Australia: Rights issue - when is more control too much control?

HG Corporate Alert: 17 December 2014
Last Updated: 21 December 2014
Article by Lea Fua

When looking to raise capital, ASX listed companies will often consider undertaking a capital raising from their shareholders through a rights issue. One of the key issues for companies to consider is where as a result of the rights issue a major shareholder either gains or increases its control of the company.

In this Alert, Senior Associate Lea Fua briefly looks at two recent Takeovers Panel (Panel) applications involving the affairs of:

  • Yancoal Australia Limited – the Panel declared there were unacceptable circumstances involving a rights issue where the major shareholder could increase its shareholding from 78 percent to 98.8 percent constitute; and
  • Wollongong Coal Limited – the Panel declined to conduct proceedings in respect of a rights issue that could result in a major shareholder increasing its shareholding from 74.39 percent to 84.99 percent.

Key points

  • When structuring a rights issue, companies need to determine early whether as a result of the rights issue, a major shareholder might increase its shareholding above 20 percent, or if it already holds more than 20 percent, increase its shareholding further (Control Element);
  • Where there is a Control Element the offering company needs to consider an appropriate dispersion strategy which takes into account the views expressed by the Panel in their Guidance Note 17 (Rights Issues);
  • In the event there is a Control Element arising in a rights issue, careful planning needs to be given to how companies will deal with a minority shareholder who takes exception and makes an application to the Panel for a declaration of unacceptable circumstances;
  • A declaration of unacceptable circumstances by the Panel will pose various problems to companies depending on the orders given by Panel. These can include seeking non-interested shareholder approval before the major shareholder can increase its shareholding in the company. Where the major shareholder is the only likely source of funds for the company, this can have an adverse impact on the company's ability to raise funds;
  • Even if the Panel does not make formal orders, the event of an application can in itself create problems for a company with some companies withdrawing offers as a result of an application to the Panel for a declaration of unacceptable circumstances.

Yancoal Australia Limited

On 10 November 2014, Yancoal announced a pro-rata, renounceable rights offer of 2.32112 Subordinated Capital Notes (SCNs) for every 100 Yancoal shares to raise up to approximately US$2.3 billion. The funds raised were intended to repay existing senior debt owing to Yanzhou Coal Mining Company Limited (Yanzhou) and to part fund Yancoal's existing coal operations and future growth. The rights issue is not underwritten.

Yanzhou (which holds approximately 78 percent of Yancoal) had committed to subscribe for its full entitlement of approximately US$1.8 billion of SCNs. If no other shareholders take up their rights, Yanzhou could acquire up to 98.8 percent of Yancoal by converting its SCNs into shares.

Senrigan Capital Management Limited has an economic interest in Yancoal shares through cash settled equity swaps and its founder and Chief Investment Officer, Mr Nicholas Taylor, holds Yancoal shares. Senrigan and Taylor (together Senrigan) submitted (among other things) that:

  • The rights offer is part of a strategy to avoid the need to obtain shareholder approval and enable Yanzhou to convert its SCNs into equity at depressed share prices "so as to permit the compulsory acquisition of minorities cheaply". They also submitted that, while the rights offer addresses some aspects of the Panel's policy on rights issues, it does not address Senrigan's concerns; and
  • The rights offer is not necessary given Yancoal's debt is not yet due for repayment and the financial support Yanzhou has committed to provide.

The Panel declared that the circumstances constitute unacceptable circumstances in relation to the affairs of Yancoal. The Panel further noted, having regard to the terms of the SCNs, that:

  • the rights offer is highly dilutive;
  • some shareholders are excluded from participation by reason of their investment mandates;
  • the SCNs are a complex security which require significant capital contribution and are unattractive to Yancoal shareholders other than Yanzhou;
  • the steps taken to minimise the control effect of the rights offer are not sufficient, including the discount conversion price which exacerbates the potential control effect; and
  • compulsory acquisition may occur at a cheaper price than would be the case through ordinary acquisition of shares.

The Panel made the following orders:

  • The conversion by Yanzhou and its associates of SCNs may only proceed with the approval of Yancoal shareholders excluding Yancoal; and
  • Yancoal may from time to time, without shareholder approval, convert such a number of SCNs to allow it to maintain (but not increase) the level of voting power in Yancoal at the date of the Panel's orders.

Wollongong Coal Limited

The Panel received an application from Gujarat NRE India Pty Ltd (Gujarat NRE) (Controller Appointed), part of the Gujarat Group, in relation to the affairs of Wollongong Coal Limited (WLC). The Gujarat Group hold approximately 6.94 percent of WLC.

On 4 November 2014, WLC announced a 19 for 20 accelerated renounceable entitlement offer at an issue price of $0.018 per share to raise up to approximately $66.68 million. The entitlement offer is not underwritten. The prospectus for the entitlement offer states that the Jindal Group (which holds approximately 74.39 percent of WLC) intends to participate for its full entitlement. If no other shareholders take up their entitlements, the Jindal Group would increase its interest to approximately 84.99 percent.

Gujarat NRE lodged an application with the Takeovers Panel in relation to the affairs of WLC and submitted (among other things) that:

  • the entitlement offer is part of a strategy to deliver control of WLC to Jindal without it paying a control premium; and
  • the structure and effect of the entitlement offer is not justified given WLC's financial circumstances.

Gujarat NRE sought final orders (among others) that:

  • the entitlement offer be cancelled;
  • the Jindal Group be restrained from proceeding with a compulsory acquisition or otherwise acquiring any further relevant interest in WLC; and
  • WLC be restrained from buying back unmarketable parcels of shares in itself.

The Panel declined to conduct proceedings and concluded there was no reasonable prospect that it would make a declaration of unacceptable circumstances. It considered that the entitlement offer by WLC complied in most respects with the Panel's guidelines on minimising the control impact of a rights issue. However, the Panel noted, in particular, the discretion of the directors to allocate shortfall shares to applicants and directed Wollongong's attention to the importance of exercising that discretion in a way that facilitated an appropriate dispersion strategy.

The Panel also noted (among other things) the time it took for the application to be made and the fact that shareholders are free to take up their entitlements and apply for shortfall shares.

© HopgoodGanim Lawyers

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