The Takeovers Panel has provided some clarity for issuers, underwriters and shareholders where a rights issue may have an impact on control.
However, the Takeovers Panel has not provided a black letter safe harbour from declarations of unacceptable circumstances being made, where rights issues are challenged by aggrieved shareholders.
The Panel has also expressly stated that where there is a clear need for funds that has not been contrived, and in the absence of other issues, a rights issue resulting in a control effect will generally not be unacceptable. This is provided that the rights issue is structured appropriately and an appropriate dispersion strategy has been put in place.
The Panel has set out guidance on various options that a company may consider to mitigate the potential control effects of a rights issue, but has retained flexibility to find unacceptable circumstances.
These mitigating factors largely reflect previous findings of the Panel, and include:
- Making a rights issue renounceable where an active market for the rights is likely
- Offering shareholders the ability to apply for extra shares before determining the shortfall available to the underwriter and its associates
- Directors not exercising any discretion regarding the shortfall in a manner likely to exacerbate a potential unacceptable control effect, except to the extent they consider necessary (acting reasonably) to prevent the issue of shares contrary to law or the ASX Listing Rules
- Creating an effective dispersion strategy for dealing with the shortfall rather than it flowing through to a single underwriter
In formulating a rights issue, issuers should consider structural matters (such as price, number of shares offered, renounceability, underwriting) and the market conditions at the time of the rights issue. As they do so, they need to consider the potential impact (actual or perceived) on control.
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