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Focus: Capital raising limit for mid to small caps increased

1 August 2012

In brief: The Australian Securities Exchange has released amended Listing Rules that increase the annual capital raising limit for mid to small caps and should mean greater flexibility for a large number of ASX-listed companies. Partners Andrew Pascoe (view CV) and Julian Donnan (view CV), Senior Associate Matthew Ireland and Lawyer Kieran Chute report.

How does it affect you?

  • As we previously reported, the Australian Securities Exchange (the ASX) has proposed increasing the annual capital raising limit for mid to small caps. Following public consultation, the ASX has now released the amended Listing Rules.
  • Listed entities outside of the S&P/ASX 300 with a market cap of $300 million or less will be able to seek shareholder approval to raise 10 per cent of issued capital per year via placement. This 10 per cent is in addition to the current 15 per cent placement capacity under Listing Rule 7.1.
  • Listed entities seeking to rely on the new rule will be subject to additional reporting and disclosure obligations.
  • The new rule will provide greater flexibility for mid to small caps to raise funds via placements, but not as much as had been proposed in the ASX April consultation paper. Also, the new rule does not apply as broadly as was initially proposed.
  • The ASX has also amended its admission requirements, with alternative securityholder spread tests, and an increased NTA threshold from $2 million to $3 million.
  • The new regime applying to placements comes into effect on 1 August 2012 (with the amended admission requirements applying to listing applications lodged with the ASX after 1 November 2012).

The new placement rules

Eligible entities and shareholder approval

Listing Rule 7.1 limits the number of securities that a company can issue via placement, to 15 per cent of issued share capital over a twelve month period, subject to a number of exceptions.

The main features of the new Listing Rule 7.1A are:

  • 'Eligible entities' (ie companies that, as at the date of the meeting referred to below, are both outside the S&P/ASX 300 and have a market cap of $300 million or less) can seek pre-emptive shareholder approval to issue up to an additional 10 per cent of share capital during the following 12 months.
  • Shareholder approval is obtained via a special resolution (ie at least 75 per cent approval) at an annual general meeting.
  • Securities issued under Listing Rule 7.1A must not be issued at a discount of 25 per cent or more to the volume-weighted average price for the securities calculated over the preceding 15 days of trading.

These changes do not alter the existing position regarding placements to persons of influence (such as major shareholders or directors). Where a listed entity proposes to issue shares to a person of influence by way of a placement, it will still require shareholder approval under Listing Rule 10.11, even where it has obtained approval under Listing Rule 7.1A.

Notice of meeting and voting exclusions

The new Listing Rule 7.3A requires companies seeking to rely on Listing Rule 7.1A to include certain disclosures in the notice of meeting where shareholder approval is sought, including:

  • the minimum price at which securities may be issued under Listing Rule 7.1A;
  • details of the risk of economic and voting dilution of existing security holders, including the risk that the share price may drop following the issue and that the issue price may be lower than the trading price on the issue date;
  • the date by which equity securities may be issued;
  • the purposes for which securities may be issued (including whether securities may be issued for non-cash consideration);
  • details of the allocation policy for issues under the approval;
  • if the entity has previously obtained approval under Listing Rule 7.1A, the total number of securities issued in the preceding 12 months as a percentage of capital, and the details of each issue; and
  • a voting exclusion statement.

Persons who may participate in the proposed issue are excluded from voting on the special resolution. A note in the relevant new Listing Rules states that where the proposed allottees are not known and identified, but where:

  • the proposed issue is a general offer to apply for securities open to the public or a section of the public; or
  • the approval is an approval at large for the issue of securities up to a certain limit,

a person's vote should not be excluded on the grounds that there is a mere possibility they will be issued securities under the proposed issue.

Disclosure upon issue

Where an entity does issue securities under Listing Rule 7.1A, it must make an announcement to the market that contains the following information:

  • details of the dilution of existing shareholders as a result of the issue;
  • where the securities are issued for cash, a statement of the reasons why the entity undertook a placement and not a pro-rata or other similar issue;
  • details of the allocation policy for the issue;
  • details of the underwriting arrangements, including fees; and
  • any other fees or costs incurred under the issue.

The new admission requirements

  • The ASX has increased the net tangible assets test for admission to official listing from $2 million to $3 million, rather than the $4 million proposed in ASX's April consultation paper.
  • The 'spread tests', regarding the minimum number of securityholders and the minimum value of each securityholder's holding required for an entity to qualify for admission to the ASX, have also been liberalised.

Comment

The new Listing Rule 7.1A will certainly offer greater flexibility to many listed entities to raise capital quickly through a placement. However, the new rules as introduced do differ from the reforms proposed in ASX's April consultation paper. In particular:

  • The definition of 'eligible entity' has been narrowed to include companies that are both outside the S&P/ASX 300 and have a market capitalisation of less than $300 million as at the date of the relevant special resolution. The ASX consultation paper did not contain the requirement that a company be outside the S&P/ASX 300. It is worth noting that the relevant time for determining whether an entity is an 'eligible entity' is the time when shareholder approval is obtained under Listing Rule 7.1A (ie the date of its AGM). This definition is unclear regarding at what point during the relevant trading day an entity's market capitalisation is assessed. This potentially gives rise to a situation where an entity with a market cap of slightly less than the $300 million threshold on the date of its AGM may potentially become ineligible to rely on Listing Rule 7.1A following an increase in its share price during the course of the day. Similarly, given the time between issuing a notice of meeting proposing a special resolution required by Listing Rule 7.1A, it is possible that an entity's market capitalisation may increase above the $300 million threshold in the period between notice being given and the AGM being held.

    Entities that foresee such a situation arising should be careful to draft the proposed special resolution on the basis that shareholder approval will be conditional on the $300 million test being satisfied at the date of the AGM. An entity may still issue securities in accordance with a special resolution made under Listing Rule 7.1A if its market cap increases above $300 million or it is included in the S&P/ASX 300 after the date of the AGM where the special resolution was passed.
  • The required shareholder approval threshold has increased from an ordinary resolution (50 per cent approval) to a special resolution (75 per cent approval).
  • The allocation policy used in determining who will be issued securities under the proposed placement/s must be disclosed in the notice of meeting at which shareholder approval is sought.
  • There is the inclusion of a requirement to disclose to shareholders at the approval stage the purposes for which securities may be issued and details of the allocation policy for issues under the approval.

As noted above, the notice of meeting must include a statement of the purposes for which the equity securities may be issued. This will require a degree of foresight from the board, and may encourage formulaic disclosure to ensure that shareholder approval is granted for the broadest possible range of capital raising purposes.

Similarly, the notice of meeting must include details of the allocation policy for the issue. Where a listed entity is seeking approval at large for the issue of securities up to 10 per cent of issued capital, it is unlikely that it will be in a position to give meaningful disclosure on this point and will therefore seek to ensure that shareholder approval is given for the broadest possible range of capital raising structures.

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