Ratification under Listing Rule 7.4: what it refreshes, and what it cannot fix

Ratification is the cheapest capacity a listed company can obtain. A resolution at the AGM converts a completed placement from an issue that consumed Listing Rule 7.1 headroom into an issue treated as having been approved, and the headroom comes back. It is also the rule most often misdescribed in board papers, because it does two things that look similar and are not: it refreshes capacity, and it does not cure a breach.

How it works

Listing Rule 7.4 provides that an issue of equity securities made without security holder approval under Listing Rule 7.1 is treated as having been made with approval if two conditions are satisfied: the issue did not breach Listing Rule 7.1, and holders of ordinary securities subsequently approve it.

The consequence is mechanical. Once ratified, the securities cease to be counted against capacity and are counted instead as securities issued with approval, so the capacity the issue consumed is restored. Nothing else changes. The securities were validly issued before the resolution and remain validly issued after it. Ratification is about arithmetic, not validity.

Listing Rule 7.4.1 is the whole point

An issue that breached Listing Rule 7.1 cannot be ratified. This is the misconception worth killing. Ratification is not a retrospective cure, an amnesty, or a way of tidying up an over-issue. Where an entity has issued beyond its capacity, the position is a breach of the Listing Rules and the answer lies with ASX: a waiver, or whatever remediation ASX requires. Putting the issue to shareholders under Listing Rule 7.4 does not fix it, and the resolution itself is misleading if the notice does not disclose that the issue exceeded capacity.

The practical discipline is to check capacity at the time of the issue and record the calculation then, not when someone sits down to draft the AGM papers. An entity that only runs the numbers at notice-drafting time finds out about a breach months late and with fewer options than it had on the day.

What the notice has to say

Listing Rule 7.5 sets out the information a notice of meeting containing a ratification resolution must include. Draft it to the rule, not to a precedent from another company’s meeting:

• the number of securities issued and the date of issue;
• the issue price, and where the securities were issued for non-cash consideration, the details of that consideration and the current value ascribed to it;
• the terms of the securities;
• the names of the allottees, or the basis on which the allottees were identified or selected;
• the use, or intended use, of the funds raised; and
• a voting exclusion statement.

The names point is where notices go wrong. If the allottees are named, name them. If they are described by category, the description has to be meaningful enough for a shareholder to understand who received the securities and on what basis. A reference to sophisticated and professional investors identified by the lead manager is a category ASX accepts. It is not a licence to omit a substantial holder or a related party who participated.

Voting exclusions

The voting exclusion in Listing Rule 14.11 applies. Persons who participated in the issue and their associates are excluded from voting on the ratification. Build the exclusion into the notice, into the proxy form and into the count. An excluded vote that gets counted is a serious problem in a resolution whose entire purpose is capacity, because the capacity depends on a validly passed resolution and the entity will be relying on it for the next twelve months.

Where ratification is unnecessary

• Issues under an exception to Listing Rule 7.1. Listing Rule 7.2 contains exceptions covering, among others, pro rata issues and issues approved under Listing Rule 10.11. An issue that never counted against capacity has nothing to refresh. Ratifying it wastes a resolution and confuses the notice.
• Issues approved in advance under Listing Rule 7.1. Prior approval and ratification are different mechanisms with different notice requirements. Listing Rule 7.3 governs the notice for a prior approval and requires the securities to be issued within the applicable period after the meeting, failing which the approval lapses and the securities fall back into the capacity calculation. Acquisition consideration securities are normally dealt with by prior approval, not by ratification after the fact, and a board paper that proposes to issue consideration shares "under Listing Rule 7.4" has the mechanism the wrong way round.
• Related party issues. An issue to a related party requires approval under Listing Rule 10.11 and, separately, consideration under Chapter 2E. Ratification under Listing Rule 7.4 is not a substitute for either, and there is no ratification equivalent in Listing Rule 10.11.

Getting the housekeeping right

• Ratify at the AGM as a matter of course. There is no reason to carry consumed capacity into a new year where the issue can be ratified.
• Put each issue in its own resolution rather than bundling them. A single defective allotment should not take down the ratification of every other issue in the period.
• Reconcile the resolutions against the issue register before the notice is finalised, so that every non-excepted issue is accounted for and the ratified figures match the Appendix 2A and Appendix 3G record.
• Recalculate capacity immediately after the meeting and give the corrected number to the board and to the broker. The point of ratification is the headroom, so it is worth knowing what it is.

How Luma Legal can help

We prepare AGM notices for ASX-listed entities including ratification and approval resolutions, run the capacity reconciliation behind them, and advise on the position where an issue may have exceeded capacity. If there is any doubt about whether an issue was within Listing Rule 7.1 at the time it was made, that question needs answering before the notice is drafted rather than after it is despatched.