With the new financial year upon us, many companies with accumulated profits will be turning their attention to the most appropriate approach to dealing with these profits in a way that will best produce maximum return for the company.
In recent times it has become popular for listed companies to consider the implementation of a Dividend Reinvestment Plan, giving shareholders the opportunity to take their dividends, either in part or entirely, in the form of additional shares in the company, rather than cash payment.
In this Alert, Partner Brian Moller and Trainee Solicitor Kaitlyn Rafter explain the process of implementing a Dividend Reinvestment Plan in your company.
- What is a DRP;
- Address common queries which might arise under the ASX Listing Rules; and
- Identify issues to consider under the Corporations Act.
Dividend Reinvestment Plan
A Dividend Reinvestment Plan (DRP) is a process by which a company offers a shareholder the ability to increase their holding in the company by electing to take some or all of available dividends in the form of the issue of further shares, without transaction or brokerage costs. DRPs are often used to reward existing shareholders for their loyalty.
For companies, the biggest advantage of a DRP is that the company can increase its issued capital, and does not have pay out the full dividend amount, or if wholly taken up by existing shareholders, any of the dividend amount, in cash.
One way for companies to make participation in the DRP particularly attractive for existing shareholders is, apart from providing the opportunity for increasing share ownership, to offer "subscription" in the DRP at a discounted issue price to current trading prices.
Participation in DRPs by shareholders must be voluntary, however companies can offer the option to shareholders that they take their dividends either wholly in cash, or wholly in new shares, or a combination of cash and new shares.
A DRP need not be approved by shareholders and can simply be adopted by the company’s Board of Directors.
Additionally, a company can choose to have the DRP either partially or wholly underwritten. This means that the company,in addition to rewarding shareholders with a dividend payment, can at the same time raise additional capital from any “shortfall” arising under the DRP, without adversely impacting upon the net cash of the company. This may then allow the cash assets retained to be utilised for purposes other than dividend payments.
Listing Rule Issues
Do I need shareholder approval?
Under Listing Rule 7.1, a company cannot issue new equity securities equivalent in number to more than 15 percent of its capital in any 12 month period without the prior approval of its shareholders (securities issued with shareholder approval under Listing Rule 7.1 do not count towards the 15 percent limit).
However, issuing shares under a DRP is an exception to Listing Rule 7.1 and as such, the issue will not count towards the company’s 15 percent limit, so long as the DRP does not limit shareholder participation. Examples of limitation to shareholder participation include:
- Where the company set a cap which may be a specified dollar amount, such as allowing shareholder participation to an identified maximum value in respect of their entitlement; or
- Where the company has specified a maximum number of shares that shareholders are able to receive in lieu of dividends.
What if I have overseas shareholders?
Understandably, issuing shares under a DRP could potentially be quite onerous where there are overseas shareholders who might take up the new shares. However, ASX have confirmed that restricting eligibility in participating in the DRP to shareholders with a registered address in Australia, (and even in New Zealand), does not amount to limiting shareholder participation. As such, companies are able to adopt a DRP, where only Australian resident shareholders may elect to take their dividends as new shares, with overseas shareholders continuing to receive their dividend payment in cash.
What if the DRP is underwritten?
Please note that the above exception does not apply to any shares which are not taken up by shareholders and are issued to an underwriter. As such, where the DRP is underwritten and there is a shortfall of shares to be taken up by the underwriter, the company must either get shareholder approval for the issue, issue the shares within the 15 percent capacity, or otherwise apply to ASX for a waiver in respect to the application of listing rule 7.1. Applying for a waiver from this listing rule is however quite common and regularly given.
What if directors or other related parties want to participate?
A DRP is also an exception to listing rule 10.11, which prohibits the issue of equity security to a related party without the approval of shareholders. As such, directors and related parties can participate in the DRP and increase their shareholding in the company in return for their dividend payment, without the approval of shareholders. Again, this exception does not apply where the DRP places a limitation on shareholder participation.
Corporations Act Issues
The offer of participation in a DRP amounts to an "offer" of securities under the Corporations Act 2001 (Cth) (Corporations Act). This would ordinarily result in a disclosure document being required but by virtue of ASC Class Order 00/238, a disclosure document is not required in relation to an offer made under a DRP.
The effect of this Class Order also ensures that shares issued to holders of listed entities are not subject to resale restrictions (under section 707 of the Corporations Act), so no “cleansing” notice need be given under section 708A(5) of the Corporations Act on conclusion of the DRP in respect of shares issued thereunder. These shares can be listed and on-sold without restriction.
The issue of shares under a DRP is also an exception to the Takeover Provisions (in Chapter 6.2D of the Corporations Act). As such, shareholders with substantial shareholdings may, by virtue of participation in a DRP, increase their holding and voting power from below 20 percent (please note that this exception does not apply to underwriters, however according to ASIC Regulatory Guide 6, case-by-case relief may be granted to this exception).