market-sensitive information; it is also focussed on the content of market-sensitive announcements. For example, ASX would generally expect an announcement regarding the signing of a market-sensitive customer contract to include information about the name of the customer, terms of the contract, nature of the products/services to be supplied, significance of the contract to the entity and any material conditions that need to be satisfied before the customer becomes legally bound to proceed with the contract, as well as any other material information relevant to assessing the impact of the contract on the price or value of the entity’s securities.4
Occasionally, newly listed entities will argue that they are unable to disclose the counterparty to a contract due to a confidentiality agreement. An entity’s continuous disclosure obligations override a confidentiality agreement in this context and ASX may direct the entity to disclose the counterparty’s identity or suspend the entity’s securities from trading until it discloses all relevant information. Listed entities should include a carve-out in contractual commitments relating to confidentiality to permit the disclosure of information that is required by law, or under the rules of a stock exchange.
Training of key employees
In order for the right information to be given to decision-makers in a timely manner, often a number of layers of management below the executive team will also need to be educated on continuous disclosure. Generally, these layers are set out in the entity’s disclosure framework and education is provided to key personnel close to the time of listing.
Not using the ASX platform for promotional purposes or releasing ‘ramping’ announcements
It is important to understand that both good and bad news must be shared if it is market sensitive. However, ASX has recently reminded listed entities that it is not acceptable to use the market platform to make announcements designed to ‘ramp’ the price of their securities, rather than to inform the market.5 In such circumstances, ASX has confirmed that it will not hesitate to suspend the entity and issue a query letter. ASX has previously advised that the market announcements platform is not to be used to publish material that is simply promotional in nature.6
Listed entities also need to consider the disclosure of their remuneration arrangements: for a myriad of reasons remuneration disclosure is an important consideration.
First, a newly listed entity7 will need to prepare, as part of its annual report, its inaugural remuneration report. The remuneration report will need to disclose the remuneration philosophy of the entity, setting out its overarching policies and practices. The remuneration report will also need to include specific remuneration details for the ‘key management personnel’8 of the entity. This level of transparency can feel uncomfortable for some newly listed entities.
Second, the remuneration report must be put to a shareholder vote at each annual general meeting.9 The vote is advisory-only and does not bind the directors or the entity.10 However, if an entity receives two consecutive ‘strikes’ against the remuneration report, it will be required to put a board spill resolution to the shareholders for a vote.
Third, if the entity is on the radar of proxy advisers, they will be particularly focussed on its remuneration arrangements. It will be important to understand the industry published guidelines at the time of determining remuneration arrangements.
The company secretary of a newly listed entity will be vital to establishing appropriate processes and procedures to assist in effective meeting management. Around the time of the first board meeting, it is a valuable exercise for all directors of the newly listed entity to discuss and agree a clear set of guiding principles or expectations for the operation of the board. The company secretary should ensure that all agendas for board and board committee meetings are clear and well-considered.
Around the time of the first board meeting, it is a valuable exercise for all directors of the newly listed entity to discuss and agree a clear set of guiding principles or expectations for the operation of the board
The company secretary should work with management on the content of board papers and meeting materials. The use of board paper templates is helpful to assist management to prepare papers that make it clear to directors what is being asked of them. For example, whether the paper is for approval, noting or discussion by the directors. This enables sound decision-making and will focus meeting time on the discussion of important issues.
Delivering meeting materials in a timely manner
While there are no strict rules, most listed entities aim to provide meeting materials a week ahead of board meetings, to allow directors appropriate time to review and consider the materials ahead of the meeting. While this is not always feasible (for example, in circumstances where a transaction is moving quickly, associated papers for decision may only be available at short notice), this is a good standard for management to aim for and is generally expected by non-executive directors who sit on listed boards.
When this timeline is not met, there can be angst between the board and management before the meeting even commences, which is not conducive to the running of a successful meeting. Directors may feel like they have not had an opportunity to review, consider and question matters they are being asked to make a decision on and could be nervous that they are not fulfilling their director duties. Management, on the other hand, may believe that matters are moving quickly so they cannot provide information in a timelier manner. The setting of clear expectations at the time of an IPO regarding the delivery of board papers will enable better board outcomes.
There is often a significant shift in the items that are considered by the board and the content of meeting materials pre- and post-IPO. Frequently in the private world, there is a more granular focus on the financials of an entity, whereas in the listed environment the focus of the board is broader and extends to culture, diversity, environmental, social and governance risks, reputation of the entity and information security.
Minutes are often (wrongly) viewed by some entities and boards as administrative in nature and a tick-the-box exercise. Following the exchange with the Chair of the Commonwealth Bank’s Board of Directors, Catherine Livingstone AO, during the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in 2018, where Ms Livingstone was questioned about the minutes of a meeting, minutes were thrust into the spotlight and many boards and management teams recognised the importance of a good set of minutes. Especially when those minutes may later be relied on as evidence.
A good company secretary will understand the appropriate level of detail to include in the minutes and importantly, what information should not be included.11 Minutes of a listed entity board meeting will in many cases be different to minutes taken for a private entity. There are number of reasons for this, including the following:
- the greater potential for legal action being taken by investors against the directors of a listed entity for an alleged breach of duties, or a regulator or court requiring the production of the board minutes
- often the boards of newly listed entities will include non-executive directors, who are also directors of other listed entities, and who bring with them certain expectations as to how the minutes should be prepared.
Changing rules and regulatory environment
Unfortunately for the company secretary of a newly listed entity, compliance is not just a matter of having a thorough understanding of the ASX Listing Rules. Corporate governance requirements and expectations are constantly evolving; a company secretary needs to keep on top of these changes.
In 2019 there has been significant change, including in the following areas:
- modern slavery reporting was introduced in January 201912
- the fourth edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations was released in February 2019,13 introducing an important new expectation of listed entities to instil and continually reinforce a culture of acting lawfully, ethically and responsibly
- significant changes to whistleblower laws were introduced in July 201914
- during 2019 Australian regulators continued to recognise the importance of entities and directors taking into consideration, and reporting on, climate-related risks15
- significant changes to the ASX Listing Rules are due to come into effect at the end of 2019.16
The Final Report of the Financial Services Royal Commission17 and the Australian Prudential Regulation Authority (APRA) Report into the Commonwealth Bank of Australia18 also provided some contemporary commentary on matters relating to governance, culture and accountability and the workings of boards and committees.
Chess Depositary Instruments (CDIs)
Over the past five years, the issue of CDIs on ASX by foreign entities has become increasingly popular. In the CDI environment, an Australian-based governance professional may be called upon to act as an ASX Listing Rule 12.6 (LR12.6) person responsible for communications with ASX.19 While not dissimilar to the role of the company secretary, this role provides an important ‘guiding hand’ through the Listing Rule obligations and requirements for the foreign entity issuing CDIs.
There are some key points and distinctions to be aware of in the first year of listing when taking on this role. Typically, an Australian-based governance professional acting as the LR12.6 communications person will not be a company secretary, or officer of the foreign entity (and query whether the jurisdiction in which the foreign entity is incorporated even contemplates the position of company (or corporate) secretary).
Consider whether the key corporate governance policies and charters of the foreign entity clearly identify the person inside the foreign entity who will be primarily responsible for reviewing, updating and monitoring compliance with those documents, which would ordinarily fall within the remit of the Australian company secretary. Although an external LR12.6 person can assist and provide guidance, given the external nature of the role, it is important that the foreign entity ensures that its obligations as outlined in corporate governance documents are imbedded and communicated within the entity.
As with an Australian-incorporated issuer, be familiar with the contents of the Admission Decision letter from ASX to the issuing entity. In particular, understand and be aware of any ongoing, post-admission obligations or Listing Rule waivers. For example, as a result of Delaware law, many Delaware-incorporated entities listing CDIs on ASX have a waiver from Listing Rule 14.2.1, to the extent that any proxy form for a notice of meeting need not include an ‘against’ vote for resolutions relating to the election of directors or appointment of auditors.
The earlier points made around continuous disclosure equally apply to issuers of CDIs. It is likely that the foreign entity-issuer would have had little or no exposure to the Australian market prior to listing, so may be starting from a low base in understanding this concept. Accordingly, there will be a need for a governance professional to underscore the importance of, and guide the foreign entity-issuer through, the nuances of continuous disclosure. In particular, the concepts of immediate notification, ensuring that information contained within an announcement is balanced, not misleading and can be verified, disclosing material contracts and providing performance guidance.
The Corporations Act will have limited applicability to the foreign entity. While it will be registered with the Australian Securities and Investments Commission (ASIC) as a foreign entity under the Corporations Act, and will need to comply with certain foreign entity reporting requirements, other aspects of the operation of the foreign entity will be regulated by the applicable laws in the place of its incorporation, as well as its constitution (or articles of association or by-laws and so on). This is particularly relevant around notice requirements for members’ meetings and the timing of the annual meeting of shareholders.
In some jurisdictions, such as the US, employee equity plans provide a significant part of the remuneration structure across the whole of the entity, and not necessarily at the senior executive level. Given the more rigorous continuous disclosure requirements for ASX-listed entities, a foreign entity-issuer should consider its approach to the drafting and ongoing maintenance of its employee equity plans. This includes the following:
- complying with the securities trading windows as set out in the entity’s securities trading policy
- timing during the year when options/convertible securities may be exercised and the entity’s approach to managing the subsequent issue of shares on conversion. This includes managing the fees to be charged by ASX for seeking quotation of the underlying CDIs.
As a newly listed entity on ASX, the board may include one or more Australian-based directors with experience of ASX-listed entities. This may mean that directors are spread geographically, which could present some logistical challenges for the board to meet and carry out its responsibilities. As mentioned earlier, not all processes undertaken by an Australian-incorporated listed entity will be relevant to a foreign listed entity and it would be good practice for the newly created board to discuss its approach to board operation and logistics. This may include the following:
- how many times the board and/or committee will meet
- whether the entity will employ video conference facilities to facilitate an easier flow of the meetings
- how non-executive directors can meet and interact with management (in person or in-camera) to get a feel for the culture of the entity, including the approach to safe work and health practices
- how minutes and resolutions (including written resolutions) will be prepared to comply with foreign and Australian regulatory requirements and to satisfy directors.
While the first year of an entity’s listing can be a challenging experience for governance professionals, and particularly for those not previously versed in listed entity practice and regulation, it also provides the governance professional with a hands-on, rewarding opportunity, working closely with the board, to influence and guide an entity through the beginning of its listed-governance journey.