Austria: New Trends In Equity Offerings

This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.

Although the Vienna Stock Exchange has not seen any IPOs recently, a number of Vienna listed companies have recently increased or are planning to increase their share capital by way of a rights issue. After the sharp downturn of equity capital markets at the peak of the financial crisis, equity capital markets transactions are slowly coming back. However, the situation has changed and issuers often decide to increase the share capital only if subscription of the new shares can be ascertained, for instance by backstop investors.

The last company to go public in a large IPO on the Vienna Stock Exchange was STRABAG SE in October 2007. Other IPOs still planned for the end of 2007 were cancelled shortly before their launch. Since then capital markets and, in particular, equity capital markets have suffered dramatically from the worldwide financial crisis, not only in Austria but worldwide. The year 2008 saw capital increases of some Austrian issuers, such as WIENER STÄDTISCHE Versicherung AG, Vienna Insurance Group and UNIQA Versicherungen AG. In 2009 the activity on equity capital markets has increased (starting from a very low level) in the form of rights issues. For instance, PORR, a construction company, Wienerberger AG, KTM Power Sports AG and most recently Erste Group Bank AG have launched capital increases in 2009, and the market is speculating about further rights issues which may still be launched in 2009 or early 2010.

The backstop alternative

In difficult market conditions issuers are prepared to approach investors only if they have sufficient deal certainty and are confident that the entire increase of share capital can be placed with investors. Since (strategic or financial) investors are looking for investment opportunities (also in equities) and may also be prepared to acquire larger participations in a company, such investors may also be prepared to backstop a capital increase. This means that those investors who often may not have been shareholders of the company so far are prepared to subscribe for either all new shares not subscribed for by the existing shareholders (exercising their subscription rights) or at least a certain number of such shares, giving them their desired participation in the company. This implies that the issuer and the backstop investor agree either on a maximum subscription price (and the subscription price as determined in the bookbuilding will be lower or equal to that maximum subscription price) or that the rights issue is made at a fixed subscription price.

In its most simple form, a backstop investor simply agrees with the company to subscribe for any of the newly issued shares which are not subscribed for by the existing shareholders (or at least the free float shareholders). If the new investor who backstops the rights issue insists on achieving a certain minimum participation in the company, it may also have to enter into an agreement with certain existing core shareholders of the issuer that they will not exercise or transfer their subscription rights or, if necessary, sell a certain number of their shares to the new investor.

In other situations, a combination of a backstop investor with a hard underwriting by the investment banks acting as managers may be required, as was the case in the recent rights issue of Wienerberger AG. In this transaction, the Libyan Investment Authority as backstop investor entered into a commitment to acquire up to 10% of the total number of shares of the company (resulting in subscribing slightly less than 1/3 of the newly issued shares) for a fixed subscription price. The managers agreed to subscribe for those new shares not placed in the offering. In this case, the backstop commitment was not sufficient to ascertain placement of all new shares, so the managers entered into a hard underwriting commitment. This is contrary to equity capital markets practice in recent years where the managers only entered into soft underwriting commitments on a best efforts basis.

In volatile markets, the issuer (and the investment banks) strive to complete the increase of share capital in a very short time frame. Under certain circumstances, a prospectus will not be required at the time the new shares are offered to the existing shareholders.

No prospectus if no public offer

According to Austrian practice, an increase of share capital in the form of a rights issue is not a public offer if the newly issued shares are available exclusively to the existing shareholders (and if the shares of the issuer are already listed on a regulated market) and if any new shares not subscribed for by the existing (free float) shareholders may exclusively be subscribed for by existing core shareholders and/or a new (backstop) investor. Moreover, no other measures may be taken that could lead to a public offer; in particular, no trading of subscription rights may occur1. Examples include the rights issues of UNIQA Versicherungen AG in November 2008 and of PORR in September 2009.

Still, a prospectus for listing purposes may be required. According to § 82 para 1 of the Austrian Stock Exchange Act (Börsegesetz; BörseG), the issuer must apply with the stock exchange within one year after issuance of the new shares that those new shares be admitted to trading. The advantage of not having to prepare a prospectus for the offering of the new shares at the time of subscription is that it permits a significant acceleration of the process. The capital increase can be completed very swiftly as no time is needed for the preparation of the prospectus, which can be filed after completion of the capital increase (maximum one year later).

If the newly issued shares correspond to less than 10% of the shares of the same class which are already admitted to listing on the same regulated market, not even a prospectus for listing will be required (§ 75 para 1 no 1 BörseG). In times of volatile capital markets and where it is more difficult to place a large number of new shares this may be an attractive alternative for an efficient and fast-track rights issue.

If, on the contrary, the new shares are also offered to persons other than the existing shareholders and the backstop investor, or if subscription rights are traded, a prospectus will be required.

Price discounts

A rights issue in volatile market conditions may only be possible at a significant discount from the prevailing stock market price. For instance, in the rights issue of Wienerberger in September 2009, the new shares were issued at a fixed subscription price of EUR 10 per new share, whereas the closing price of the Wienerberger stock on the stock exchange shortly before the announcement of the transaction was EUR 15.50.

In no event may new shares be issued at a price below par (or, in case of no par value shares, below the pro rata par value). In case of a listed company with a liquid market, the prevailing opinion is that new shares may be issued at a significant discount from the prevailing stock market price if the capital increase is made against cash contribution with full subscription rights of existing shareholders, and if existing shareholders who do not wish to exercise their subscription rights can effectively sell their subscription rights2. Whereas capital increases which are made at market do not require that subscription rights be traded on the stock exchange (and are not traded in most instances in practice),3 this does not hold true in case of a deeply discounted offer. In such case, shareholders who do not wish to exercise their subscription rights must have the possibility to sell their subscription rights in a liquid market, typically on the stock market.

The Wienerberger rights issue confirms this practice. Subscription rights could be traded on the Vienna Stock Exchange during part of the subscription period.

Lock-up; stand-still

In cases where a backstop investor acquires a significant participation in the issuer, the issuer will typically also strive to agree with the backstop investor on a lock-up and a stand-still. The backstop investor may enter into a lock-up typical for a significant shareholder of a listed company (i.e. not to sell its shares for a period of six months to one year) as well as a stand-still in the form that it will not increase its participation in excess of a certain percentage of the voting rights of the issuer and not submit any tender offer for the shares in the company without the issuer's prior consent.

A rights issue with a backstop investor is serving the needs of both the issuer and the investor. The issuer is able to complete a capital increase and to raise its equity in a rather short time frame and with sufficient deal certainty. The investor, on the other hand, is able to acquire a significant but not controlling stake in a company which it considers a strategically or financially attractive investment.

This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.

Footnotes

1 See also FMA Circular dated 29 March 2007 (Rundschreiben der Finanzmarktaufsicht zu Fragen der Umsetzung der Prospektrichtlinie im Kapitalmarktgesetz und Börsegesetz) II.A.6.

2 Winner in Doralt/Nowotny/Kalss, AktG § 149 Rz 32 f.

3 Supporting the view that shareholders are not legally entitled to a trading of subscription rights at the stock exchange: Winner in Doralt/Nowotny/Kalss, AktG § 153 Rz 77 f.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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