Key points
- ASIC proposes to facilitate capital raising.
- Certain Chapter 6 impediments proposed to be removed.
- Companies still need to comply with underlying takeovers policy.
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With debt markets effectively closed, accelerated equity raisings have been an effective way for listed companies to raise money. Companies have applauded reduced regulation of equity raisings—most recently, the ‘low doc’ alternative to a rights issue prospectus.
ASIC now proposes to remove some of the Chapter 6 impediments to equity raisings.
Chapter 6 currently regulates an equity raising if it would have an effect on control. Whether there is an effect on control will depend on the spread of the register, the level of shareholder participation, the identity and structure of the underwriting and other factors.
The ASIC proposal will no doubt be welcomed by business—to the extent that it allows for faster access to capital or improves the prospect of obtaining underwriting. Issuer companies will of course still need to ensure that their capital raising initiatives are consistent with the policy underlying Chapter 6.
Shortfall facilities – new takeovers exception
A common feature of rights issues in recent times is a facility allowing shareholders to subscribe for shares not taken up by other shareholders under the rights issue, known as a ‘shortfall facility’. Shortfall facilities were initially introduced as a means of reducing the control implications of underwriting a large shortfall, a purpose recognised by the Takeovers Panel.
Shortfall facilities are not currently exempt from the 20 per cent takeover threshold. The practice of issuers has been to seek case-by-case relief from ASIC if the take up under the shortfall facility would result in any shareholder exceeding 20 per cent.
Company rights issues and underwritings are both already exempt from the takeovers threshold. With appropriate disclosure as to any ‘control’ implications, ASIC recognises that the policy of Chapter 6 would support the exemption extending to shortfall facilities. Accordingly, ASIC now proposes to provide relief to shareholders who exceed the 20 per cent threshold through participation in a shortfall facility.
ASIC has suggested the following conditions to its proposed relief:
- all shareholders being able to participate in the shortfall facility on a pro-rata basis and on equal terms, and
- disclosure to shareholders about the terms and potential control effect of the shortfall facility.
It should be noted that the more innovative shortfall facility structures may not meet these conditions. For example, sometimes the shortfall facility in respect of the institutional component of a rights issue is available to institutions who are not actually shareholders at the time of the rights issue. The control implications of more novel structures would need to be considered on a case-by-case basis.
The advantages of the proposed relief are noted by ASIC to include:
- companies will save time and money, as they will not be required to seek shareholder approval or ASIC relief in respect of acquisitions under shortfall facilities
- it may improve companies’ ability to raise capital in the current market, and
- it may improve companies’ ability to obtain underwriting, as there may be a smaller shortfall of securities to underwrite.
DRP underwriting
ASIC also proposes to extend the 20 per cent takeover threshold exception to underwriters of a DRP. ASIC’s conditions are that the issuer provide information to its shareholders regarding the key underwriting terms, identities of sub-underwriters and any associations between an underwriter or sub-underwriter and substantial shareholders.
ASIC has noted that this relief may improve companies’ ability to obtain underwriting for their DRPs. Issuers will still need to consider the ASX implications, including whether the company has sufficient ‘placement capacity’ to issue shares to a DRP underwriter.
Conclusion
ASIC’s proposed relief is tipped to facilitate capital management initiatives by removing some of the technical Chapter 6 impediments.
Although companies will be eligible for relief without the need for ASIC case-by-case approval, issuer companies still need to ensure they comply with the disclosure requirements and the underlying Chapter 6 policy.
More information
For information regarding possible implications for your business, contact