This article was written by David Friedlander, Joseph Muraca and Amanda Isouard.
On 31 March 2020, the Australian Securities and Investments Commission (“ASIC”) and the Australian Securities Exchange (“ASX”) announced that they would each grant temporary capital raising relief to facilitate emergency capital raisings for ASX-listed entities. The response to those changes was largely positive. The temporary changes have facilitated a number of emergency capital raisings with more suitable structuring and pricing, for which the regulators should be commended.
In response to market developments since that time and in consultation with ASIC, ASX announced on 22 April 2020 some revisions to its temporary capital raising relief. On 23 April 2020, ASIC issued a media release expressing its support for the enhanced disclosure revisions and its view that these enhanced disclosure requirements should apply to capital raisings more broadly.
Key changes to the ASX relief
We have issued a previous Client Alert on ASIC’s and ASX’s initial temporary capital raising relief.
The key changes to the ASX relief are as follows:
- allocation transparency: within 5 business days of completion of the relevant placement which utilises the temporary extra placement capacity, the entity must publicly announce to ASX:
- the results of the placement;
- reasonable details of the approach taken by the entity in identifying investors to participate and how it determined their allocations (including the key objectives and criteria for allocations, whether this included a “best effort” to allocate pro-rata to existing securityholders and any significant exceptions or deviations from those objectives and criteria); and
- that as far as it is aware, no securities were issued (or agreed to be issued) to any LR 10.11 persons (e.g. related parties, certain substantial holders and their associates) without securityholder approval under LR 10.11 (or it being conditional on that approval), under a LR 10.12 exception or with an ASX waiver applying.
In addition, the entity must at the same time privately give ASX and ASIC an electronic allocation spreadsheet setting out:
- full details of the allottees (including names, existing holdings as understood by the entity, the number of securities applied for at or above the final price or that were offered in the placement); and
- the number of securities they were allocated in the placement (including if none).
ASX’s changes here are made in the context of media commentary and some stakeholder agitation regarding allocations in a small number of recent capital raisings. ASX is to be commended for proposing a sensible approach for placements which take up some or all of the temporary extra placement capacity, as it balances keeping the market informed and not over-regulating the competitive auction process necessary to ensure high quality bookbuild processes.
We are strongly of the view that the vast majority of participants in institutional bookbuilds are well advised and do not need extra regulator protection. They are sophisticated parties who “play the game” with the same level of brinkmanship as those on the other side of the allocation process. Based on our experience, allocations are usually a business judgment made by issuers (with advice from their advisers) in good faith and for a proper purpose, with no material personal interest and where they rationally believe the allocations are in the best interests of the entity. Increased disclosure of the nature suggested by some that goes further than what has been required by ASX can do more harm than good to capital raisings – because it will impact the tools a board has at its discretion as it navigates the bookbuild process.
- extra placement capacity – structures: placements utilising the temporary extra placement capacity may be coupled with a follow on accelerated or traditional timetable entitlement offer. Previously the relief had only covered accelerated entitlement offers. This change is of benefit to issuers which have small institutional registers where there is limited advantage in conducting an accelerated institutional component of the entitlement offer.
- extra placement capacity – calculations: ASX has made clarificatory changes regarding how the temporary extra 10% placement capacity is calculated (e.g. that any securities issued in the previous 12 months that have not had securityholder approval under LRs 7.1 or 7.4 or are otherwise not made under a LR 7.2 exception are to be deducted from the 25%).
- SPPs – LR 10.11 participation: ASX has granted a waiver of ASX LR 10.12 exception 4 so that LR 10.11 parties (including directors) may participate in a share purchase plan ("SPP") (which follows on from a placement utilising the temporary extra placement capacity) on the same terms as other securityholders subject to certain conditions. We understand that case-by-case relief may be available for participation by certain LR 10.11 parties in placements in certain circumstances, which would be very helpful for issuers who want to show that key stakeholders are supportive of the capital raising and would better allow those securityholders to not be diluted.
- SPPs – cap and scaleback: if a cap is to be used for an SPP which follows on from a placement utilising the temporary extra placement capacity, the entity must use all reasonable endeavours (rather than best endeavours) to ensure that the participants have a reasonable opportunity to participate equitably in the overall capital raising. The entity must also disclose why a limit was used and how it was determined in relation to the overall capital raising.
Any scaleback for an SPP which follows on from a placement utilising the temporary extra placement capacity must be on a pro rata basis based on the size of existing securityholdings or on the number of securities applied for. These arrangements must be clearly disclosed in the SPP offer booklet.
- use of temporary class waivers: ASX has clarified that when an entity wants to have the benefit of one of the temporary class waivers:
It appears that ASX will be monitoring the use of the class waivers to determine whether they are being used in the most part to genuinely facilitate emergency recapitalisations or whether they are generally being used for opportunistic raisings. If ASX sees a trend of the latter, it is possible that ASX may revisit the granting or terms of these class waivers.
- entities must notify ASX before the relevant entity undertakes the capital raising – the notification will not be released to the market; and
- the notice must include details as to whether the capital raising is proposed to be made to raise urgently needed capital to address issues arising in relation to the COVID-19 health crisis and/or its economic impact or for some other purpose.
- withdrawal of temporary class waivers: ASX has made it clear that it can withdraw the temporary class waivers for both individual entities (at any time and for any reason) and for the market (including prior to the scheduled expiry date of 31 July 2020) through written notice.
- back-to-back trading halts: ASX has emphasised that back-to-back (4 day) trading halts must be specifically requested upfront. If it is not specifically requested upfront, ASX will only grant a single trading halt for up to 2 days and will not grant an extension (meaning an entity that needed longer would need to go into suspension).
All of these changes apply to capital raisings announced from 23 April 2020 onwards.
ASIC’s support for enhanced disclosure
ASIC has expressed support for ASX’s enhanced disclosure changes to ASX's temporary capital raising relief. In doing so, ASIC notes its expectation that:
- directors must provide transparent disclosure to the market about the capital raising decisions they are making which are required to be in the best interests of the entity; and
- issuers be prepared to explain those fundraising decisions to securityholders.
ASIC also encourages issuers and licensees to have one eye to Report 605 (“Allocations in equity raising transactions”) which it released in December 2018. Report 605 sets out ASIC’s views on best practices for allocations.
ASIC will monitor the public disclosures made by issuers about capital raisings to ensure that they are accurate, sufficiently detailed and provide meaningful (rather than boiler plate) disclosure. ASIC has confirmed it will also review the privately provided allocation spreadsheets for placements.
Importantly, ASIC has noted that it considers the enhanced disclosure requirements are also appropriate for capital raisings which do not rely on ASX’s temporary relief and encourages all issuers to make that disclosure for all placements and SPPs. ASIC has further noted that its surveillance of allocations will go beyond capital raisings relying on ASX’s temporary relief. It is essential that issuers are aware of ASIC’s approach and how it applies to a broader spectrum of capital raisings.
 Being from when the completion announcement is made to ASX.
 Apart from the back-to-back trading halt, which is clarifying ASX’s original position.