On 2 April 2012, the Australian Securities Exchange (ASX) released draft changes to the ASX Listing Rules, which increase the capital raising limit for mid to small caps. The proposal forms part of the first phase of listing initiatives that the ASX is rolling out in 2012. The consultation period for the draft changes closes on 14 May 2012.
What are mid to small caps?
The ASX currently defines 'mid to small caps' as listed entities with a market capitalisation of AU$300 million or less, which it says is a good proxy for companies outside of the S&P/ASX 300.
Every six months on the last trading day in May and November, the ASX proposes to compile a list of mid to small caps, which will be published on the ASX's website. Companies on the most recently published list (regardless of any changes in their market capitalisation since the publication date) will be eligible to take advantage of an increased placement cap under proposed Listing Rule 7.1A, as described below.
Increasing the placement cap
In our experience, placements are a particularly important capital raising tool for mid to small caps that often have a narrow range of shareholders, which limits the utility of various other capital raising options, like rights issues and share purchase plans, as fundraising tools. In fact, in recent years, placements have provided up to nearly 70% of the secondary capital needs for mid to small caps.
Under the proposed Listing Rule 7.1A, mid to small caps will be able to seek shareholder approval to issue 10% of their issued capital within 12 months of the approval, provided that the issue is not at a discount of greater than 25% of the market price. This placement capacity will be in addition to the 15% currently permitted under Listing Rule 7.1 without shareholder approval, which will remain unchanged.
Shareholder approval under Listing Rule 7.1A will typically be effective for 12 months, unless the company enters into certain major transactions during that period. As noted above, this will be the case even if the company's market capitalisation increases above AU$300 million during that 12 month period.
It is important to bear in mind that shareholder approval under Listing Rule 7.1A does not 'wipe the slate clean' and provide a company with immediate access to additional placement capacity. Rather, as with the operation of Listing Rule 7.1, a company must assess what its placement capacity is on a rolling 12-month basis. This means that, prior to issuing shares under Listing Rule 7.1A, a company must determine whether its issued capital has exceeded the 10% limit during the immediately preceding 12 months, regardless of whether the relevant shareholder approval has been obtained in the interim.
Additional disclosure obligations
Additional disclosure obligations will apply in relation to placements under Listing Rule 7.1A. By way of example, in order to obtain the required shareholder approval, the notice of meeting must contain (among other things) the following information:
- The minimum price at which the shares may be issued
- A statement of the risk of economic and voting dilution of existing shareholders
- The date by which the new shares may be issued
- The purpose of the issue
- Details of previous issues under Listing Rule 7.1A, if any
- A relevant voting exclusion statement (although it remains unclear how this requirement will operate - being so far in advance of the possible capital raising event).
In addition, following an issue under Listing Rule 7.1A, a company will be required to disclose the following additional information to the market in an updated Appendix 3B:
- Details of the dilution to existing shareholders as a result of the issue
- Where the shares are issued for cash, a statement of the reasons why the entity undertook a placement and not a pro rata or other similar issue
- Details of the allocation policy for the issue
- Details of the underwriting arrangements including fees
- Any other fees or costs incurred under the issue.
Take home points
If the proposed Listing Rule changes come into effect, companies with a market capitalisation of approximately AU$300 million should bear the following points in mind:
- They should monitor the ASX publication of mid to small cap companies to confirm whether the company is on the list.
- In preparing for its Annual General Meeting (AGM), the directors should consider whether the company is entitled to seek shareholder approval under Listing Rule 7.1A, and if it is, whether the company wishes to do so.
- If seeking shareholder approval is on the agenda for the AGM, more extensive disclosure requirements apply for the notice of meeting (as set out above).
- Given the greater restrictions that apply in relation to an issue under Listing Rule 7.1A in comparison to an issue under Listing Rule 7.1 (ie the discount must be less than 25% of the prevailing market price), if the relevant resolution under Listing Rule 7.1A is passed, the directors should consider prioritising an issue under Listing Rule 7.1A over an issue under 7.1 to retain more flexible funding options moving forward.
We will continue to monitor these developments closely and provide further updates as material developments arise.
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