This guide answers ten key questions commonly raised by listed companies who are seeking to raise capital from their existing shareholders.
Due to the tightening of debt markets and increased costs of traditional bank facilities, more and more companies have been turning to equity capital markets and their shareholders to satisfy their financing and capital requirements.
Historically, listed companies have preferred conducting institutional placements over traditional rights issues for this purpose, mainly as a traditional rights issue takes much longer to complete than a placement and requires significant work to be carried out in preparing a prospectus.
However, as part of efforts to manage the impact of current market conditions and build confidence in New Zealand's financial markets, proposed relaxation in the timetable and disclosure requirements for rights issues may result in even more NZX listed companies undertaking rights issues to satisfy their funding requirements.
- Are we eligible to conduct a rights issue?
Any NZSX listed Issuer can offer a rights issue to its equity security holders.
- Is shareholder approval required?
Shareholder approval will generally not be required to conduct a rights issue if the offer is renounceable (ie the rights can be traded) and made to everyone who holds equity securities in the issue class, proportionately to their existing holdings. However, a non-renounceable rights issue will usually require shareholder approval.
- Do we have to prepare a prospectus?
Ordinarily an Issuer must prepare a short-form prospectus and an investment statement in compliance with the Securities Regulations 1983.
A short-form prospectus has fewer disclosure requirements than a standard prospectus for an offer of equity securities. This is because, as existing shareholders of the Issuer, prospective investors in a rights issue already hold information about that Issuer.
NZX or Dual Listed Issuers (with NZX as their home exchange) can use the new trans-Tasman Mutual Recognition Scheme to extend a New Zealand offer to Australian shareholders with minimal additional disclosure obligations. In reverse, Overseas or Dual Listed Issuers (with ASX as their home exchange) can use the Scheme to extend an Australian offer to New Zealand shareholders.
The proposed introduction of a 'simplified disclosure prospectus' under the Securities Disclosure and Financial Advisers Amendment Bill (Bill) will further streamline the disclosure process. Under the Bill, listed Issuers will be able to offer securities to the public using a simplified disclosure prospectus rather than a prospectus and investment statement. Investors will be referred to information previously disclosed by an Issuer under its continuous disclosure obligations and given information specific to the proposed issue of securities.
The Ministry of Economic Development is seeking submissions by 27 May 2009 on regulations prescribing the content of the simplified disclosure prospectus.
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- Is there a prescribed timetable for a rights
Rights issues must comply with the timetable set out in the NZSX Listing Rules unless a waiver is obtained from NZX. The standard rights issue timetable lasts for a minimum of 30 business days after announcement.
In contrast, Australian listed Issuers can use a number of accelerated rights issue structures. This gives Overseas and Dual Listed Issuers (with ASX as their home exchange) the opportunity to combine an accelerated Australian structure with the Trans-Tasman Mutual Recognition Scheme to raise funds more quickly from New Zealand investors.
Accelerated rights issue structures include:
- An Accelerated Non-Renounceable Entitlement Offer, under which an offer is made and shares are issued to institutional shareholders within a short period and any shortfall is placed with institutional investors via a bookbuild following which the retail offer takes place in accordance with the usual ASX rights issue timetable
- A RAPIDS® issue (a Renounceable Accelerated Priority Issue
with Dual Bookbuild Structure), under which the institutional
portion of the offer takes place first on an accelerated timetable
again followed by a retail offer on the usual ASX rights issue
timetable. After each portion of the offer, a bookbuild is
conducted with respect to renounced entitlements under the
institutional and retail offers respectively and the net proceeds
are paid to the shareholders who renounced their
It is worth noting that certain NZX and ASX waivers and ASIC modifications may be required in order to complete an accelerated offer.
- Should our rights issue be renounceable?
As mentioned, a rights issue can be renounceable or non-renounceable. If a shareholder does not take up their rights in a non-renounceable issue, they will simply lapse. Under a renounceable rights issue, a shareholder who does not take up their entitlement can renounce their rights and sell them.
Although non-renounceable issues are common, an Issuer may prefer that those shareholders who do not want to, or are not in a position to, subscribe for additional shares under the offer realise some value for their rights.
- Can we offer different terms to different
Generally the terms of an offer, including the price and entitlement, must be the same for all shareholders in the relevant class. There are exceptions under the NZSX Listing Rules which permit an Issuer to make a disproportionate offer in limited circumstances (such as to avoid the creation of less than minimum holdings).
- Do we have to extend the NZX listed offer to
shareholders in other jurisdictions?
A rights issue will usually be offered pro-rata to every person who holds equity securities in the relevant class. However, an Issuer may restrict an offer to shareholders with a registered address in New Zealand if they think that it is unreasonable to offer securities or interests to shareholders resident in other jurisdictions (non-residents) given the number of such shareholders and the cost of complying with relevant foreign laws.
Depending on the composition of its share register, it is common for Issuers to limit an offer to shareholders with a registered address in Australia or New Zealand.
If the offer is to be restricted, the Issuer must advise the non-residents that they will not be included in the rights issue. Further, if the rights issue is renounceable, the Issuer must appoint a nominee to sell rights which would otherwise have been offered to non-residents with any net proceeds being sent to the non-resident holders.
- Should the rights issue be underwritten?
There is no legal requirement for a rights issue to be underwritten. However this is desirable where an Issuer needs to raise funds for a specific purpose and requires certainty. Underwriters and sub-underwriters can include financial institutions, stockbrokers, major shareholders of the Issuer or other related or unrelated parties.
As a primary objective of having an issue underwritten is to achieve certainty that all funds sought will be raised, Issuers should pay careful attention to conditionality and termination rights of the underwriters particularly around areas such as market falls and material adverse change.
In the current economic environment we may see underwriters imposing greater conditionality, covenants and termination provisions and potentially higher underwriting commissions to compensate for the greater risk exposure. Underwriters may also be unwilling to provide an underwriting commitment without a major shareholder's agreement to take up their entitlement and/or sub-underwrite a portion of the shortfall.
- Will the rights issue use up my 20% placement
Equity securities issued under a rights issue do not use up an Issuer's 20% (increased from 15%) placement capacity under NZSX Listing Rule 7.3.5.
- What happens if my major shareholder goes over the
takeover threshold by acquiring shares under the rights
If a significant shareholder takes up their entitlement but some other shareholders do not, there is a possibility their percentage voting power will increase beyond the 20% takeover threshold. This puts the shareholder at risk of contravening takeover laws. However, if their acquisition of shares under the rights issue is not a bid for control of the Issuer it will be exempted from the operation of the Takeovers Code, provided that the following conditions are satisfied:
- The offer is made to everyone who holds securities in the issue class, proportionately to their existing holdings
- The shareholder, within six months of allotment, reduces the percentage of securities they hold in the Issuer to the percentage they held immediately prior to the rights issue
- The shareholder does not exercise any of those excess voting rights before they reduce their shareholding
- Acquisitions by an underwriter or sub-underwriter to a rights issue over the 20% threshold are subject to a similar exemption.
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