Equity raising opportunity amidst COVID-19

Yesterday ASIC and ASX announced a number of temporary measures to provide listed companies with greater flexibility to raise capital amidst the challenges of the COVID-19 pandemic. 

In this alert we provide a summary of the temporary measures announced by ASIC and ASX. 

In summary 

1. ASIC has granted relief to permit companies to undertake a “low doc” rights issue, placement or share purchase plan (SPP) under the Corporations Act 2001 (Cth) (Corporations Act) if they have been suspended from trading for up to 10 days in the past 12 months – increased from five days. 
2.  ASX will permit a company to request two consecutive trading halts, allowing the company a total of up to four trading days in halt to execute a capital raising. 
3. A company’s placement capacity under ASX Listing Rule (LR) 7.1 has been increased to a maximum of 25% of ordinary securities on issue, to be used as a one-off measure subject to certain conditions. 
4. ASX has waived the “one for one” cap on the number of securities that may be offered to shareholders under a non-renounceable rights issue under LR 7.11.3. 

The changes will make fundraising more accessible to listed companies navigating the challenges of the COVID-19 environment, but directors will have to exercise caution in undertaking capital raisings in the current market. The steps taken by both regulators appear to acknowledge the need for listed companies to have flexibility in the current environment, while also being aimed to maintaining protective measures for existing shareholders and retail investors.

“Low doc” offer relief 

ASIC has granted relief to enable a listed company to make a “low doc” offer (being an offer which does not require disclosure to investors under the Corporations Act) where the company has been suspended for no more than 10 days over the previous 12 months, an increase from the maximum of five days specified under the Corporations Act.

The company will be able to rely on the relief if:

• the company has been suspended for up to 10 days in the 12 months before the offer; and
• the company was not suspended for more than five days in the period commencing 12 months before the offer and ending 19 March 2020 (being the date on which the Federal Government changed its travel advice to the most severe Level 4 warning: ‘do not travel’ overseas).

The relief is directed at listed companies which have gone into suspension after 19 March 2020 due to the impact of COVID-19 and therefore gone beyond the permitted five days under the Corporations Act. The relief will assist companies to consider placements and entitlement offers (which aligns with relief provided by ASX) provided they do not exceed the 10 day suspension limit. 

Back-to-back trading halts permitted 

ASX will permit a listed company to request two consecutive trading halts, allowing a total of up to four trading days in halt to plan and implement a raising.
 
ASX notes that the company simply needs to make it clear in their request for a trading halt that they are seeking two consecutive back-to-back halts of two days each to consider a capital raising. 

Placement capacity increased from 15% to 25% 

Under LR 7.1, a company can issue up to 15% of the total number of ordinary securities on issue over a 12-month period without shareholder approval. ASX has granted a class waiver to effect the following: 

• There is a temporary uplift in the placement capacity under LR 7.1 to 25%, an increase of 10%. 
• The use of the temporary extra placement capacity can only be used for the issue of fully paid ordinary securities and is conditional on the company either:
  • making a follow-on pro rata entitlement offer under exceptions 1, 2 and/or 3 of LR 7.2 (the exceptions relate to a pro rata issue and the underwriting of and issue of any shortfall); or
  •  making a follow-on offer to retail investors under an SPP,

    in each case at the same or a lower price than the placement price. 

• Under LR 7.1A eligible companies can access additional 10% issuance capacity where shareholder approval is obtained at the company’s annual general meeting. Companies that already have this extra 10% placement capacity under LR 7.1A can elect to use their existing 7.1A capacity or the new temporary extra 10% placement capacity, but not both. 
• The temporary extra placement capacity is a one-off measure and is not able to be ratified or replenished.  A company that wishes to do more than one placement using the temporary extra placement capacity or issue something other than fully paid ordinary securities will need to approach ASX for an individual waiver. 
• A company that has already used up part of its existing 15% placement capacity under LR 7.1 or additional capacity under LR 7.1A will need to deduct that when calculating the proportion of the temporary extra placement capacity that is available to use. 
• Other restrictions that apply to the issue of securities under the Listing Rules (such as LR 10.11 where securities are issued to related parties) will continue to apply.

The company will need to notify ASX in writing that it intends to rely on the waiver and make the usual notification to ASX of a proposed issue of securities in the form of an Appendix 3B and if the securities are to be quoted, an Appendix 2A. 

Some companies have been quick to take advantage of the new changes. Webjet, which is currently in trading suspension, today announced an equity raising of $275m intended to strengthen their balance sheet in light of the impact of COVID-19. Part of the equity raising is by way of a fully-underwritten institutional placement that is reliant on the company’s extra placement capacity.

Waiver of the “one for one” cap on rights issues 

Under existing LR 7.11, a pro rata issue must meet certain requirements including, under LR 7.11.3, that the ratio of securities offered must not be greater than one security for each security held by the shareholder (unless the offer is renounceable). 

ASX has granted a waiver from LR 7.11.3 and is not proposing a replacement cap at this stage. ASX has stated that companies “are expected to choose a ratio for their non-renounceable entitlement offer that meets their capital raising needs and that is fair and reasonable in the circumstances”. The class waiver applies to both accelerated and standard non-renounceable rights issues. 

The class waiver notes that the company must notify ASX in writing that it intends to rely on that waiver and explain the circumstances in which it is doing so. 

ASIC and ASX reminder on fairness in capital raisings

In its Market Integrity Update also published yesterday, ASIC has acknowledged that some listed companies may need to raise capital due to the COVID-19 pandemic but reminded directors of the importance to consider fairness between shareholders – both institutional and retail – in capital raisings. ASIC notes that directors must act in the best interests of the company, which requires the balancing of a range of considerations, such as the need to raise capital quickly and the cost to and possible dilution of security holders. ASX has confirmed that it shares ASIC’s expectations and may withdraw the benefit of the class waivers it has granted in any particular case if they are being abused or the listed company is acting unfairly or unreasonably in the circumstances. 

Placements are attractive for companies looking to raise capital with speed and certainty amidst market volatility - as a placement can generally be undertaken without shareholder approval (within the company’s LR 7.1 capacity) or prospectus disclosure (provided the issue is to investors exempt from the requirement to give disclosure under the Corporations Act). However, directors should note the expectations of ASX and ASIC and ensure their capital raising structure is in the best interests of the company, with due regard to the interests of existing shareholders. A key focus of ASIC appears to be scale back and allocation policies for such raisings. 

Key takeaways 

• Listed companies have a number of options to raise capital, including a placement to institutional investors, a rights issue, SPP or combination of these. The measures implemented by ASIC and ASX give greater flexibility to conduct raisings during the challenging COVID-19 environment.
• Under the temporary relief granted by ASIC, a company can undertake a “low doc” rights issue, placement or SPP where they have been suspended for a total of up to 10 days in the previous 12 month period (increased from 5 trading days) and provided the company was not suspended for more than five days in the period commencing 12 months before the offer and ending 19 March 2020. 
• Under the relief granted by ASX: 
  • a company may request two consecutive trading halts to effect a capital raising; 
  • the placement capacity under LR 7.1 has been increased from 15% to 25%; and
  • the cap on the number of securities that may be offered under a rights issue - one new security for each security held - has been waived.  
• The measures are intended to be temporary. ASIC may revoke its relief with 30 days’ notice and the regulator has said a decision to revoke will be based upon an assessment of market conditions and consultation with key stakeholders. The class waivers granted by ASX will expire on 31 July 2020 unless ASX decides to extend them. 
• Companies should be mindful that calculation of a company’s remaining placement capacity under 7.1 with the temporary increase will have some complexities and requires consideration of the number and types of securities issued by the company over the previous 12 months and whether they were issued with or without shareholder approval or under certain exceptions.
• ASIC and ASX have reminded directors to consider whether the structure of any capital raising is in the best interests of the company – which will require consideration of factors such as the need to raise capital quickly (such as via a placement) and possible dilution to existing shareholders. 

If your company is considering undertaking a capital raising and would like further advice on the changes discussed in this article, please contact our Corporate and Mergers & Acquisitions team.