Recently1, the ASX released draft proposals to enhance the capital raising environment for mid/small cap companies (MSC) currently listed on ASX2. A significant proposal is to enable MSCs to seek a 12-month mandate from shareholders to issue up to an additional 10% of the issued capital of the company without further approval. Given the size of most ASX-listed life sciences companies, this proposal is very significant for the sector.
This article briefly looks at:
- What exactly is the proposal?
- What are the benefits of the proposal?
- Is there devil in the detail of the proposal?
- Will the changes alter the capital raising process for MSCs in the life sciences sector?
What exactly is the proposal?
The proposed Listing Rule 7.1 A enables MSCs to seek shareholder approval to issue 10% of their issued capital, 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 LR 7.1 without shareholder approval.
The maximum discount of 25% is to the average market price over the 15 previous actual trading days immediately prior to the issue. The method of calculating the discount is designed to avoid incongruous results arising out of nil trading days.
The mandate will be effective for 12 months (unless the company obtains shareholder approval under LR 11.1.2 or 11.2 to undertake a significant transaction) and remains valid even if the company's market capitalisation increases above AUD300 million during that 12 month period.
Additional disclosure obligations will apply in relation to both the notice of meeting seeking shareholder approval, and the disclosure notice at the time, of an issue under the new rule.
It should also be noted that the changes do not override LR 10.11 regarding placements to related parties which will still require shareholder approval before they can proceed.
What are the benefits of the proposal?
The proposal gives directors of a MSC the option of seeking a forward looking capital raising mandate. As a result, it allows directors flexibility to take advantage of capital raising opportunities as they arise on short notice without the need to obtain shareholder approval which effectively imposes a 35-45 day delay on any such opportunity. This is particularly important in the current market where market volatility means that opportunities need to be executed quickly.
The combined effect of LR 7.1 and 7.1A enabling the issue of up to 25% of issued capital at a 25% discount exceeds the parameters seen in comparable jurisdictions3. Further, given that 15% can be placed at any price, it provides MSCs with flexibility beyond that which they would achieve in comparable markets.
Is there devil in the detail of the proposal?
Beyond the 25/25 parameters, the detail needs to be considered. Firstly, the notice of meeting seeking approval for the mandate must include a statement of the purposes for which the securities may be issued. This requires a level of foresight for the directors which may clash with the benefit of having flexibility to move quickly (as noted above) to raise capital.
In addition, there is a voting exclusion which prevents a person who may participate or otherwise obtain a benefit from the proposed issue under the mandate from voting on the mandate. This may cause difficulty where substantial existing shareholders wish to support a future placement under the proposed new rule, but have already voted on the granting of the mandate.
On completion of an issue using the mandate, the company must make an announcement to ASX which includes a statement as to why the MSC used their capacity under the mandate rather than undertaking a pro rata or other issue. These statements will be scrutinised by shareholders in considering whether to renew such mandates in the future. Given the ability to raise funds with "low-doc" rights issues and share purchase plans, directors may find it difficult at times to justify the use of the mandate.
It is important to remember that the shareholder approval under the proposed new rule does not 'wipe the slate clean'. Rather, as with LR 7.1, a company must assess its placement capacity on a rolling 12 month basis, regardless of whether the relevant mandate has been obtained in the interim.
Given the greater restrictions which apply in relation to an issue under the proposed new rule (eg. the maximum discount), a company should consider prioritising an issue under a LR 7.1 A mandate over an issue under LR 7.1 in order to retain more flexible funding options moving forward.
Will the changes alter the capital raising process for MSCs in the life sciences sector?
Life sciences companies in Australia tend to follow a well-worn path. They list as MSCs with sufficient funding to take them through 18-24 months of further development, during which time they will seek to obtain licensing or other revenues to continue their development.
Retail investors who support IPOs in this sector see their investment as speculative - looking for the blue sky return - and understand the inherently risky nature of taking a life sciences product to market. As a result, they are generally not interested in follow on investment.
However the nature of life sciences business means that funding is required to take projects through various stages. If partnering funds are not available, this funding has to come from new investors. Accordingly, there is a reliance on placements ahead of rights issues and share purchase plans.
Given the time and effort required to raise funds through a placement, and the fact that MSCs by their very size are often looking to raise amounts which reflect a substantial portion of their market capitalisation, the changes proposed by the ASX are a welcome addition to the fund raising options available to MSCs in the sector.
equity capital markets - ASX proposal and consultations",
released by ASX Limited, 2 April 2012
2The ASX considers mid/small caps to be companies with a market capitalisation of AUD300m or less.
3The closest approximation is Toronto Stock Exchange which allows issues up to 25% of issued capital with a sliding scale maximum discount from 15-25% depending on the share price of the company in question. Hong Kong has a 20/20 limit, while Singapore only allows a 10% discount. In the UK, there is no limit on AIM, although UK companies at law have pre-emption rights built in which must be disapplied by shareholder resolution. IPC guidelines in the UK suggest 5/5 limit in any one year.
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