In the past three days, the Federal Government, Australian Securities and Investments Commission (ASIC) and Australian Securities Exchange (ASX) have made some unprecedented and significant (although temporary) changes to the regulatory landscape with respect to equity capital raisings in Australia in response to the COVID-19 pandemic.
In this alert, we summarise some of those key changes and provide some thoughts on the immediate future. Collectively, these changes are welcome and significantly shift the goal posts in favour of Australian businesses looking to raise equity capital on an urgent basis. That said, it is certainly not open season for entities and their boards.
What are the changes made by the Federal Government regarding foreign investment?
The Federal Government has announced temporary changes to Australia's foreign investment laws. Relevantly, all monetary thresholds have been reduced to nil.
As no change has been announced to the percentage acquisition thresholds (usually 20% unless a media company, land corporation or agribusiness), this will still allow foreign investors (excluding foreign government investors) to participate in equity capital raisings without approval from the Treasurer, provided that such participation falls below such percentage thresholds or within certain exemptions. Importantly, an exemption applies for participation in rights issues but not for shortfalls, so smaller companies will need to be more careful in allocating shortfall to foreign investors to ensure there is no breach of the foreign investment rules.
For underwriters with the benefit of a business exemption certificate issued under Australia's foreign investment regime, there will be no change. The position for underwriters without such an exemption has not changed either. They will still be able to acquire shortfalls representing less than 20% in most companies even though the monetary thresholds have been removed.
In summary, the impact of the foreign investment law changes on capital raisings by ASX listed entities is expected to be limited but the sudden tightening of the regime may still dampen appetite from offshore investors, who are a key element of Australia's capital markets.
Please refer to our previous client alerts for further detail on the impact of the changes.
What are the changes made by ASIC?
ASIC has announced that it had granted temporary relief to permit "low doc" placements, share purchase plans (SPPs) and rights issues where an entity:
- has been suspended for up to a total of 10 days in the previous 12 months before the offer; and
- has not been suspended for more than five days commencing 12 months before the offer and ending 19 March 2020 (being the date when the Federal Government changed its travel advice to "Level 4 - do not travel").
Entities that have been suspended for more than five days before 19 March 2020 or entities that have been suspended for more than 10 days in total will need to apply to ASIC for individual relief to conduct a "low doc" capital raising or otherwise prepare and lodge a prospectus.
This provides entities with more flexibility to remain in voluntary suspension for longer periods while they structure their offer, engage with investors and other third parties such as debt financiers and finalise details of their capital raising plans without adversely affecting their ability to issue a cleansing notice. When added to the ASX change permitting back-to-back trading halts, this effectively gives a company a total of 14 days without trading to finalise and execute equity capital raisings, up from the current 7 days. In the current environment, that has to be a good thing.
What are the changes made by ASX?
ASX has announced temporary emergency capital raising relief which will expire on 31 July 2020 unless ASX decides to remove or extend such relief. This is the first time that ASX has issued a class waiver to vary the Listing Rules. This unprecedented action means that the changes have immediate effect, compared to the usual lengthy process associated with Listing Rules changes.
Placements, share purchase plans (SPPs) and entitlement offers are affected and are discussed in further detail in the table below. There are no real changes to dividend reinvestment plans or IPOs.
How do these changes impact capital raisings?
Uplift in placement capacity
Key to ASX's relief is that it will temporarily allow an uplift to the standard 15% placement capacity to 25% (Temporary Extra Placement Capacity) provided that any placement is made in conjunction with a follow-on accelerated entitlement offer or SPP, in each case, at the same or lower price than that offered under the placement.
Other key features of this relief are as follows:
Whilst not the most equitable capital raising structure, placements are a popular form of capital raising given the short timeframes and tighter discounts available. The relief announced by ASIC and ASX is pragmatic and, given the generous cap on SPPs (details of which are set out below), we are expecting that many entities (especially those without significant capital needs or looking to minimise cost of capital) will take advantage of this relief over the coming weeks and months. The fact that entities can benefit from a back-to-back trading halt, and be suspended for a longer period, and still follow this route just adds to the attractiveness.
What about underwriters?
Placements have always been popular given the short period of market risk they are required to assume and we see greater preference towards placements going forward.
SPP restrictions are waived
ASX is waiving the current restrictions on SPPs that restrict (i) the number of securities issued under the SPP to not more than 30% of the number of fully paid ordinary shares issued, and (ii) the price per security issued under the SPP to at least 80% of the five day volume weighted average price for the securities in that class. The $30,000 annual limit on SPP participation by a security holder remains unchanged.
As noted above, the price of securities issued under a SPP that follows a placement must be equal to or lower than the placement price. On the other hand, if an entity does not undertake a placement, then the issue price of the securities is set at the board's discretion.
If there is a limit on the amount to be raised under the SPP, the entity must use its best endeavours to ensure that SPP participants have a reasonable opportunity to participate equitably in the overall capital raising. Any scale back must be applied on a pro rata basis to all participants.
Removing these SPPs restrictions materially increases the flexibility and therefore the attractiveness of this type of transaction but with important checks and balances still retained.
When offered with a placement, we expect non-underwritten SPPs to be highly popular.
|3. Entitlement offers||
Waiver of "one-for-one cap" on non-renounceable entitlement offer
ASX has waived the 1:1 ratio limit on entities offering securities under a non-renounceable entitlement offer. This will apply to both accelerated and traditional non-renounceable entitlement offers. ASX has not imposed a replacement limit so boards are free to set their own ratios but ASX expects entities to choose an appropriate ratio for their non- renounceable entitlement offer that meets their capital raising needs and is also fair and reasonable in the circumstances.
Non-renounceable entitlement offers are always the preferred entitlement structure for entities in urgent need of large amounts of equity capital in uncertain markets. The ASX relief is designed to enhance the flexibility and attractiveness of non-renounceable entitlement offers and it will achieve those aims. For now, we see the non-renounceable entitlement offer as the "go to" structure for entitlement offers. The fact that entities can benefit from a back-to-back trading halt, and be suspended for a prolonged period and still follow a "low-doc" offer adds to the attractiveness.
An entity that elects to do a placement with a follow-on accelerated pro rata entitlement offer will qualify for the normal “supersize” waiver ASX grants where an entity is contemplating a placement followed by a pro rata entitlement offer. Listed entities will not need to apply separately to ASX to get the benefit of this waiver.
Entities would do well to remember, however, that rights issues can be a mechanism to transfer control and the general takeovers policy remain unchanged. Accordingly, it will be particularly important in these circumstances to ensure that the rights issue is appropriately structured having regard to guidance provided by the Takeovers Panel. In addition, ASIC nominee approval may be needed as part of the exemption allowing investors to acquire more than 20% under a rights issue. ASIC has examined these transactions closely in the past to ensure that the arrangements are not designed to avoid the requirements of Chapter 6 of the Corporations Act or otherwise give rise unacceptable circumstances, and we don't see that changing.