MSCs have a market capitalisation of $300 million or less and are not included in the S&P/ASX 300 Index.
Recently, the Australian Securities Exchange (ASX) amended its Listing Rules to enhance the capital raising environment for mid/small cap companies (MSC) currently listed on ASX. The most significant change enables MSCs to seek a mandate from shareholders to issue an additional 10% of the issued capital of the company without further approval. Given the size of most ASX-listed Life Sciences companies, this change is very significant for the sector.
This article briefly looks at:
- What exactly is the amendment?
- What are the benefits of the amendment?
- Is there devil in the detail?
- Is it positive for the Life Sciences sector?
What exactly is the amendment?
New Listing Rule (LR) 7.1A enables MSCs to seek shareholder approval for a forwardlooking mandate to issue an additional 10% of their issued capital.
This placement capacity is in addition to the 15% currently permitted under LR 7.1 without shareholder approval. The maximum discount under the mandate is 25% to the average market price over the 15 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 undertakes a significant transaction in accordance with the LR) and remains valid even if the company no longer qualifies as a MSC during that 12 month period.
Additional disclosure obligations 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.
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 amendment?
The amendment 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. This eliminates the need to obtain shareholder approval at that time which can result in a 35-45 day delay. This is particularly important in the current market where market volatility means that opportunities need to be executed quickly.
Is there devil in the detail?
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 to raise capital.
On completion of an issue using the mandate, the company must make an announcement to ASX which includes a statement as to why the company used 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 new rule (eg. the maximum discount), a company should consider prioritising an issue under a LR 7.1A mandate over an issue under LR 7.1 in order to retain more flexible funding options moving forward.
The changes adopted by the ASX are a welcome addition to the fund raising options available to Life Sciences companies.
Is it positive for 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 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 adopted by the ASX are a welcome addition to the fund raising options available to MSCs in the sector.
© DLA Piper
This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.
DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to www.dlapiper.com