Clayton Utz Insights
02 August 2012
By Stuart Byrne and Addison Ma.
The introduction of new fundraising rules in the ASX Listing Rules should provide more flexibility and ability for small to mid cap companies to raise additional capital. But remember to get approval at the AGM first as you only get one chance a year.
ASX's new fundraising rules for small to mid cap companies kicked off on 1 August 2012. This set of new rules was originally proposed in April 2012. For ASX Listing Rule changes, they generated a fair amount of passion and angst and ASX tweaked these reforms in response. The changes won't be for everyone, but certainly if the market understands that you will need capital in the short to medium term, the flexibility they offer should be considered by eligible companies.
One of ASX's aims was to help improve access to capital and funding for small to mid cap companies. Where these companies have a narrow range of shareholders, the usefulness of pro-rata rights issues as a fundraising tool is limited. Further, with speculative investments, the ability to return regularly to shareholders for further injections of capital on a pro-rata basis can also be limited. As such, placements (to institutional investors) are a very common and crucial source of capital for these companies. ASX analysis showed that in 2011, placements provided close to 70% of the secondary capital needs for small to mid cap companies.
Under the current rules, a company is able to issue up to 15% of its issued capital on a non pro-rata basis without shareholder approval in any rolling 12 month period. The effect of the new rules is to allow an eligible company to issue an additional 10% of its issued capital, bringing its total head-room or placement capacity to 25%.
The new requirements are as follows:
Eligibility: You must not be in the ASX/S&P 300 Index and must have a market capitalisation of less than $300m as at the date of your AGM.
Approval: You must obtain shareholder approval by special resolution (at least 75% in favour) at your AGM. The original draft April 2012 amendments only required approval by ordinary resolution.
Discount: The additional 10% can only be discounted to a maximum of 25% to market price.
Disclosure requirements: New disclosure obligations will apply where the special resolution is proposed at the AGM, when securities are issued and when any further approval is sought. Among other things, you will have to explain:
- the purpose of the issue;
- its impact on current shareholders (eg. dilution);
- the allocation policy;
- why the issue is via a placement and not as or in addition to a rights issue; and
- the fees and costs involved.
What happens if the company is no longer eligible?
You must be eligible as at the date of the AGM. Provided a special resolution is passed at the AGM, the approval to issue under the additional capacity will be valid for 12 months (or earlier if there is a major change of activity or disposal of main undertaking under the Listing Rules) irrespective of whether you enter the ASX/S&P 300 or if your market capitalisation exceeds $300m during those 12 months. Of course, if you do not meet the eligibility criteria at the next AGM, you won't be able to renew or apply for approval.
AGMs only happen once a year
Approval for additional capacity must be obtained at an AGM. It cannot be approved at any other securityholder meeting. It may seem obvious but as an AGM only occurs once a year, if you are considering future capital raisings (and using the additional head-room), you need to be prepared before your AGM to comply with the various notice and disclosure requirements. If you do not obtain approval at the AGM, you will need to wait another 12 months before getting another chance.
Notice disclosures require a small crystal ball
The notice of approval for additional head-room must contain certain disclosures about the purpose of the proposed issue(s) and the allocation policy. These disclosures may be difficult to determine, particularly as it may not be known at the time of the notice why and to who any future placements may be made to. This could potentially limit your flexibility as future raisings under the approval may be constrained by the disclosures made when approval was sought (potentially 12 months ago).
With respect to the disclosure of allocation policies, ASX states that you must provide "as much detail as is reasonably practicable in the circumstances". We suspect that with the first wave of notices under the new regime, the wording will be particularly generic so as not to restrict future issues. We would also expect companies to discuss the form of wording with ASX as part of the normal ASX approval under the Listing Rules for notices of AGM (and documents requiring approvals under the Listing Rules).
We also suspect that in reality, the approval for additional head-room will be most useful when no proposals to conduct a placement are currently being considered. By their nature, placements are executed quickly and it may prove to be the case that the long time frame required to draft the AGM notice, obtain ASX's approval, dispatch the notice to shareholders, wait the required notice period and hold the meeting may not lend itself to an actual live placement. The situation where definitive statements about placement purpose and allocations may be given in a notice may therefore never arise.
Who to exclude from the vote?
A voting exclusion statement is also required to be disclosed in your notice. You must state that any votes from particular securityholders (or a class of) will be disregarded from the approval vote. This will apply in relation to those securityholders who may participate in the proposed issue or who may gain an advantage from the passing of the resolution. A note in the Listing Rules states that this participation must be more than a "mere possibility".
An interesting issue may arise where a major securityholder is not excluded from the vote and subsequently participates in a placement that is authorised under the approval and the company has no intention or understanding at that time that the particular securityholder would be approached to participate in a placement. This should be permitted where no capital raising was planned at the time of seeking approval. But care should be taken to ensure that the voting exclusion doesn't apply to avoid an invalid approval (and breach of the Listing Rules) or misleading or deceptive conduct.
What can we do now?
If you are an eligible company that may need funds in the next 12 months and the market understands this is possible, you should consider whether seeking approval for additional placement capacity under Listing Rule 7.1A is prudent bearing in mind that approval can only be sought at your AGM.
Given that approval does not oblige you to conduct a placement, seeking approval at your AGM, regardless of whether or not there are any future capital raisings in the pipeline, at least gives you the flexibility of using the additional head-room if required.
On the other hand, if the market does not think that you are in need of additional capital however, you should think carefully and talk to your financial and legal advisers, as seeking approval for additional head-room could send a negative signal to the market and put downward pressure on your stock price.
The new changes also included a change to the spread and net asset test admission requirements, and these will take effect on 1 November 2012.
 Determined by the 15 trading day VWAP to the date the placement price is agreed, or if securities are not issued within 5 trading days of the price being agreed, to the date before securities are issued. [back]
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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.
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