It's a time of much uncertainty for the equity capital markets community as a result of the cases being brought by the ACCC and ASIC in relation to the ANZ capital raising in 2015. How joint lead managers can work together to manage a capital raising transaction without breaching cartel provisions and what disclosure is required in relation to the outcome of a raising has been and will continue to be a much discussed topic for lead managers and issuers alike.
ASIC’s report 605 gives almost no guidance on when disclosure is required in relation to a shortfall however it does give guidance on two important issues: allocation processes and bookbuild messaging.
For the second year in a row, ASIC provided an early Christmas gift to Australian equity capital market participants with the release of a publication of significance.
ASIC Report 605 Allocations in Equity Capital Transactions (Report), released on 20 December 2018, provides a detailed overview of the way that various types of Australian ECM transactions are carried out and sets out ASIC’s findings from its review of market practice for the allocation of securities in equity capital market transactions. This includes a number of “best practice” recommendations for lead managers as well as some for ASX-listed issuers (and those aspiring to be ASX-listed).
The Report comes at a time when there is global focus on the management of conflicts of interest in allocation processes in ECM transactions – ASIC’s report largely adopts a number of the recommendations contained in the International Organisation of Securities Commissions’ (IOSCO’s) final report into equity capital raising processes from September 2018.
Given that regulatory context, and considering observations that ASIC has made in previous reports concerning management of confidential information and conflicts of interest in capital raising processes, ASIC’s findings set out in the Report do not come as much of a surprise. We expect that a large number of lead managers are already conducting themselves largely in accordance with the “best practice” recommendations made by ASIC in the Report. That said, some of the recommendations concerning the role of compliance in allocation processes, the records to be maintained (in particular, setting out and recording the reasons for each allocation decision) and participation by employees in securities transactions are likely to be new (and perhaps unanticipated) developments.
Additionally, there are a number of significant points coming out of the Report relevant to boards of issuers. It is those comments that are in some respects the most significant in the Report.
ASIC reminds boards that approving the issue of securities (including the allocations made) is their responsibility and ASIC’s Report suggests that in discharging their duties they should be having regard to:
- considering carefully the purpose of the raising and what the issuer hopes to achieve beyond just raising funds (for eg, to increase the number of institutional investors on the share register to improve liquidity);
- ensuring that they understand and engage with the allocation process (which includes ensuring that the terms of appointment of the lead manager allow them to do this – note, ASIC considers that it is sufficient that this be done through a right to be consulted on allocations; they do not require the issuer have a veto on allocations), informing themselves about the lead manager’s allocation policy and interrogating the allocation recommendations they receive; and
- scrutinising and querying the basis for any statements in any ASX announcements about the outcome of the capital raising transaction. ASIC notes that the use of “overly expressive” language should be avoided (precisely what is meant by this is left unsaid – but safe to assume that statements about the level of support for a capital raising must be balanced and factually supportable).
ASIC also notes in passing that based on its analysis of post-offer pricing performance, issuers may not be focussing on the terms of raising (ie the offer price) as “actively as they should’. We query that statement obviously and in our experience, issuers are typically very focused on the issue price and minimising the discount but there are a number of factors to balance, pricing (maximising proceeds and/or minimising the dilution impact for non-participating holders) being one of them, but others will often be of equal (and sometimes greater) importance, such as funding certainty (i.e. ability to obtain an underwriting commitment), the desire for a successful raising (i.e. ensuring that there is sufficient demand for the offering), the desire for a successful aftermarket and also the company’s interests in the long term health of its share register.
For lead managers, it is worth bearing in mind that although the findings in the Report are expressed as recommendations, it provides a strong indication of the approach ASIC will take in interpreting the content of legal obligations that all lead managers have (which include the obligations to provide financial services “efficiently, honestly and fairly”, to have in place adequate arrangements for the management of conflicts and not to engage in misleading or deceptive conduct in relation to securities). That being said, some of the “better practices” are expressed to be examples of things that might be considered. We suggest that lead managers consider the appropriateness of these suggestions in the context of their individual circumstances and processes.
Overall, ASIC has refrained from taking a prescriptive approach to allocations (compare this to ASIC’s guidance on sell-side research). However, like with the guidance on sell side research, we expect that the significance of the recommendations will become more apparent as the industry attempts to implement the recommendations.
All lead managers should consider their systems and practices against ASIC’s “best practice” recommendations, which include:
- putting in place a standalone allocation policy and procedures which are designed to ensure a fair and efficient allocation process and to avoid or minimise potential conflicts – even for large lead managers which already have such policies, those policies should be reviewed against ASIC’s guidance. ASIC’s guidance promotes more transparency and engagement with issuer’s on allocation processes more generally in ensuring the issuer’s objectives in allocation decisions are held above the lead managers’ interests such as fostering the relationships between lead managers and particular fund managers. Although ASIC observes that in underwritten deals, there is a tendency to prefer investors who are sub-underwriting, ASIC doesn’t go as far as to suggest this is improper;
- putting in place record keeping for allocation recommendations which includes the names of each investor who bid for securities, the number of securities they bid for, whether they are an existing holder, the number of securities they were allocated and the reasons for making an allocation recommendation that certain investors or classes of investors receive a disproportionately larger or smaller allocation relative to others – it will be interesting to see how easy it is to adhere to the latter requirement given the tight timeframe that allocation decisions are made, however some general notes on approach should certainly be able to be recorded; and
- defining the role that the broker’s compliance team has in monitoring compliance with the allocation policy (including in reviewing messages provided to investors during bookbuilds and in attending briefings to the sales team) – going forward, lead managers who are not already reviewing their compliance with their allocation policies and procedures on a sample basis, should consider doing so. For those lead managers who do not have compliance review bookbuild messages and electronic communications that go to investors, following this recommendation could require an increase in staff and in their training (though query how easy it will be for compliance team members, who would not have background on the issuer or the transaction, to assess whether communications are problematic).
There are a few additional areas in the Report which will also be of interest to lead managers:
- ASIC warns about the need to take care in messaging during bookbuilds to avoid misleading and deceptive conduct – and even suggests that lead managers should take into account their knowledge of investors to determine if an investor’s bid is excessive (the suggestion being that lead managers should know which investors are likely to inflate their bids – practically, this might not always be the case). ASIC also recommends that messages be provided in writing and to investors at the same time or as close together as practicable. Update messages are recommended if previously communicated information is or becomes inaccurate – we see this as further complicating decisions to keep investors informed during the course of a bookbuild (although clearly it has always been incumbent on lead managers not to mislead or deceive in this regard);
- a series of recommendations relating to allocations made to employees or principal accounts of the broker, which will be of interest to small and mid-sized brokerage firms, where this is acknowledged by ASIC to be a common practice (including because clients expect their advisers to have “skin in the game”). The conclusions here is that ASIC recommends against these allocations though it is implicit that they may continue but at a minimum:
- lead managers must have robust policies and procedures to enable conflicts to be managed (ASIC doesn’t consider that it is appropriate for these sorts of allocations to be made when the offer is well supported by quality demand);
- these allocations should be disclosed to the issuer together with their rationale;
- these allocations should also be disclosed to investors who received an allocation (other than where there is an undersubscribed offer) – the timing of this requirement appears to be after the allocation process is complete. ASIC’s goal is to increase transparency; and
- certain other recommended practices be followed, including minimum holding periods, timing of employee/principal account bids and ensuring that any “buffer” is not allocated to employees/principal accounts; and
- although ASIC refers to the practice of “Chairman’s Lists” in IPOs (allocating a small portion of the IPO to friends and family of the issuer), it doesn’t pass comment on this. We do not read the Report as suggesting that ASIC has an issue with the use of such lists in IPOs (subject to who is included in it: clearly where there are employees of the lead manager, the guidance relating to those sorts of allocations will be relevant).
ASIC has flagged that it will next look at practices in debt capital market raisings – suffice to say, to the extent the recommendations of this Report apply, debt capital market participants should also follow those.