With market volatility continuing to be driven by the economic and social upheaval caused by COVID-19, the number of entities that are finding themselves with a need to raise capital is ever increasing. All entities that rely on revenue/earnings for cash flow over the next 6 to 9 months will need to consider raising debt or equity capital.
In our recent article Raising Capital in uncertain times we considered at a high level the options that were previously available to listed entities that may find themselves particularly impacted by these difficult times. We queried whether the investor market would be supportive of capital raisings in the same way they were during the GFC, and discussed some of the legislative and regulatory reforms that were introduced shortly before and during the GFC that assisted entities to replace debt financing and shore up balance sheets swiftly and efficiently at a time of volatility and uncertainty.
Despite this, on 31 March 2020, ASIC and ASX introduced temporary measures intended to facilitate rapid capital raisings during COVID-19. We first described these temporary measures in our article Raising Capital in uncertain times – ASIC and ASX reforms to facilitate capital raisings. However, following a chorus of objections from certain market participants, and consultation with ASIC, ASX has now updated the temporary measures with the intention to improve the overall operation.
ASX developments – 22 April 2020 updates
In its ASX Compliance Update released on 22 April 2020, ASX updated and clarified the measures introduced on 31 March 2020. The updated temporary measures are as follows:
Back-to-back trading halts
ASX is continuing to permit an entity to request two consecutive trading halts, totaling 4 trading days, to assist entities execute any form of capital raising (not just an accelerated pro-rata offer as was provided for in its 31 March reforms).
However, ASX has now made it clear that in its request for such a trading halt, the entity must state that the 4 day halt is for the purpose of considering, planning and executing a capital raising to raise urgently needed capital. Consecutive trading halts are not permitted for any other purpose.
If an entity simply requests a regular trading halt, ASX will only grant it a single trading halt for a maximum of up to two trading days and will not consider a subsequent application from the entity for a second consecutive trading halt.
If the capital raising cannot be executed within the extended 4 day timeframe, an entity can request voluntary suspension which can now be for a period of 10 days without limiting the ability of an entity to raise capital through a ‘low doc’ offer.
Temporary Extra Placement Capacity waiver
ASX is continuing the temporary increased placement size in any 12 month period of 25% (Temporary Extra Placement Capacity), subject to the entity undertaking the placement in conjunction with a pro-rata entitlement offer (standard or accelerated) or a SPP – in each case at the same or lower price than the placement price. The normal ‘supersize’ waiver is also included in the class order waiver.
Under the amended terms of the Temporary Extra Placement Capacity waiver, ASX requires the entity to do the following within 5 business days of completing the relevant placement:
announce to the market: (a) the results of the placement; (b) reasonable details of the approach that the entity took in identifying investors to participate in the placement and the key objectives and criteria it followed in determining their respective allocations (including whether one of the objectives was a best effort to allocate pro-rata to existing holders, and any significant exceptions/deviations from those); and (c) that, as far as the entity is aware, no securities were issued or agreed to be issued in the placement to any person referred to in ASX Listing Rule 10.11 without complying with one of the exceptions set out in ASX Listing Rule 10.12 (e.g. the placement being conditional on shareholder approval).
supply ASIC and ASX (in the case of ASX, not for release to the market) a detailed allocation spreadsheet that shows full details of the persons to whom securities were allocated in the placement including existing holding, number of securities the investor applied for or was offered in the placement and the final allocations (including any zero allocations).
A 25% placement capacity is already available to entities that fall outside the ASX 300 and have a market cap equal to or less than $300 million, and sought shareholder approval to increase their placement capacity at their AGM under ASX Listing Rule 7.1A. Entities that are already eligible to use this additional placement capacity will be able to use their additional placement capacity or the Temporary Extra Placement Capacity (but not both).
ASX has noted that this is a one-off measure that can only be used for one placement and entities cannot obtain shareholder approval to replenish this temporary placement capacity under the listing rules.
Temporary reforms relating to SPPs
In relation to SPPs, ASX is continuing to waive the usual SPP restrictions around SPP price and number of securities that may be issued under the SPP, and instead will simply require that the follow on SPP occurs at a price equal to or lower than the placement price. Further, if an SPP is undertaken without a placement, ASX is waiving the pricing restrictions usually set out in the ASX Listing Rules and allowing the SPP to be undertaken at any price determined by the board.
Additional updates to the Temporary Extra Placement Capacity waiver as it applies to SPPs include:
if there is a limit on the amount to be raised under the SPP, the entity must use all reasonable endeavours to ensure the SPP participants have a reasonable opportunity to participate equitably in the overall capital raising and must disclose why a limit is in place and how the limit was determined in relation to the total proposed fundraising;
expanding the existing provisions requiring the scale-back arrangements for SPP offers to be applied on a pro-rata basis to all participants to allow that to be based either on the size of their existing security holdings or the number of securities they have applied for; and
allowing parties covered by listing rule 10.11 (including directors and related parties) to participate in an SPP on the same terms as other security holders.
Non-renounceable Offer Ratios waiver
ASX is continuing to waive the one-for-one cap on non-renounceable entitlement offers and instead listed entities are expected to choose a ratio for their non-renounceable entitlement offer that meets their capital raising needs and that is fair and reasonable in the circumstances.
New process requirements
A listed entity wishing to take advantage of the Temporary Extra Placement Capacity waiver or the Non-renounceable Offer Ratio waiver must, before the entity undertakes the relevant capital raising, provide a confidential notice to ASX that clearly sets out the circumstances of the capital raising, including whether the capital raising is proposed to be made to raise urgently needed capital to address issues arising in relation to the COVID-19 crisis and/or its economic impact, or if the capital is needed for some other purpose.
A further update introduced on 22 April 2020 is that ASX has now specified its ability to withdraw the new class waivers from an individual listed entity at any time and for any reason by giving the entity written notice to that effect. It may also withdraw the class waivers prior to their scheduled expiry date of 31 July 2020 for all listed entities with notice to the market to that effect.
Application of the reforms
Many entities are already taking advantage of the measures introduced on 31 March 2020 and we expect many more entities are likely under funding pressure coupled with the need to raise capital rapidly to survive. However, as we previously noted, in structuring their capital raisings, entities must remember their obligations to consider fairness between shareholders – both institutional and retail – and structure offers where possible to help achieve fairness. This requires directors to balance a range of considerations, such as the need for quick and certain capital, and the cost to, and possible dilution of, existing securityholders – an important reminder highlighted by both ASIC and ASX in their earlier market releases and further evident by the updates to the temporary measures released on 22 April 2020.
By including a condition that placements utilising the Temporary Extra Placement Capacity waiver must be undertaken in conjunction with a capital raising that is made available to retail investors, ASX is ensuring retail securityholders have an opportunity to participate in the offer at the same or a lower price to institutional investors. However, this only assists to an extent, and even where retail investors have the appetite to participate in the retail component of such an offer, which at this point in time may be low, the practical effect is still likely to be significant dilution for retail investors. Boards will need to take care to consider properly and document properly the process by which it is decided to take advantage of the increase in placement capacity, given the potential for adverse effect on minority shareholders.
The updated temporary measures that require entities utilising the Temporary Extra Placement Capacity waiver to disclose: (a) to the market reasonable details of the approach the entity took in identifying investors to participate in the placement and the key objectives and criteria it followed in determining their respective allocations including whether one of the objectives was a best effort to allocate pro-rata to existing holders, and any significant exceptions/deviations from those; and (b) to ASIC and ASX (not for release to the market) a detailed allocation spreadsheet showing full details of persons to whom securities were allocated and the number of securities allocated, including existing holdings, number of securities applied for and any zero allocations), are a response to complaints and concerns regarding the dilutive capital raisings that have been undertaken since the temporary reforms were first introduced. The additional best endeavours obligation on an entity undertaking an SPP in conjunction with a placement relying on the Temporary Extra Placement Capacity waiver to use all reasonable endeavours to ensure SPP participants have a reasonable opportunity to participate equitably in the overall capital raising is another means by which ASX is encouraging directors to treat their shareholders fairly.
The changes made by ASX to the class waivers reflect ASIC’s expectation that directors must provide transparent disclosure to the market about the capital raising decisions they are making which are required to be in the best interests of the company. In its media release 20-097MR dated 23 April 2020, ASIC has stated that it will be reviewing the allocation spreadsheets provided by issuers and monitoring the disclosures made by companies about placements, rights offers and SPPs to ensure they are accurate, sufficiently detailed and provide meaningful, rather than ‘boiler plate’ disclosure. ASIC has stated that, for example, the following disclosures would require additional information to be provided:
‘largely on a pro-rata basis to existing shareholders’ should also include reasons why some existing investors were treated differently; and
‘80% to existing holders’, does not explain the basis for that allocation or whether it was done on a pro-rata basis.
Interestingly ASIC has stated that it considers the enhanced disclosure required under ASX’s Temporary Extra Placement Capacity waiver is also appropriate for other capital raisings that do not need to rely on the waiver and therefore encourages entities to make these types of disclosures for all placements and SPP’s.
However, despite these efforts, the question remains as to whether the updated temporary measures to facilitate capital raisings, in particular the Temporary Extra Placement Capacity waiver, treat retail investors fairly. We expect the inevitable result of dilutive capital raisings in this market, as in all downturns, will continue to be a transfer of value away from the small, typically retail investors, to the large.
Nevertheless, as we have seen to date, we expect the updated temporary measures will continue to have the desired effect – to help facilitate capital raisings.
If you are a business that may need to raise funds, it is important to start thinking about this now, as we expect there to be many more entities in need of capital in the coming weeks and months. If you are considering a capital raising or would like to discuss the contents of this article, please contact Patricia Paton.
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