Further to our previous note ASX, in consultation with ASIC, has updated the two temporary emergency capital raising relief class waivers it granted on 31 March 2020 (being the temporary placement capacity waiver and the non-renounceable offers waiver).
The main purpose of the amendments is to:
- clarify that the class waivers are focused on facilitating capital raisings in circumstances where there is an urgent need for capital to address issues arising in relation to COVID-19 or its economic effect; and
- require specific disclosure about the allocation process for placements that use the expanded capacity,
while making some tidy up and consistency changes.
ASX has made these amendments in response to concerns from institutional and other investors about the use of the expanded placement capacity, in particular regarding allocation of securities on an other than pro rata basis. Further, ASX is seeking to ensure that the emergency capital raisings facilitated by the class waivers are limited to those related to funds required in relation to COVID-19 or its economic effect.
We note that placements are not required to be offered pro rata. They are not entitlement offers, and a range of factors determine allocations. It is our experience that Boards and their advisers were already very cognisant of dealing appropriately with their institutional shareholders in undertaking placements. However, Boards need to retain the flexibility to allocate shares appropriately, including to seek to ensure the smallest possible discount (which benefits in particular shareholders who are not participating) and obtain underwriting, both of which may in some circumstances require an element of non pro rata allocation.
We have provided a brief overview of the key amendments and ancillary amendments below as well as some points directors of issuers should be considering about allocations.
Notifying ASX of intention to use a class waiver
ASX has made it clear that entities wishing to take advantage of a class waiver must write to ASX notifying it of their intention to do so before undertaking the placement or non-renounceable offer. That written notification (which will not be for release to the market) must also explain the circumstances of the proposed capital raising including whether the capital raising is to raise urgently needed capital to assist the entity to address issues raising in relation to COVID-19 (or its economic impact) or for some other purpose.
ASX has signalled that it may withdraw a class waiver from a particular listed entity at any time and for any reason. This power could be used to restrict access to the class waiver by entities seeking to raise funds for non-COVID-19 reasons, but it will be interesting to see how the power is used in practice – noting that many companies which have raised funds in recent weeks have done so for a combination of purposes, including both strengthening their financial position in the face of COVID-19 related challenges and positioning themselves for future growth.
ASX has also foreshadowed that the class waivers may be withdrawn before their scheduled expiry at the end of July 2020.
Updates to the temporary placement capacity uplift
- Entities must make certain disclosures to the market in relation to the outcome of the placement within 5 business days of completing it. Those disclosures relate to the entity’s approach to identifying investors who were invited to participate in the placement, the key objectives and criteria for determining allocations (including whether one of those criteria was a ‘best effort’ to allocate existing securityholders their pro rata proportion of the placement) and significant exceptions to or deviations from the criteria, and a statement that to the entity’s knowledge no allocations were made to related parties and certain substantial holders (subject to limited exceptions).
- Following completion of the upsized placement, entities must give ASIC and ASX detailed allocation spreadsheets identifying the persons to whom securities were allocated (including their name, existing securityholding, how much they applied for and how much they were allocated). This requirement also applies where a person who bid above the final price was allocated no stock. Allocation spreadsheets will not be released to the market.
- To qualify for the 25% capacity, a placement may be followed by a standard rights issue (i.e. it does not have to be an accelerated rights issue) – this is designed to assist entities that do not have large institutional registers, as accelerated entitlement offers are of limited benefit to them.
- Where an SPP offer is capped and undertaken in conjunction with an upsized placement, in addition to the entity using reasonable endeavours to ensure that SPP participants are given an opportunity to participate equitably in the overall capital raising, entities must explain why a cap was imposed and how the cap was determined relative to the total capital raising.
- ASX has clarified that the relaxation of the criteria for issuance under an SPP to qualify as exception to Listing Rule 7.1 will also apply in relation to the SPP exception from Listing Rule 10.11, meaning related parties’ (including directors) and certain substantial holders can participate on the same terms as other securityholders.
ASX has also clarified certain ancillary matters, including that:
- where an entity has partially utilised its existing 15% listing rule 7.1 placement capacity or any additional 10% listing rule 7.1A capacity, that used capacity is not ‘refreshed’ by the temporary extra placement capacity class waiver; and
- SPP scale-backs on a pro rata basis may be based either on the size of an existing securityholder’s pre-capital raising securityholding or their application size.
ASX has also reminded listed entities wishing to apply for back-to-back trading halts to make that request clear in their trading halt application, and that consecutive trading halts are not permitted for purposes other than considering, planning and executing a capital raising.
These updates apply to capital raisings announced on or after 23 April 2020, and only affect raisings which need to rely on the ASX’s temporary class waivers (e.g. for 25% placement capacity).
ASIC issued a statement in support of the ASX’s changes, warning that it will be reviewing allocation spreadsheets and monitoring disclosure “to ensure they are accurate, sufficiently detailed and provide meaningful, rather than ‘boilerplate’ disclosure”.
Regardless of whether entities utilise ASX’s temporary class waivers, ASIC has encouraged all entities to provide the same level of disclosure about placements and SPPs as required by the class waivers.
Side effects of allocation disclosure
The heightened transparency required by ASX’s amendments should be considered against the backdrop identified in ASIC’s Report 605: Allocations in equity raising transactions which noted that there is an implicit understanding that the starting point for allocation in a placement is to offer existing securityholders a pro rata allocation. Based on recent media commentary, it seems that a number of institutional shareholders, proxy advisers and others now consider that pro rata allocation is an explicit requirement. However, as we mention above, there is no requirement for companies undertaking a placement to offer new securities to existing security holders.
Report 605 does not conclude that there is a requirement for pro rata allocation in a placement and acknowledges that the objectives of an issuer in addition to raising funds may include adding new long-term institutional investors to the register, to provide or increase liquidity, broadening the investor base and maximising the price at which securities are issued
In making allocation decisions directors need to discharge their duties to act in the best interests of the company. There are legitimate reasons why those best interests may not always be served by allocations that are pro rata for existing shareholders. However, with the knowledge that allocation decisions will be laid bare as part of the requirements to use the extra placement capacity, additional unnecessary pressure may be placed on a Board that deviates from fairly strict pro rata allocations to existing securityholders who are eligible to participate.
This is an important discussion well beyond the period of application of the temporary emergency capital raising relief because of ASIC’s commentary outlined above that it considers that the enhanced disclosure required under ASX’s temporary waiver is also appropriate for all other capital raisings that do not need to rely on the class waiver.
What Boards need to be thinking about in relation to allocations
In this environment, directors of issuers undertaking capital raisings should:
- engage with the investment bank managing the capital raising in advance of the offer to settle the proposed approach to allocations and following the bookbuild, to finalise the allocations in accordance with the issuer’s objectives. Our experience is that Boards were already doing this;
- consider how allocation decisions are made and approved and how the process might be documented in a way that provides an appropriate record without creating burdensome procedure (given that such decisions are being made and approved in very short periods of time);
- consider the treatment of existing securityholders as part of the allocation policy in the case of a placement or control implications in a rights issue, but not lose sight of the overall objectives of the capital raising. Again, our experience is that Boards were already doing this;
- expect scrutiny of allocations and criticism (both direct and through the media) by existing shareholders unhappy with their allocations (or lack thereof); and
- carefully scrutinise the proposed disclosure around allocations in any ASX announcements about the capital raising.
If we can be of any assistance, please phone or email any of these key contacts:
The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2020