27 August, 2012

 

Legal News & Analysis – Asia Pacific – Australia – Capital Markets

 

In brief

 

On 1 August 2012, amendments to the Listing Rules came into effect to facilitate capital raising by mid to small cap listed entities.

 

Amendments to the admission requirements in the Listing Rules relating to the net tangible asset test and spread test will commence on 1 November 2012.

 

These amendments follow extensive industry consultation (in response to the proposals and consultation paper, Strengthening Australia’s equity capital markets released by ASX in April 2012). These amendments are one part of ASX’s strategy to implement initiatives to maintain the attractiveness, and improve the competiveness, of Australia’s equity capital markets.

 

ASX has also initiated consultation on proposals to reduce the standard timetable for rights issues to seek to ensure standard rights issues remain a viable capital raising mechanism.

 

Facilitating capital raising for small to mid caps

 

An additional 15% for eligible entities 

 

New listing rule 7.1A will permit an eligible entity to seek approval from shareholders by special resolution at its annual general meeting (AGM) to issue a number of equity securities equal to 10% of the number of ordinary securities on issue 12 months before the date of issue (in addition to the 15% currently permitted under listing rule 7.1 without shareholder approval).

 

An eligible entity is one that at the date of the AGM when the resolution is considered:

 

• has a market capitalisation (excluding restricted securities and securities quoted on a deferred settlement basis) of A$300 million or less; and
• is not included in the S&P/ASX 300 Index.

 

ASX will determine an entity’s market capitalisation by reference to quoted securities in the entity’s main class (other than restricted securities and securities quoted on a deferred settlement basis) and the closing price for those securities on the last trading day on which trades in the securities were recorded before the date of the AGM. The S&P/ASX Index is rebalanced twice a year and published by S&P Dow Jones on the first Friday of March and September with the changes coming into effect on the third Friday of March and September. ASX will make available a list of these entities in the S&P/ASX Index each time the index is rebalanced.

 

ASX recommends that:

 

• a listed entity which intends to seek shareholder approval under listing rule 7.1A at its AGM should provide a draft calculation of its market capitalisation to ASX at the time it lodges its draft notice of AGM with ASX for review; and
• if there is a concern that by the time of the AGM the listed entity may be included in the S&P/ASX 300 Index or have a market capitalisation over $300 million it would be prudent for the resolution in the notice of AGM to be expressed as being conditional on the entity not being in the S&P/ASX 300 Index and not having a market capitalisation of greater than $300 million on the date of the AGM.

 

The approval will expire 12 months after the AGM or earlier if a transaction is approved under Listing Rule 11.1.2 (a significant change to the nature or scale of activities) or 11.2 (the disposal of the main undertaking). It will continue to operate even if the entity’s market capitalisation goes over A$300 million or it is included in the S&P/ASX 300 Index during the 12 month period.

 

Issue price requirements

 

The issue price of securities issued under listing rule 7.1A must be no less than 75% of the volume weighted average market price for securities in that class calculated over the 15 trading days on which trades in that class were recorded immediately before:

 

• the date on which the price at which the securities to be issued is agreed; or
• if securities are not issued within 5 trading days of that date, the date on which the securities are issued.

 

A listed entity may use any recognised information service provider as the source of its VWAP calculation. The listed entity must disclose the 15 day VWAP figure, and the source of the VWAP data, when it announces an issue of securities under listing rule 7.1A.

 

If the securities are issued for non-cash consideration, ASX has indicated that the entity must issue a valuation to the market that demonstrates that the non-cash consideration satisfies the “at least 75% of VWAP” requirement. The valuation may be provided by an independent expert or by the directors, provided that the directors have appropriate expertise to value the relevant kind of non-cash consideration and the directors’ valuation report contains a similar level of analysis and is of a similar standard as an independent expert’s report.

 

Notice of AGM requirements

 

The notice of the AGM at which an eligible entity seeks shareholder approval under listing rule 7.1A will need to disclose certain information, including:

 

• the minimum price at which equity securities may be issued under listing rule 7.1A;
• the risks of economic and voting dilution of existing security holders that may result from an issue under listing rule 7.1A, including the risk that: 
• the market price may be significantly lower on the issue date than on the date the approval is sought; and 
• the securities may be issued at a price that is at a discount to the market price on the issue date;
• a table describing the potential dilution on the basis of at least three different assumed issue prices and three different values for the variable “A” in the formula in listing rule 7.1A (ie the number of ordinary securities on issue 12 months before the proposed issue) including at least one example that assumes that “A” is double the number of securities on issue at the time of the approval and the price has fallen by at least 50%; and
• the date by which the new securities may be issued including a statement that the approval will cease to be valid if holders approve a transaction under listing rule 11.1.2 or 11.2; and
• the purposes for which the equity securities may be issued, including whether the entity may issue any of them for non-cash consideration;
• details of the allocation policy for the issue; and
• details of securities issued in the previous 12 months under an earlier approval under listing rule 7.1A; and
• a voting exclusion statement.

 

Disclosure on issue of securities

 

Once shares have been issued under the new rule 7.1A, the entity must provide the ASX for release to the market details of, amongst other things, the dilution that has occurred for existing shareholders (this would be expected to disclose the percentage of the issued capital of the entity represented by the placement and the percentage of the post-placement issued capital held by the pre-placement security holders), why a placement was used and not a pro rata issue available to all shareholders, details of any underwriting arrangements, including fees payable to the underwriter and any other fees or costs incurred in connection with the issue.

 

The entity must also provide ASX with a list of the allottees and the number of securities issued to each. This information is not for release to the market.

 

It is proposed that the new rules will be reviewed after two years.

 

Amendments to ASX admission requirements for all entities

 

The changes to the admission requirements which will come into effect on 1 November are as follows:

 

ASX Listing Rule	Spread requirements
LR 1.1 Condition 7	400 holders of securities in main class with a minimum holding of A$2,000 (excluding restricted securities)   OR   350 holders of securities in main class with a minimum holding of A$2,000 (excluding restricted securities) and at least 25% of the securities in the main class are held by non-related security holders (excluding restricted securities held by the non-related security holders)   OR   300 holders of securities in main class with a minimum holding of A$2,000 (excluding restricted securities) and at least 50% of the securities in the main class are held by non-related security holders (excluding restricted securities held by the non-related security holders)
	Net tangible assets
LR 1.3	Applicants seeking admission under the assets test are required to have Net tangible assets at the time of admission is at least A$3 million after deducting the costs of the fund raising

 

Facilitating efficient and timely rights issues

 

In July 2012, ASX released a new proposals and consultation paper, Modernising the timetable for rights issues, detailing initiatives to reduce the standard timetable for rights issues by leveraging off advances in systems, operational processes and technology.

 

The consultation paper identifies a number of potential reductions in the standard timetable for rights issues, which together could reduce the timetable from a maximum of 26 business days to a maximum of 16 business days.

 

The proposals aim to ensure that standard rights issues remain a viable capital raising mechanism, and respond to the need for listed companies to raise capital quickly in post GFC market conditions. The potential benefits of the shortened timetable include:

 

• increased attractiveness of the rights issue as a capital raising mechanism, as issuers will have access to capital sooner;
• lower underwriting risk and related cost; and
• a reduction in the discount required to raise the required capital.

 

ASX is seeking to ensure any proposals to reduce the timetable strike an appropriate balance between certainty of funding, time to market and increased costs associated with compliance with the shortened timetable, on the one hand, and maximum participation by existing shareholders in the rights issue, on the other.

 

Proposed amendments to rights issue timetable

 

The key proposed changes to the standard timetable for rights issues are summarised in the table below:

Step	Current timetable Business Day	Proposed timetable Business Day
Announcement date	0	0
Ex date Commencement of rights trading*	2	1
Record date	6	3
Day by which documents must be sent to security holders	By day 10	By day 6
Close of rights trading*	15	10
Acceptances close date	At least day 20	At least day 13
Issue date	26	16
Total timetable	26 business days	16 business days

* Only relevant to renounceable rights issues

 

A number of the areas identified in order to deliver savings in the timetable will require ASX and other stakeholders (such as share registries, listed companies, custodians and brokers) to implement system changes and achieve process efficiencies.

 

Most of the proposed changes appear to be workable although some logistical challenges may face issuers with larger share registers in despatching the offer documentation within the shortened time frames and initially, participation by remote shareholders may fall given the tight response times (although over time this issue ought to be able to be addressed with the use of electronic communication).

 

The proposed change that however does not appear feasible is the shortening of the timetable between acceptances close and the issue of securities. The proposed period does not allow enough time for the final processing and reconciliation to occur and the implementation of sub-underwriting commitments. In addition, the timeframe would not accommodate backend book builds.