Capital consolidations for ASX-listed companies: the resolution, the timetable and what the ratio does to your options

A consolidation is one of the simplest corporate actions on paper: an ordinary resolution under section 254H of the Corporations Act 2001 (Cth), a ratio, and a new number of securities on issue. In practice it touches every convertible security on the register, the unmarketable parcel position, escrow, and the way ASX calculates placement capacity. Most of the work sits downstream of the resolution.

The resolution

Section 254H allows a company to convert all or any of its shares into a larger or smaller number by ordinary resolution passed at a general meeting. The resolution should state the ratio and the effective date, and deal expressly with the treatment of fractions.

Listing Rule 7.20 governs the notice of meeting. Rather than restating the rule, use the notice to answer the questions shareholders will actually have: what happens to their holding, what happens to their options, what happens if they end up with a fraction, and what happens if they are left with a parcel too small to sell.

Ratios must be expressed as whole numbers. A fractional ratio has to be multiplied up, so a ratio of one for one and a half is expressed as two for three. Settle this before the notice is drafted, because the ratio drives the option adjustment arithmetic and the arithmetic is what the market will check.

Consult ASX before you announce a timetable

This is the step that gets skipped. Appendix 7A requires the entity to consult ASX before publishing a timetable for a consolidation, so that ASX can confirm the timetable is acceptable. The Appendix 7A timetable assumes an Australian company acting under section 254H. A trust or a foreign company must consult ASX on the changes needed to accommodate its constitution or its governing law. If the entity later becomes aware it cannot meet the announced timetable, it must immediately consult ASX and announce a new timetable acceptable to ASX.

The notification is made on the Appendix 3A.3 online form under Listing Rule 3.10.1(a). The form asks for the securities on issue before and after the consolidation, and for the exercise price of options before and after. Where the numbers are estimates at lodgement, the actual figures must follow as soon as reasonably practicable and no later than the issue date.

What it does to convertible securities

Consolidation is where option registers come apart. Listing Rule 7.21 governs the treatment of convertible securities, Listing Rules 7.22.1 and 7.22.2 govern options specifically, and Listing Rule 7.24 deals with partly paid securities. The effect for options is that the number of underlying securities is consolidated in the same ratio and the exercise price is adjusted in inverse proportion, so the aggregate exercise price is unchanged.

• Run the adjustment for every class of options and performance rights before the notice goes out, and check the answer against the terms of issue. Where the terms of issue and the Listing Rules produce different answers, the mismatch needs to be identified rather than discovered.
• Performance rights with vesting hurdles expressed as share prices or market capitalisation need the hurdle adjusted as well. The Listing Rules do not do this for you. The terms of issue have to, and if they do not, the hurdle becomes either trivial or unreachable overnight.
• Convertible notes with a fixed conversion price need the same treatment, and the note terms usually contain their own adjustment clause that may or may not align with the Listing Rules.

Fractions and unmarketable parcels

Deal with fractions in the resolution. The standard approach is rounding up to the nearest whole security, which is simple and avoids a residual cash payment mechanism. Rounding down or cashing out fractions is possible but adds administration for very little benefit at small-cap scale.

The larger issue is unmarketable parcels. A consolidation at a meaningful ratio will convert a long tail of small holders into holders of parcels worth less than the unmarketable parcel threshold. Those holders cannot economically sell, and the registry cost of servicing them continues indefinitely. The Listing Rules and the constitution provide the machinery for a sale facility to deal with them, and the sensible time to consider it is at the board meeting that approves the consolidation, not a year later when someone reviews the registry invoice.

The trap: consolidation does not refresh your placement capacity

Boards sometimes assume a consolidation resets the Listing Rule 7.1 position. It does not. Guidance Note 21 makes the point directly: where an entity has consolidated, subdivided or otherwise reconstructed its capital during the relevant period, ASX will make appropriate adjustments to the variables in the capacity formula so that the calculation reflects the reconstruction. The capacity you had before the consolidation is the capacity you have after it, expressed in post-consolidation securities. Anyone modelling a post-consolidation raise off the new share count, without adjusting the historical issue record, will overstate the headroom, and the overstatement is discovered at the worst possible moment.

Restricted securities and securities subject to voluntary escrow are consolidated with everything else and remain restricted. The consolidation does not shorten the escrow period, and the Appendix 3A.3 should be consistent with the entity’s escrow records.

Practical sequence

• Settle the ratio and model the effect on every class of security, including options, performance rights, convertible notes and partly paid securities.
• Model the unmarketable parcel tail at the proposed ratio and decide whether a sale facility runs with the consolidation.
• Consult ASX on the timetable before anything is published.
• Draft the notice of meeting to Listing Rule 7.20, and check the fraction and rounding treatment against the constitution.
• Lodge the Appendix 3A.3, and diarise the actual figures if estimates were used.
• Recalculate Listing Rule 7.1 and 7.1A capacity on a post-consolidation basis before the next raising is discussed with a broker.

How Luma Legal can help

We run consolidations for ASX-listed entities, including the ratio analysis, the convertible security adjustments, the ASX timetable consultation and the notice of meeting. Consolidations are frequently done immediately before a raising or a transaction, and the sequencing between the consolidation, the capacity calculation and the offer is where the value sits.