The Court refused to equate securities issued to an underwriter in payment of an underwriting fee for a rights issue with shortfall securities issued to the underwriter under the rights issue, finding that the former do not fall within the second exception to LR 7.1 and should be counted in reducing the number of securities available for a subsequent issue under LR 7.1.  In reaching such a conclusion, the Court highlighted the intention of LR 7.1 to protect shareholders from dilution of their voting and economic interests, and in this context, likened underwriting fee securities to a placement.  Listed companies will need to consider whether they have capacity to issue shares to underwriters, under the 15% limit in LR 7.1, when agreeing underwriting terms.

In August 2012, Bass Strait Oil Company (BAS) issued a placement of approximately 56 million shares (the Somerton Securities) to Somerton Energy Ltd (Somerton), thereby diluting the interest of Oil Basins Limited (OBL) in BAS from 19.90% to 17.38%.  OBL sought orders to reverse the dilution of its BAS shareholding, claiming that the issue of the Somerton Securities breached the prohibition in ASX Listing Rule 7.1 (LR 7.1) on issuing or agreeing to issue, without shareholder approval, more equity securities in 12 months than would represent 15% of its issued capital by reference to the formula in LR 7.1.

The issue in dispute was whether 10 million options issued to GMP Securities Australia Limited (GMP) as part of GMP’s fee for underwriting a rights issue in September 2011(Underwriting Fee Securities) fell within the second exception under LR 7.1 for issues under an underwriting agreement to an underwriter of a pro rata rights issue.

The Court rejected BAS’s submission that the second exception under LR 7.1 applied to any issues of securities to an underwriter under a relevant underwriting agreement (ie both shortfall securities and the Underwriting Fee Securities).  The Court held that such an interpretation would conflict with the intention and purpose of LR 7.1 to protect a shareholder from dilution of their voting and economic interest in an entity, with the exceptions covering situations where shareholders do not require the same protection (such as a rights issue where a shareholder can choose whether or not to participate).  The Court then likened the issue of the Underwriting Fee Securities to a placement in which the existing shareholders have no involvement in the issue of shares (and no means of protecting themselves against dilution).

Accordingly, the Court found that:

  • the Underwriting Fee Securities should have been counted in the calculation under LR 7.1, reducing the number of securities that BAS could issue without shareholder approval; and
  • the failure to do so meant that the issue of the Somerton Securities breached LR 7.1.

However, the Court declined to grant OBL substantive relief due to the small extent to which OBL’s shares had been diluted by the failure to include the Underwriting Fee Securities (less than 0.5%) and BAS’s undertaking to the ASX to offset the same number of securities issued in breach of LR 7.1 from the number of securities it could issue until August 2013.

See the case.