On 12 April 2019, the JSE published for comment proposed amendments to its Listings Requirements to strengthen the regulation of primary listings and secondary listings. The proposed changes take account of the public comments raised during the consultation process that kicked off in September 2018 after the JSE released a consultation paper (Paper) on "possible regulatory responses to recent events surrounding listed issuers and trading in their shares" (click here to read our e-alert on the Paper).
We set out below an update on how the proposed amendments will affect primary listings. Interested parties are invited by the JSE to submit comments by 24 May 2019.
Enhanced corporate governance oversight
Initial proposals which are not being pursued
A key issue addressed by the Paper was the need for a more robust corporate governance oversight of listed companies. As part of a package of proposals related to this issue, the Paper tested proposed mandatory non-binding advisory shareholders votes on: (i) the corporate governance report; and (ii) board diversity. The JSE, however, decided not to pursue these proposals in light of existing shareholder protections and certain reservations expressed during the consultation process. Specifically, on the vote on board diversity, the JSE found favour with the argument that shareholders already have the power to approve the composition of the board through their vote on directors' appointments.
The JSE also elected not to proceed with the proposals for mandatory formal training for members of the audit committee and the company secretary. The JSE agreed with comments that the Companies Act 2008 and the Listings Requirements provided sufficient measures to ensure the quality of these functions.
Key proposals in line with the Paper
In line with the themes raised and proposals tabled in Paper, the JSE has decided to pursue the following:
- board diversity: the JSE proposes that issuers be required to adopt a policy on the promotion of broader diversity on the board, focusing not only on gender and race but also on the promotion of other diversity attributes such as culture, age, field of knowledge, skills and experience, and that the company publish its performance against the policy annually;
- disclosure of compliance with applicable laws: the JSE proposes that the social and ethics committee (SEC) of the issuer must make a positive statement in the pre-listing statement (PLS) that it has complied with its mandate set out in the Companies Act 2008 (Act), read with the Companies Regulations 2011. The SEC must also either state that there is no material non-compliance to disclose, or disclose any such material non-compliance. This disclosure obligation places significant responsibility on the SEC. The board of directors will also be required to make a positive statement in the PLS that the issuer complies with the provisions of the Act in relation to its incorporation and that it operates in conformity to its constitutional documents; and
- disclosure of material risk factors: currently, only mineral companies are required to include a section on material risk factors in their PLS. The JSE proposes that all issuers must include in their PLS a description of material risks which are specific to the issuer, its industry and/or securities. The disclosure of risk factors must also be made in the issuer's annual financial statements, but may be incorporated by reference to the disclosures in the PLS.
New proposed amendments
The JSE proposes other key changes that were not originally tabled in the Paper but that the JSE considers necessary to address issues highlighted by the Paper. These include:
- appointment of sponsor: issuers must appoint an independent sponsor (as was the case prior to September 2014);
- appointment of auditor: the appointment of the auditors of listed companies must be approved by shareholders at each annual general meeting. Accordingly, auditors may no longer be reappointed automatically without resolution to that effect;
- audit committee: the audit committee is tasked with ensuring that the issuer has established appropriate financial reporting procedures and that those procedures are operating. The JSE proposes that the audit committee must, as part of this function, consider the group structure of the issuer to ensure it has access to all the financial information to effectively prepare and report on its financial position. This is particularly relevant for issuers that form part of a complex group structure;
- CEO and FD responsibility statements: the chief executive officer (CEO) and financial director (FD) will be required annually to give substantive responsibility statements, including in respect of the accuracy and completeness of the company's annual financial statements and the existence and efficacy of the company's internal financial controls;
- dealings in securities: it is proposed that dealings by "prescribed officers" in securities also be disclosed (in addition to disclosure by directors and the company secretary), and that an announcement obligation arises for agreements giving rise to security interests over shares at the time the agreement is concluded, at the time of any exercise of the lender's rights thereunder and at the time of any amendment or termination of the agreement; and
- repurchase of securities: the provisions of the Listings Requirements on repurchase of securities will be amended to clarify that they also apply to repurchases by foreign incorporated primary listed issuers.
Stricter entry criteria for listings on the Main Board
The JSE proposes stricter listing criteria for entry on the Main Board. The proposed changes relate to the following criteria:
- subscribed capital requirements: the JSE abandoned the proposal to increase the minimum subscribed capital requirements for companies wishing to list on the Main Board. However, it proposes to strengthen these requirements by requiring companies to have accumulated the minimum subscribed capital during the three financial years before listing and not through listing;
- shareholder spread requirement: the JSE proposes to narrow the definition of public shareholders to exclude: (i) closely held shares linked to the directors, their associates, their extended family, management of the company; (ii) shares held subject to a six months or longer restricted dealing period and (iii) shares held by persons and their associates which in aggregate exceed 5%. On introduction of the listing, the board of directors will be required to make a positive statement in the PLS that the public shareholder requirement has been achieved and the basis for this conclusion; and
- new listing announcement: companies applying for a listing on the JSE will need to publish an announcement on SENS 10 business days (increased from 5 business days) prior to the date of listing to give investors sufficient time to assess the listing. Sponsors and boards of directors will also be required to confirm in writing to the JSE that no material objections were reported to either of them in respect of the listing during that period.
Some issuers and prospective issuers may heave a sigh a relief at the abandoned proposals originally mooted in the Paper. However, investors concerned by the recent scandals that rocked listed companies may think the proposed amendments do not go far enough to address their concerns.
Written by Elodie Maume, Senior Professional Support Lawyer & Colin du Toit, Partner at Webber Wentzel