Today, ASIC flexed its muscle and delivered a swift blow to the capital raising hopes of ASX listed, Regional Express Holdings Limited (REX) in response to continuous disclosure breaches ASIC alleges occurred in May 2020.
As a result of ASICs actions, regional air carrier REX is now prevented from utilising the reduced content prospectus rules (and it appears other related exemptions) under the Corporations Act for 12 months (expiring 14 December 2021).
The decision will be a significant blow to REX who, like all airlines suffering through this ‘COVID era’, would likely need the flexibility to undertake emergency capital raisings to help underpin what is no doubt a severely diminished business.
This is particularly damaging to REX, and one suspects could not come at a worse time for the carrier, considering its aspirations of stealing market share in the capital city aviation market from the now rebirthed Virgin Australia.
Why was REX placed on a capital raising leash?
ASICs decision was based on an allegation that REX failed to disclose to the market material information regarding its business prior to making those disclosures (via its Chairman) to journalists.
Specifically, ASIC allege that the Chairman of REX released to a journalist on 11 May 2020 a business plan which included:
• plans to commence new routes into capital cities; and
• a plan to invest $200million for this purpose which it intended to fund via an equity raising.
This was news to the market, considering REX (an ASX listed company) had not made any such disclosure via the ASX company announcements platform.
Immediately following the article, on 12 May 2020, ASX placed REX into a trading halt (presumably having seen the AFR media article).
In response to ASX’s actions, REX made an announcement on 13 May 2020 which in essence confirmed the content of the Australian Financial Review article, noting that “[REX] is considering the feasibility of commencing domestic airline operations…REX discloses that it has been approached by several parties interested in providing the equity needed for REX to start domestic operations in Australia…in the vicinity of $200million…”
Impact of the decision
What is interesting in this particular case is that ASIC has chosen to punish REX in both a swift and potentially impactful way by restricting the ability for REX to utilise the “reduced content prospectus” rules in Section 713 of the Corporations Act (as well as the cleansing notice provisions in Section 708A and 708AA), rather than other avenues open to it (which include civil penalty and formal criminal proceedings).
Whilst these other avenues might have a more financial and long-term impact on REX if ASIC were to chose to go down such a path, they also deliver justice potentially more slowly and in a more formalised manner.
The current approach adopted by ASIC in this matter is arguably more measured and reflects that whilst the actions of REX (in ASICs mind) constituted a breach of the continuous disclosure rules, it may not have been of such gravity to warrant a civil penalty or worse.
For REX, however, undertaking its $200million equity raising (if it chooses to do that) over the next 12 months will now be far more difficult in that if REX chooses to undertake a placement, it will not be able to take advantage of the short form prospectus content provisions nor the cleansing statement provisions (Section 708A) of the Corporations Act and will likely need to undertake a full Section 710 prospectus (otherwise known as an IPO prospectus) – likely leading to increased costs and increased delay.
If you require any assistance with capital raising procedures, please contact a member of our Corporate Advisory and Governance team.