The Australian Securities and Investment Commission (ASIC) has recently released Consultation Paper 105 setting out ASIC's proposed reforms to facilitate equity capital raisings during difficult economic times. These reforms follow hot on the footsteps of proposals to expand the ability of issuers to raise new equity from shareholders through the use of share purchase plans.
The key aim of these proposed reforms is twofold, namely:
- to facilitate equity capital raisings in times of global financial turmoil and tight debt markets
- to increase the access that retail shareholders have to upcoming equity capital raising opportunities that otherwise would have likely to occur via institutional placements.
Time will tell as to whether these reforms are just a short term fix to facilitate equity fundraisings in these gloomy economic times, or a general recognition that the current fundraising laws are too restrictive on issuers.
In essence, ASIC has proposed four key reforms to Australia's fundraising and takeovers laws.
Proposed changes to the pricing parameters for managed investment scheme placements
Section 601GA(1)(a) of the Corporations Act 2001 (Cth) (Corporations Act) provides that the constitution of a registered managed investment scheme must make adequate provision for the consideration that is to be paid to acquire an interest in the scheme.
However, relief from this requirement is currently available for placements of quoted interests in registered schemes whose interests are in a class listed on the Australian Securities Exchange (ASX) or an approved foreign market. Unless the placement has member approval, that relief is only available where the following conditions are met:
- any issue under a placement over the last 12 months does not comprise more than 15% of the interests in that class of interests
- the issue price for the interests issued under the placement does not exceed a discount of more than 10% of the current market price of interests in the same class.
In light of recent market conditions, the 10% discount cap may not provide sufficient scope for the market to efficiently set the issue price of interests in listed registered schemes in volatile economic periods and therefore hinder the ability of such schemes to attract capital investment.
Accordingly, ASIC's proposal is to remove this 10% pricing cap on placements, on the basis that the market will efficiently and fairly price interests issued under a placement. If this proposal is adopted, ASIC intends to closely monitor market practices to determine whether further regulatory guidance or changes are needed.
The maximum five day suspension period for rights issues and secondary sales
Section 708A(5) and section 708AA of the Corporations Act set out exemptions that permit the secondary sale of securities to occur and an offer of securities under a rights issue to be made, without a full blown prospectus.
To qualify for these exemptions, the issuer must lodge the requisite cleansing notice with ASX. One of the key requirements to be able to utilise this cleansing notice procedure is that trading in the issuer's securities must not have been suspended for more than five days during the shorter of the period during which the class of securities is quoted and the period of 12 months before the day on which the offer is made.
Due to extremely volatile market conditions, many companies have been forced to suspend trading in their shares for longer than five trading days to avoid trading in their securities occurring on an uninformed basis. This has resulted in these companies being unable to avail themselves of the cleansing notice procedure due to the rigidity of the five day test, thereby hampering their ability to raise new equity.
ASIC proposes case-by-case relief to permit rights issue and secondary sales without a full prospectus even through the company has been suspended from trading for more than five trading days in the past 12 months. The rationale for case-by-case relief instead of class order relief is that it gives ASIC an opportunity to assess the individual circumstances of each case in deciding whether the issuer should still be able to take advantage of these streamlined fundraising processes.
Factors that ASIC would consider in deciding to grant individual relief include:
- the length of any suspension
- the reason for the suspension
- the period of time that has elapsed since the suspension
- the announcements made to the market since the suspension.
ASIC will not simply take an approach that adopts a longer period than five days without critical consideration of why the fiveday period set out in the legislation should change. The longer the suspension period, the greater the level of scrutiny that ASIC will apply in granting any relief.
Rights issues and shortfall facilities
With the tightening of credit markets, many companies have turned to their shareholders to raise capital to address funding shortfalls or to reduce debt levels (see the recent rights issues conducted by Wesfarmers, Orica and Incitec Pivot to name just a few).
For companies seeking to raise funds by way of a rights issue, it may be difficult to secure professional underwriting unless the issuer employs some type of dispersion mechanism (such as shortfall facility or back-end bookbuild) to increase the prospects of take up and minimise the prospects of rights falling through to the underwriter. Such dispersion mechanisms also help to achieve a more equal spread of securities issued under the rights issue.
However, such dispersion mechanisms are not equivalent to an 'underwriting' and so acquisitions of securities which would otherwise breach the 20% takeovers prohibition are not exempt by virtue of items 10 or 13 of section 611 of the Corporations Act. Accordingly, member approval under item 7 of section 611 of the Act would generally be required for a major shareholder to acquire further shares under such dispersion mechanisms.
ASIC proposes to grant class order relief to enable members in listed companies to be able to take up any shortfall in rights that other members have not accepted even if by doing so, they exceed the takeover threshold. This relief is conditional on:
- all the members being able to participate in the shortfall facility on a pro rata basis and on equal terms
- the provision of adequate information to members concerning the terms of the shortfall facility
- the provision of adequate information to members concerning the potential effect the shortfall facility will have on the control of the entity.
ASIC recognises that this proposed relief may potentially increase the risks of members' interests being unfairly diluted in a rights issue context. However, ASIC has the power to seek a declaration of unacceptable circumstances from the Takeover Panel if it appears that the proposed relief is being abused for control purposes. Further, the rights issue must still be genuinely accessible to all shareholders for the exemption in section 611 item 10 of the Corporations Act to apply to exempt acquisitions of shares by a major shareholder (as a result of following its rights or participating in a dispersion mechanism) which would otherwise breach the 20% takeovers prohibition.
Underwritings of dividend reinvestment plans
Under the Corporations Act, an exemption applies to acquisitions which would otherwise breach the 20% takeovers prohibition where the acquisition is under a dividend reinvestment plan that is open to all members. Unlike the rights issue exception discussed above, the dividend reinvestment plan exemption does not extend to acquisitions by an underwriter. This has limited the pool of potential underwriters of a dividend reinvestment plan.
The relief proposed by ASIC is broadly analogous to the existing exception for underwriters of rights issue under Item 10 of section 611. ASIC is proposing to grant class order relief to enable an underwriter of a dividend reinvestment plan to take up any shortfall under a dividend reinvestment plan, even if by doing so it exceeds the 20% takeover threshold. This relief is conditional on the provision of adequate information to members regarding:
- the key terms of the underwriting
- the identities of any sub-underwriters
- any associations between the underwriter or sub-underwriter and a controller or one or more substantial shareholders.
This information would be required to be given to the market at the time the dividend reinvestment plan is announced.
As with rights issues, ASIC recognizes that while this proposed relief may potentially increase the risks of members' interests being unfairly diluted under a dividend reinvestment plan, it has the power to seek a declaration of unacceptable circumstances from the Takeover Panel in appropriate circumstances.
ASIC's reform proposals should have a significant impact in facilitating equity capital raisings and encouraging retail participation in those raisings. Apart from the removal of the 10% pricing cap on placements for managed investment schemes (where ASIC has flagged its intention to review market practices), the case-by-case relief and the scope for Takeover Panel intervention provides the necessary check and balance to ensure that these reform proposals are not abused.
ASIC has called for comments on the proposed reforms by 30 March 2009. The relatively short consultation period is designed to ensure that ASIC can adequately respond to the prevailing market conditions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.