An overview of the proposed JSE Market Segmentation Project

Introduction

The Johannesburg Stock Exchange (the "JSE") has seen an uptick in delisting transactions across various sectors in recent years. Various reasons have been cited as driving this trend, including the cost of compliance associated with being listed on the JSE. On 18 April 2024, the JSE published a notice announcing various proposed amendments to the JSE Listings Requirements ("Listings Requirements") as part of their market segmentation project. It appears that these proposed amendments are aimed at reducing the legal and administrative requirements imposed in connection with certain corporate actions and transactions, which is likely to reduce the compliance costs associated with transactions.

Proposed market segmentation

Currently, the JSE is comprised of a two-tiered equities market, namely, the Main Board and AltX. The proposed market segmentation project would result in the current Main Board being further split into two sections, being the Main Board prime segment ("Prime Segment") and the Main Board general segment ("General Segment").

Under the proposed amendments, the Prime Segment would be the default position and listed companies would have to apply to the JSE for classification under the General Segment. In making this determination, the JSE will consider whether the applicant is included in the FTSE/JSE All Share Index. The JSE will approve the application provided the applicant issuer is not included in the FTSE/JSE All Share Index. For new listings, the JSE will consider the likelihood of the applicant being included in the FTSE/JSE All Share Index in the near future. Any issuer in the General Segment that has been included in the FTSE/JSE All Share Index for 12 months will be excluded from the General Segment.

Proposed Amendments

Set out below are notable variations to the Listings Requirements that will apply to issuers approved for the General Segment subject to the provisions of the Companies Act, 2008 ("Companies Act") and the company's memorandum of incorporation.

Categorisation of transactions

Section 9 of the Listings Requirements classifies certain transactions (principally acquisitions or disposals) into categories based on percentage ratios that are calculated using various factors, such as market capitalisation, transaction value and dilution. In essence, category 2 transactions are transactions with a percentage ratio of 5% or more but less than 30%. Category 1 transactions are transactions that have a percentage ratio of 30% or more or if the total consideration is not subject to any maximum. The amendments propose an increase to the percentage ratio for category 1 transactions from 30% to 50%. Category 1 transactions require the issuer to publish a circular and call a meeting of shareholders for approval. Thus, issuers in the General Segment will be able to implement a greater number of transactions without having to comply with the circular requirements applicable to category 1 transactions, as the threshold for category 1 transactions has been increased.

Financial Reports

For new listings, the applicant issuer is not required to provide historical financial information of any category 1 transaction implemented in the current year or preceding financial year.

Section 3.15 of the Listings Requirements mandates listed companies to publish interim or quarterly condensed financials within prescribed timelines. The proposed amendments do away with this requirement for companies in the General Segment.

Transactional Compliance

Section 6.19(h) of the Listings Requirements provides that a company is required to prepare a pre-listing statement if it issues securities exceeding 50% of its issued securities (in that same class) over a three-month period. Under the proposed amendments, this obligation is only triggered for issuers in the General Segment if the issued securities over a three-month period exceed 100% of the issued securities of that class.

The following corporate actions no longer require a fairness opinion when implemented by a General Segment issuer:

• a specific issue in terms of section 5.51(f) of the Listings Requirements;
• a general issue of options/convertible securities in terms of section 5.53(b) of the Listings Requirements;
• a specific repurchase in terms of section 5.69(e)(ii) of the Listings Requirements;
• a related party transaction in terms of section 10.4(f) of the Listings Requirements; and
• a small-related party transaction in terms of section 10.7 of the Listings Requirements.

However, in the above circumstances, the related party corporate action agreement must be open for inspection. In addition, the independent members of the board must prepare a statement confirming that (i) the corporate governance processes have been adhered to for the approval of that corporate action, (ii) no related parties or associates participated in voting, and (iii) the corporate action was concluded on an arm's length basis and is fair to shareholders.

Repurchase transactions and share issuances

The requirements for the approval of repurchases and share issuances in respect of the General Segment have been relaxed in the following manner:

• a general authority to issue shares for cash does not require shareholders' approval, provided it does not exceed 10% of the issuer's issued share capital, as at the date of each annual general meeting. Issuers in the Prime Segment will still require approval of shareholders holding 75% of the voting rights;
• in respect of a specific authority to repurchase securities from parties other than related parties, shareholders' approval is not required provided it does not exceed 20% of the issuer's share capital in any one financial year. A special resolution will still be required for issuers listed in the Prime Segment; and
• a general repurchase of securities will not require the approval of a special resolution of shareholders.

It must be noted that section 48(8)(b) of the Companies Act currently provides that any repurchase of shares in excess of 5% of the shares in a class must be approved by a special resolution and the board is required to procure that an independent expert report contemplated in section 114(3) is compiled and presented to shareholders before they vote on such a matter. However, the Companies Amendment Bill [B27-2023] ("Amendment Bill") repeals section 48(8) and exempts any repurchase transactions implemented by listed companies from the special resolution requirement. The Amendment Bill has been approved by the National Assembly and shall come into effect once signed by the President.

Conclusion

It must be noted that issuers may prescribe additional compliance requirements in their memoranda of incorporation, which may impose similar requirements to those that have been relaxed in terms of the proposed amendments.

The JSE has invited the submission of comments on the proposed amendments by no later than 20 May 2024.