Following Compliance Update no 03/20 and two temporary class waivers providing emergency capital raising relief measures, and subsequent changes in Compliance Update no 04/20 to these temporary class waivers on 22 April 2020, ASX has now released Compliance Update no 05/20 on 1 May, in which it announced that it has published amended versions of the temporary class waivers that were issued on 23 April 2020, as well as observations on some other listing rule matters.
The further update from ASX seeks to clarify the operation of the waivers and includes guidance from ASX on the need to engage with ASX early in relation to proposed reliance on the class waivers and to ensure entities relying on the class waivers try to structure capital raisings in a way that is equitable to existing shareholders.
What do ASX-listed entities need to consider?
Enhanced disclosure requirements for placements
ASX has clarified that the allocation spreadsheet to be provided to ASIC and ASX within 5 business days of completing the placement must also contain details of applicants who applied for securities at or above the final price but did not receive an allocation in the placement.
Notice of reliance
Both class waivers have been amended to make clear that the notice of reliance must be provided to ASX:
- before offering any securities (in respect of placements); and
- before the offer is announced (in respect of entitlement offers).
Early engagement with ASX recommended
In the updated temporary class waivers issued on 22 April, ASX made clear that it has the power to withdraw the class waivers either in respect of a specific listed entity, or generally.
In Compliance Update no 05/20 issued on 1 May, ASX recommends that entities proposing to rely on the class waivers should engage with ASX early – as ASX will need to understand the structure and purpose of the capital raising, including proposed allocation policy for any placement, in considering whether or not to exercise its power to prohibit an entity from relying on the class waiver. ASX does not want to be advised of a capital raising the evening before it is launched.
ASX appears to be drawing a distinction between capital raisings being undertaken for urgent funding, as opposed to raisings providing capital for future opportunities. While ASX is not precluding entities from relying on the temporary class waivers where the capital raising is not being conducted in response to COVID-19, the Compliance Update indicates that ASX will likely prohibit an entity from relying on the class waiver where it considers the capital raising contains "inequitable features" for existing security holders, particularly where the capital raising is being undertaken for growth opportunities or unidentified future acquisitions. Where the capital raising appears to ASX to have been structured equitably, ASX is unlikely to withdraw the benefit of the class waiver even if it is not specifically COVID-19 related. Critically, equal treatment of existing shareholders appears paramount to ASX's considerations here.
Convertible notes and listing rule 6.1
ASX has also taken the opportunity to remind listed entities of listing rule 6.1 which requires that the terms that apply to each class of equity security must, in ASX's opinion, be appropriate and equitable. Of particularly note to ASX are the terms that have attached to convertible notes that are being issued by smaller listed entities in need of cash and ASX's concern that those terms may be highly dilutive to existing security holders. Again, equitable treatment of existing security holders seems to be front of mind of ASX in dealing with companies raising capital at the moment. ASX again suggests entities consult with ASX at the earliest opportunity and be able to defend the issue of any security which is dilutive to existing holders (including, for example, whether alternative sources of funding options were considered).
As mentioned in our previous update, ahead of launching a capital raising relying on ASX's temporary COVID19 relief measures, ASX-listed entities and arrangers will need to be prepared to be able to justify to ASX the reasons for the capital raise and expect further scrutiny from ASX and ASIC with respect to its allocation policies.
In this latest update, ASX is particularly focused on ensuring existing shareholders are not disadvantaged by entities' capital raising plans. Boards of ASX-listed entities will need to be able to show how the capital raising is equitable to new shareholders and, if it is dilutive, the reasons why the entity decided to raise funds in that manner.