Jurisdiction - Singapore
Reports and Analysis
Singapore – Rights Issue Vs Private Placement.

16 October, 2014

 

In Singapore, there are various ways that a company listed on the stock exchange can raise funds, depending on its needs and the market factors at that point in time. This article will focus on two common types of equity financing exercises available to companies listed on the Singapore Exchange Securities Trading Limited (“SGX”): rights issue and private placement.


An equity financing exercise involves the issue of additional securities. Chapter 8 of the SGX Listing Manual (“Listing Manual”) deals with transactions undertaken by companies that result in a change in capital. A company seeking to undertake equity financing must first obtain shareholders’ approval, whether by way of a general mandate or a specific approval by shareholders in a general meeting.


A company listed on the SGX is obliged to comply with the terms of the Listing Manual as well as other laws such as the Companies Act (Cap. 50), the Securities and Futures Act (Cap. 289) (“SFA”) and the Securities and Futures (Offers of Investment) (Shares and Debentures) Regulations 2005. These laws are primarily designed to protect the investing public.


Rights Issue


A rights issue involves the offer of new shares and/or convertible securities to existing shareholders on a pro-rata basis in proportion to their shareholding interests in the company. Each existing shareholder will be entitled to participate in the rights issue, but is not obliged to subscribe for his rights. The issue price is set at the company’s discretion and is typically at a discount to the market price. To further attract subscribers, companies may offer convertible securities at no charge, in addition to the rights issue (e.g. one share with one free warrant for every two existing shares). These additional convertible securities typically have an expiry date for shareholders to convert at a fixed price, also known as the exercise price. As both the issue price and exercise price would significantly impact a shareholder’s decision to subscribe for his rights, pricing a rights issue correctly is critical.
A rights issue can either be renounceable or non-renounceable. It can also be fully underwritten, partially underwritten or not underwritten at all.


Renounceable Rights Issue


Under Rule 816(1) of the Listing Manual, in a renounceable rights issue, the rights to subscribe for securities may be renounceable in part or in whole in favour of a third party and at the option of the entitled shareholders. Shareholders who do not have sufficient funds to subscribe for their entitlements are given the opportunity to sell their rights during the “nil-paid” trading period, which is typically a period of 9 days or more. The books closure date is the date fixed by the company for the purpose of determining entitlements to distributions or rights of holders of its securities. Persons (natural or juristic) who become shareholders after the books closure date are not entitled to participate in the rights issue.


Our analysis of approximately 100 rights issues undertaken by listed companies in Singapore over the last 3 years has revealed that renounceable rights issues are preferred over non-renounceable rights issues with approximately 97% of the companies undertaking renounceable rights issues.


Non-Renounceable Rights Issue


In a non-renounceable rights issue, the securities are not transferable and cannot be sold in the open market. Shareholders are only given the option to subscribe for their entitlements or forgo their rights. A non-renounceable rights issue is thus more restrictive in nature, resulting in a lower volatility and subscription rate than a renounceable rights issue.
Further, in accordance with Rule 816(2) of the Listing Manual, the issue price for a non-renounceable rights issue can be set at a maximum of 10% discount to the weighted average price for trades done on the SGX for the full market day on which the rights issue is announced. To price the rights at a discount exceeding 10%, specific shareholders’ approval is required, consequently delaying the rights issue by at least a month.


Underwritten Rights Issue And Undertaking By Shareholders


The company may decide whether the rights issue is to be underwritten by a financial institution; however, it is not mandatory, as stated in Rule 817 of the Listing Manual. For a rights issue that is not underwritten, the company bears the risk of an unsuccessful offering, while an underwritten rights issue releases the company of the risk.


Certainty may also be obtained for a fully underwritten rights issue as an underwriter’s main role in a rights issue is to guarantee that the funds sought by the company are raised. Underwriters will enter into an underwriting agreement with the company obliging them to subscribe for the shares in the event of a shortfall.


Alternatively, companies may approach their substantial or controlling shareholders for undertakings to demonstrate their support for the rights issue as well as their commitment to the company. This practice is encouraged as it gives minority shareholders assurance of the integrity of the company and the prospects of the rights issue. Such undertakings will generally be taken into consideration in a shareholder’s decision to subscribe for his rights.


To ensure that existing shareholders are not prejudiced, they are given priority over directors or substantial shareholders who have control or influence over the company in connection with the day-to-day affairs of the company for the rounding of odd lots and allotment of the excess rights, during the offer period.


Private Placement


In contrast to a rights issue, a placement allows the company to select its investors. Investors do not have to be existing shareholders to obtain shares via placement as it is not offered on a pro-rata basis. These new shares can be placed with one or more investors, as long as they are independent and are not under the control or influence of any of the company’s directors or substantial shareholders.


Placements to directors, substantial shareholders, their immediate family members, related and associated companies and sister companies of substantial shareholders, as well as corporations in whose shares directors and substantial shareholders have an aggregate interest of at least 10% require specific shareholders’ approval. Each of these proposed placees and its associates must abstain from voting on the resolution during the general meeting.


A placement is similar to a non-renounceable rights issue where the issue price is concerned. It must not be priced at more than 10% discount to the weighted average price for trades done on the SGX for the full market day on which the placement or subscription agreement is signed. Issues on renounceability and underwriting do not come into play for placements.


Under s 272B(1)(a) of the SFA, placements are exempted from having to issue a prospectus if the offer of securities are made to not more than 50 investors within any 12-month period. The assumption is that the company’s equity would be offered to sophisticated investors with sufficient financial knowledge and experience to be capable of evaluating the risks and merits of investing in a company. In comparison, for a rights issue, an offer information statement must be issued regardless of the number of investors as it is undertaken on a pro-rata basis to all existing shareholders. Non-shareholders are not entitled to participate in a rights issue unless the non-shareholder is a financialinstitution underwriting the rights issue. As less documentation is required for a private placement, the cost to the company is typically lower.


Conclusion


Company’s Perspective


The need to obtain a specific amount of funds within a limited timeframe is often a key consideration. From the company’s perspective, where timelines are the main concern, the process of obtaining funds by way of placement may be preferred over a rights issue as, under normal circumstances, less documentation is required and the transaction may be completed in a shorter period of time. A company is also given more flexibility and control over share allocation.


Further, as the company is able to select its investors, a placement allows the company to establish strategic alliances or relationships with reputable investors, ensuring the investors’ compatibility in goals and interests. Bonding a strategic partner to the company through an equity stake may reduce “hold-up” problems and other contracting costs, resulting in a potentially larger increase in profitability for the company. Confidentiality is also better preserved under a placement as fewer disclosures are required.


With the option of placing shares to non-existing shareholders, placements also serve as an alternative to rights issue where takeover issues are concerned. Ideally, a company’s rights issue would be fully subscribed. However, in a less ideal situation where the rights issue is not fully subscribed, a controlling shareholder with its concert parties having an aggregate shareholding interest of close to 30% may trigger the mandatory offer obligations under Rule 14 of the Singapore Code on Takeover and Mergers if other shareholders do not subscribe for their entitlements, resulting in the controlling shareholder and its concert parties acquiring 30% or more of voting rights in the company. Where such risk is of concern, a placement may be preferred.

 

While placements may be more appropriate for companies seeking the “endorsement” of a strategic investor and relatively quicker access to funds, companies may prefer rights issues when there are concerns of dilution of current shareholding interests. Right issues may also enable companies to raise more funds, since rights issues are undertaken on a larger scale.

 

Shareholders’ Perspective


From the perspective of existing shareholders, a rights issue may be preferred over a placement if the shares are issued at an attractive price, as issuance of placements to new shareholders would dilute the existing shareholders’ stakes without any compensation. A rights issue, however, protects existing shareholders from share dilution by providing them with the option to subscribe for their entitlements, failing which, existing shareholders are taken to accept that their shareholding interests will be diluted after the fresh round of share issuance.

 

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For further information, please contact:

 

Li-Ling Ch’ng, Partner, RHTLaw Taylor Wessing
li-ling.chng@rhtlawtaylorwessing.com


Kok Liang Chew, Partner, RHTLaw Taylor Wessing
kokliang.chew@rhtlawtaylorwessing.com


Ng Yi Wayn, RHTLaw Taylor Wessing
yiwayn.ng@rhtlawtaylorwessing.com


Valda Heng, RHTLaw Taylor Wessing
valda.heng@rhtlawtaylorwessing.com

 

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