In brief 11 min read
As the COVID-19 situation continues to evolve, we have moved well beyond business-as-usual considerations when it comes to raising equity. Similarly, our corporate and securities regulators have temporarily relaxed certain rules to address the critical fundraising needs of listed entities in the current environment. This Insight:
- provides commentary on matters Boards, supported by management, may wish to consider in raising equity;
- makes some observations about what we are seeing in the market to date or expect to see; and
- outlines some of the recent regulatory changes.
The Board (reflecting on its legal obligations to act in the best interest of the company as a whole) is the appropriate body to decide which capital raising mechanism to adopt in the circumstances, be it an entitlement offer or placement and/or share purchase plan. We have set out below some commentary that may inform such a decision.
- No 'one size fits all' - First and foremost, the Corporations Act is not prescriptive as to the type of raising that a company may adopt.
- Considerations - The range of considerations to ensure that any decision is in the interests of the company include: the size and urgency of the funding required, the market conditions at the time of the raising, the overall cost of capital associated with the option chosen, the costs and availability of alternate sources of funding, the availability of underwriting support and the interests of all existing and potential shareholders.
- Remembering the GFC - Reflecting on the urgent raisings that occurred during the height of the GFC, entities tended to place a heavier weighting on speed and certainty in their choice of capital raising structure, making greater use of institutional placements to access capital quickly to minimise the market risks associated with a capital raising when retail investor risk appetite was sharply reduced. Doing so also served to have the underwriters off risk in a shorter period, meaning the termination events in an underwriting agreement operated within a more confined period.
- Fairness - ASX has noted that as market conditions stabilised, the weighting applied to ‘fairness’ to all shareholders in raisings increased and the relative attractiveness of pro-rata issues arose, particularly for accelerated rights offers where various mechanisms were introduced to enhance outcomes for shareholders (eg the SAREO and PAITREO structures). These enabled companies to access the majority of capital from institutional investors within a short time horizon, while also providing retail investors with the opportunity to participate in the offering on similar terms, but with more time to consider their position.
- Weighing the factors - From a regulatory perspective, ASIC and the ASX continue to support the principle that entities should, where possible, seek to minimise the dilution of existing retail shareholders. The share purchase plan, as a follow-on to an institutional placement, has been the mechanism by which many entities have sought to address this issue. That said, a traditional renounceable rights issue, made on equal terms to all shareholders, is still considered the ‘fairest’ option. However, this option needs to be balanced against the length of time it can take to complete such an offer, with the consequence that shareholders may be exposed to greater costs and execution risks. By comparison, an institutional placement (particularly where there is no offer to retail investors) clearly raises issues of shareholder dilution but can be done quickly and at a lower cost.
Ultimately, it will be a decision for the Board to make a considered assessment based on the circumstances and the information to hand, including the range of risks that must be balanced. Keeping a record of those factors that influenced the decision and being able to communicate that rationale to shareholders is also important.
Market developments and practice are still emerging in the COVID-19 environment. To date, what we are seeing is a return to some of the features that were prevalent during the GFC, but which tended to recede into the background during a more benign macro-economic environment, together with some fresh initiatives.
- Increased placement capacity - The ASX has granted a temporary lift in a listed entity's 15% placement capacity under ASX Listing Rule 7.1 to 25%, subject to the entity undertaking a follow-on accelerated pro-rata entitlement offer or SPP offer. This increased capacity can only be utilised as a one-off and cannot be ratified or replenished.
- Relaxation of the 1:1 ratio for non-renounceable rights issues - The ASX has also granted a temporary waiver of the 1:1 ratio cap that is applicable to non-renounceable rights offers in ASX Listing Rule 7.11.3. ASX has not prescribed a substitute ratio but entities will need to notify the ASX and provide an explanation of the applicable circumstances. This will apply both to accelerated non-renounceable entitlement offers (ANREOs) and traditional non-renounceable rights issues. As a matter of practice, we tend to see a predominance of non-renounceable rights issues in times of economic distress.
- COVID-19 disclosure - In the current environment, COVID-19 disclosure is naturally influencing the disclosure in the offer materials (namely the investor presentation) in a myriad of ways, including:
The overall investment thesis is built around the soundness and strengths of the underlying business. Investors are asked to contribute equity because, if the company is able to navigate through the current headwinds, including by meeting its short-term liquidity needs, it should be able to recommence its business activities once the situation normalises and earnings, and share prices, will rebound.
- its impacts on revenue and guidance. In relation to the latter, many companies will simply not be able to give quantitative guidance at all, and nor does the law require it. An outlook is also likely to be heavily qualified by reference to the sheer uncertainty of the current situation. That is, the severity and duration of COVID-19 and responses by governments and others to counteract its spread preclude the entity providing meaningful forward-looking guidance;
- the amplification of risk disclosure, both COVID-19-specific disclosure and how COVID-19 impacts other risks that the company may ordinarily disclose; and
- the use of the proceeds from the raising. One of the themes we are seeing in the current environment is a narrative relating to maintaining liquidity, provision for balance sheet fortification and prudent management of cashflow through cuts to CAPEX and OPEX.
- Debt position - The entity's debt position often goes hand-in-hand with its equity. So, for a number of companies, it's critical to present disclosure that demonstrates its debt funding will either remain in place, is the subject of waivers or has otherwise been amended or substituted with a new financing arrangement.
- Underwriting agreements - We are seeing, and expect to see, more market fall clauses in underwriting agreements, particularly given recent volatility. These are clauses that facilitate termination by the underwriter/joint lead managers where a prescribed index, such as the S&P/ASX All Ordinaries Index falls below a prescribed percentage (eg 10%, 12.5%, 15%). Similarly, we can expect to see closer negotiation of termination events relating to matters such as force majeure, change of law and material adverse change clauses, often carving out COVID-19 specific matters known and in existence as at the date of the underwriting agreement.
- Time frames - The time periods for offers tend to run to the shorter of the limits prescribed by the ASX's timetables. This means for placements and the accelerated institutional portion of a rights issue the bookbuild is finalised within one to two days, with settlement in around a week, but the retail offer will run for around three to four weeks.
- Liability - The liability regime remains unchanged for placements and accelerated rights issues, namely the law of misleading and deceptive conduct remains the touchstone for ensuring the disclosure is accurate and, unlike offers under a prospectus, no formal due diligence defence applies.
- Due diligence - Notwithstanding no due diligence defence applies in a 'low-doc' raising, in almost all cases we still see a comprehensive due diligence process adopted for 'low-doc' rights issues. For placements, the position is more mixed. Some companies, as a matter of house policy, will run a formal due diligence process, complete with committees and sign-off/reports from management, accountants and lawyers. This can be to ensure a robust process is followed, as well as to 'put the feet to the fire' of all those involved. In other cases, there may be less time to run a formalised process, and the due diligence is largely concentrated on a management due diligence questionnaire which is designed to flush out all material non-public information that will require disclosure in the offer materials. Irrespective of the type of offer, our advice to clients is to never let the process become the 'main item'; it is just a means to an end, and that is to ensure, as far as possible, that disclosure is true and accurate and therefore not misleading and deceptive, including, importantly, by omission.
- Foreign shareholders - Joint lead managers will be focused on the composition of the register. For the company, being able to supply up-to-date information regarding investors, in particular, details of any interactions with large offshore holders is important. For rights issues, there is an exemption for FIRB. In other cases, whether there is a FIRB requirement may depend, particularly for foreign government investors/sovereign wealth funds, the size of their holding and the proposed degree of participation.
In its Listed@ASX Compliance Update on 1 April, the ASX released some updates and guidance to listed entities in light of COVID-19, with a focus on temporary capital raising relief measures and continuous disclosure obligations. We have summarised the key takeaways below.
- Back-to-back trading halts - ASX will permit an entity to request two consecutive trading halts, allowing it a total of up to four trading days in halt to consider, plan for and complete a capital raising.
- 25% placement capacity - As noted above, ASX has granted, in the form of a class waiver, a temporary uplift in the 15% placement capacity in ASX Listing Rule 7.1 to 25%, subject to there being a follow-on accelerated pro-rata entitlement offer or SPP offer. Here, the entitlement offer or SPP price must be the same or less than the placement price. An entity intending to use the extra placement capacity must notify ASX of its decision to rely on the class waiver and the circumstances in which it is doing so.
- ANREOs - As noted above, entities are not constrained by the 1:1 ratio cap on non-renounceable entitlement offers. However, entities will need to address why such a step is fair and reasonable in the circumstances and notify the ASX of their decision to rely on the class waiver.
- Earnings guidance - The ASX has noted it is acceptable and understandable to withdraw and review earnings guidance which was issued prior to the outbreak of COVID-19. Entities that have not reviewed their published guidance in light of COVID-19 are strongly encouraged to do so.
- Entities in financial difficulty – Listed entities in financial difficulties are subject to the same disclosure standards under ASX Listing Rule 3.1 as other entities. If there is an adverse development affecting the financial condition or prospects of an entity that falls outside the carve-outs to immediate disclosure in ASX Listing Rule 3.1A and a reasonable person would expect information about that development to have a material effect on the price or value of its securities, the listed entity must immediately disclose that information under ASX Listing Rule 3.1.
ASIC has also been active in granting relief and providing support to companies on an expedited basis across a number of fronts. In relation to capital raisings, the standard position under the Corporations Act for issuers seeking to raise capital is that they cannot issue a cleansing notice when they have been in suspension for more than 5 days in the last 12 months. In a recent media release, ASIC has announced it will provide temporary relief1 to entities which have been suspended for a total of up to 10 days in the last 12-month period. Individual relief applications are not required in order to issue the relevant cleansing notice.
Under this temporary relief, entities which have:
- not been suspended for more than a total of 10 days in the last 12 months; and
- not been suspended for more than 5 days in the 12 months to 19 March 2020 (19 March was when the Federal Government changed its travel advice to the most severe Level 4 warning: 'do not travel' overseas),
will be able to undertake certain ‘low doc’ offers (including rights offers, placements and share purchase plans), even if they do not meet all the normal requirements. ASIC will also consider, on a case-by-case basis, granting relief if a listed entity has been in a longer period of suspension than 10 days.
Pursuant to ASIC Corporations (Trading Suspensions Relief) Instrument 2020/289 and ASIC Corporations (Amendment) Instrument 2020/290 (with respect to share purchase plans).