We have previously written about control effect in rights issues and the regulatory limits on major shareholder underwriting arrangements (see the alerts titled “Same album, different track – control effects in rights issues” and “Getting your rights issue right”).
Since our last update, the Takeovers Panel has released a consultation paper seeking submissions on a number of proposed amendments to Guidance Note 17.
The balancing exercise remains
Although the update is welcome, the proposed amendments do not represent a major shift from the existing guidance and practice – in effect the balancing exercise remains. Broadly, the proposed changes:
- provide more detailed guidance on structuring to mitigate potential control effects, particularly through the use of shortfall facilities and other dispersion strategies;
- seek to clarify the circumstances in which a clear need for funds might counteract any potential structural issues which otherwise give rise to unacceptable circumstances; and
- outline that unacceptable circumstances may arise if an underwriter is interested in control (consistent with the decision in Datadot Technology Limited  ATP 13).
Mitigating potential control effects
In terms of structuring a rights issue to mitigate against potential control effects, the Takeovers Panel suggests that an entity should consider:
- making the rights issue renounceable where an active market for the rights is likely (noting that renounceability alone is not a safe harbour);
- offering a shortfall facility under which investors (or others) can apply to take extra securities in advance of determining the shortfall available to any underwriter. Where a shortfall facility is available:
- if applications under the facility exceed the number of securities available, securities should be allocated on a pro-rata basis and any cap on participation should not materially restrict the ability of investors to participate; and
- directors should not otherwise exercise any discretion regarding the shortfall in a manner likely to exacerbate a potential unacceptable control effect (except to the extent necessary to prevent an issue of securities in contravention of the Corporations Act or ASX Listing Rules);
- some other similarly effective dispersion strategy for dealing with the shortfall; and/or
- informed approval by non-associated investors of the rights issue and underwriting (including sub-underwriting) by related parties.
Additional features include using several, non-associated sub-underwriters, sufficient time and disclosure being given to allow investors to assess the offer and inviting external investors to take up any shortfall.
Clear need for funds – a safe harbour?
The Takeovers Panel is also seeking submissions on whether, in circumstances where there is a clear need for funds (which has not been caused or induced by a person who may benefit from any potential control effect) and an appropriate dispersion strategy to deal with any shortfall, structural issues (such as pricing and size) are still relevant in determining whether a rights issue is unacceptable.
In this respect, the revised draft guidance suggests that a rights issue will generally not be unacceptable if there is a clear need for funds and an appropriate dispersion strategy has been put in place.
This may assist in reducing some of the structural constraints that may otherwise apply for entities seeking to raise capital on an urgent basis – but is not of itself a safe harbour.
The proposed revisions are incremental rather than ground-breaking and reflect the current state of play as articulated in a number of recent Takeovers Panel decisions.
Entities considering undertaking a rights issue must also have regard to ASIC’s guidance in Regulatory Guide 6 (which has not changed), particularly in circumstances where a nominee is appointed to facilitate the sale of securities that would otherwise be offered to ineligible foreign shareholders.
ASIC continues to have an oversight role in relation to rights issues and will typically exercise its powers when approving a nominee. ASIC may withhold its approval if it considers that the rights issue is designed to avoid the requirements of Chapter 6 or may otherwise give rise to unacceptable circumstances.