As part of its wider package of reforms to the regulation of capital raisings by ASX-listed entities, ASX has announced a proposal to shorten the standard timetable for traditional entitlement offers by up to two weeks, and changes that have the effect of reducing the spread requirements and increasing the ability of small caps to raise capital. Even with these changes, in volatile capital markets “traditional” entitlement offers will still compare unfavourably with accelerated entitlement offers and institutional placements and we do not expect the changes to have a significant impact on the relative attractiveness of traditional entitlement offers absent greater stability in Australian equity markets.
1 The proposals and their immediate impact
ASX is currently consulting on proposals to reduce its standard timetable for rights issues from a maximum timetable of 26 business days down to 16 business days.
ASX’s objective is to make “traditional” entitlement offers (i.e. non-accelerated entitlement offers) a more viable fundraising option by shortening, as far as practicable, their timetable.
This is in response to criticism from ASIC, the media and shareholder groups about inequality of treatment arising from the widespread reliance on accelerated entitlement offers and institutional placements since the beginning of the GFC.
Accelerated entitlement offers, where proceeds can be obtained from institutional shareholders in a week, and institutional placements, which may be completed in a period of days, have proven far more viable options for companies in need of equity in volatile capital markets than have traditional entitlement offers which take at least 4 to 5 weeks under the standard timetable. In particular, obtaining underwriting commitments for such a period has either proved impossible or too expensive in many instances.
The bottom line is that whilst the proposals would shave two weeks off the standard timetable, this is not, by itself, going to put traditional entitlement offers on par with accelerated offers or placements. ASX acknowledges this by asking whether future law reform may be undertaken to facilitate rights offers conducted inside a week to all shareholders (and not just institutional shareholders).
As a result, even with these changes, in volatile capital markets “traditional” entitlement offers will still compare unfavourably with accelerated entitlement offers and institutional placements and we do not expect the changes to have a significant impact on the relative attractiveness of traditional entitlement offers absent greater stability in Australian equity markets. It is also worth noting that we have seen some recent resurgence in the use of the “traditional” offer structure, whether because of fairness considerations, the significance of retail shareholders on a company’s register (or the lack of a significant institutional presence) or where a company has no broker or underwriter. To the extent a company wishes to use the “traditional” offer structure, these changes undoubtedly enhance the flexibility and viability of that option.
2 Is it possible to adopt a shorter timetable for traditional entitlement offers now?
Even though the release of the consultation paper demonstrates that ASX is amenable to abbreviating its standard timetable, it will not be feasible to conduct a traditional offer on the expedited timetable prior to finalisation of the proposal. There are a number of mechanical and technological changes ASX (and certain other stakeholders, such as registries) must implement before systems can function in accordance with the shorter timetable, which ASX has warned will take time. Submissions are due in mid-August, though ASX has not indicated how long the consultation, or implementation of the resulting changes, will take.
3 What effect would the proposed changes have on traditional offer timetables?
The overall 10 business day abbreviation of the standard timetable would be achieved by reducing the time periods prescribed for the steps set out below:
Click here to view table.
Additionally, to accommodate rights trading during a renounceable rights offer within the shorter period from the ex date to the close of applications, ASX is proposing that the minimum number of business days from the end of rights trading to the close of applications be reduced from 5 business days to 3. This has the effect that the rights-trading period is reduced from a minimum 11 business days to 7. One immediate advantage of the proposed changes will be to prevent the anomalous situation which can arise under the current standard, where a person can acquire shares on the ex date (which are, by definition, ex entitlement) and have their purchase settle on the record date (making such a person a shareholder on the record date and creating confusion about why they do not have any entitlement to participate in the offer).
4 What effect would the proposed changes have on accelerated rights issues?
The ASX Listing Rules do not currently provide a standard timetable for accelerated entitlement offers, although an exposure draft of changes published in August 2011 (following an ASX consultation process initiated in January 2011) contained three draft timetables for JUMBO, AREO / SAREO and PAITREO accelerated offer structures.
ASX has confirmed that those accelerated timetables will not be finalised until it has implemented the changes to the traditional timetable arising from its current consultation process. The August 2011 draft accelerated timetables will be amended to take into account any consequential impact arising from the changes to the traditional timetable. To some extent, the changes reflect time periods used under an accelerated timetable (e.g. the shorter period between the ex-date and record date). We would expect ASX to suggest similar alterations to the PAITREO timetable to the extent these have features coinciding with a traditional renounceable offer.
So, for the moment, it remains necessary to obtain standard form ASX waivers to facilitate an accelerated offer.
5 Changes benefitting small caps
- New capital raising rules for companies outside the S&P/ASX 300
Another interesting development in the capital raising world are the changes set to commence on 1 August 2012 that permit companies outside the S&P/ASX 300 with a market capitalisation of less than $300 million to issue a further 10% of capital within 12 months by placement, provided:
- shareholder approval is sought and obtained by special resolution at an AGM;
- the extra 10% is issued at a maximum discount to market of 10%; and
- additional disclosure obligations are complied with.
- New admission criteria
ASX has also announced the following amendments to the requirement for new admissions to the official list, applicable from 1 November 2012:
- liberalising the “spread test” applicable to all entities applying for admission to the official list from 1 November 2012; and
- increasing the net tangible assets test for admission from $2 million to $3 million. (The net tangible assets test applies to all entities applying for admission as ASX Listings other than those that comply with the profit test).
Under the spread test changes, there will be 3 alternative “spread tests” under which an applicant entity may apply for admission (of which an application need only satisfy one):
Click here to view table.
These new capital raising rules offer small caps timely access to greater fund raising opportunities and the liberalisation of the spread test will provide assistance in getting floats of all sizes off the ground in these more challenging times.