Focus: ASIC proposes easing restrictions on equity capital raisings
17 March 2009
In brief: ASIC has put forward proposals to remove certain regulatory restrictions to rights issues, dividend reinvestment plans and placements. As Partner Anna Lenahan and Senior Associate Zoe Green report, ASIC has sought comments on the measures by the end of this month.
How does it affect you?
- The Australian Securities and Investments Commission (ASIC) has released Consultation Paper 105 (CP 105), which seeks the views of stakeholders (including listed entities, industry associations and retail advisers) on four proposals designed to facilitate efficient equity capital raisings by listed entities.
- Unlisted registered managed schemes may also find particular relevance in the proposals, as ASIC has sought feedback on whether to extend the relief to unlisted entities with more than 50 members. The consultation paper has given these entities an opportunity to make their case for relief.
On 24 February 2009, ASIC released CP 105. In it, ASIC has acknowledged that deteriorating market conditions over the past 12 months have resulted in restricted access to debt financing. Against this background, ASIC has proposed four key reforms to Australia's fundraising and takeover laws in an effort to facilitate equity capital raisings by listed entities during difficult economic times.
ASIC has indicated its desire to implement the proposals within a relatively short time-frame and has therefore asked for comments on the consultation paper to be submitted by 30 March 2009.
The proposals are to:
- modify current class order relief to remove the 10 per cent cap on the amount by which the issue price for interests in a listed managed investment scheme issued under a placement can be discounted to the current market price;
- provide case-by-case relief to permit rights issues and secondary sales without a full prospectus or product disclosure statement (PDS), even if the listed entity has been suspended from trading for more than five days in the 12 months before the capital raising;
- grant class order relief to enable members of listed entities to take up on any shortfall under a rights issue (including accelerated rights issues under Class Order 08/35), even if by so doing they exceed the 20 per cent takeover threshold; and
- grant class order relief to enable an underwriter of a dividend reinvestment plan (DRP) that is open to all members to take up any shortfall under that plan, even if by so doing they exceed the 20 per cent takeover threshold.
Removing pricing restrictions for listed managed investment schemes to make placements at a discount
Under section 601GA(1)(a) of the Corporations Act 2001 (Cth), 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. Class Order 05/26 provides relief from this requirement where the issue of interests under a placement satisfies a number of requirements set out in that Class Order, including the requirement that:
the amount by which the issue price for the interests is less than the current market price for the interests in the same class does not exceed 10% of the current market price.
In a move that we consider will be welcomed by listed managed investment schemes, ASIC is proposing to remove this 10 per cent cap and permit the scheme's responsible entity to set the issue price of interests issued under a placement at any discount to the current market price of interests in the same class that the responsible entity considers to be appropriate. ASIC's rationale for this proposal is based on the principle that the market will efficiently and fairly price (and set the appropriate level of discount to current market price of) interests issued under a placement.
Increasing the maximum five-day suspension period
There are a number of exceptions under the Corporations Act to the requirement to issue a prospectus or PDS (as applicable) for the offer of listed securities or interests in registered managed investment schemes. These include the exceptions in s708AA and s1012DAA (applicable to rights issues) and in s708A(5) and s1012DA (applicable to secondary offers). Issuers can only rely on these exemptions if they satisfy certain requirements, including that trading in the relevant securities or interests must not have been suspended for more than five days in the past 12 months.
ASIC is proposing to increase this maximum five-day suspension period, but on a case-by-case basis, rather than on a class order basis. When considering whether to grant the relief, ASIC will assess the individual circumstances of each case, including the length and reason for any suspension of trading, the period of time that has lapsed since the suspension and any announcements that have been made since the suspension.
ASIC has acknowledged that it has given relief from this requirement in the past, but in very limited circumstances. It would seem that this approach will largely continue, given ASIC's indication that it will not grant relief from this requirement without 'critical consideration' as to why the five-day suspension period should be increased.
Broadening the takeovers exception for rights issues and dividend reinvestment plans
Interests issued under a rights issue or DRP can trigger the takeover threshold contained in s606 of the Corporations Act, if interests acquired by a member exceed 20 per cent of the securities in the entity. ASIC is proposing to grant relief that will effectively extend or broaden the exceptions to this rule that are currently available for rights issues and DRPs.
- Rights issues
Item 10 of s611 of the Corporations Act provides an exception to the takeovers threshold rule for members who will exceed the 20 per cent threshold when they participate in a rights issue (provided that the rights issue satisfies the requirements of item 10, including the requirements that offers are all on the same terms and made to all members on a pro rata basis). This exception does not cover acquisitions by members under shortfall facilities (which may not be pro rata or on the same terms as the initial offer), nor does it cover accelerated rights issues, as these offers are not technically on the same terms.
ASIC is proposing to grant relief (both to listed companies and listed managed investment schemes) that will enable members participating in a rights offer to take up securities or interests made available through a shortfall facility, even if by so doing they exceed the takeover threshold. This relief will be conditional upon all members being able to participate in the shortfall facility on a pro rata basis and on equal terms. It will also be subject to an information requirement – that is, the release to the market of the terms of the shortfall facility and the potential effect on the control of the entity.
ASIC has also indicated that it is proposing to grant class order relief from the takeover provisions for accelerated rights offers that comply with the conditions of Class Order 08/35.
- Dividend reinvestment plans
Item 11 of s611 of the Corporations Act provides an exception to the takeovers threshold rule for members who will exceed the 20 per cent threshold when acquiring interests under a DRP, provided that the DRP is available to all members (disregarding any unavailability to foreign holders).
Unlike the rights issue exception in item 10 of s611, this exception does not currently extend to acquisitions by underwriters of the DRP.
On the basis that this has proved to be a practical impediment to this type of fundraising, ASIC proposes to grant class order relief (to both listed companies and listed managed investment schemes) to enable an underwriter of a DRP to take up any shortfall under that DRP, even if by so doing, they exceed the 20 per cent takeover threshold. The relief will be subject to an information requirement – that is, details of the key terms of the underwriting, the sub-underwriters and associations between the underwriter or sub-underwriter and a controller or one or more substantial shareholders will need to be released to the market at the same time as the DRP is announced.
ASIC has specifically noted that the proposals in CP 105 add to those outlined in CP 103, Review of share purchase plan threshold, which contemplate changes to the existing thresholds around share purchase plans relief, further expanding investment opportunities for retail investors.
It has also asked specifically for feedback as to whether some or the relief proposed in CP 105 should be extended to entities that are not listed but have more than 50 members. Therefore, the consultation paper (and the proposals outlined in it) may also have relevance for unlisted registered managed investment schemes and gives these entities the opportunity to make their case for the extension of the relief proposed by ASIC to these schemes.
The closing date for submissions on CP 105 is 30 March 2009.
For further information (including to access a copy of CP 105), refer to ASIC's website. If you would like assistance with your submission or have a query on any related matter, please feel free to contact us.
- Robert PickPartner,
Ph: +61 3 9613 8721
- Andrew KnoxPartner,
Ph: +61 7 3334 3356
- Andrew PascoePartner,
Ph: +61 8 9488 3741
- Robert ClarkePartner,
Ph: +61 3 9613 8034