This article was written by Joseph Muraca
When it comes to raising money through an equity capital raising, there are a number of structures available to issuers. They range from many forms of rights issues, to DRPs, hybrid capital instruments, vanilla bonds and other structured products as well as placements and share purchase plans (“SPPs”).
Among some, there has been a view (an irrebuttable presumption almost) that boards should always defer to rights issues, and particularly renounceable rights issues, whenever raising equity capital. The rationale is that renounceable rights issues are the ‘fairest’ approach because they give all shareholders the same chance to participate and preserve their pro-rata interest in the company or otherwise be compensated for the dilutive impact of the capital raising.
When a decision has been made to raise capital, the factors that can inform what capital raising structure to adopt can often be more nuanced. Boards should consider the range of potential options open to them rather simply adopting a ‘one-size fits all’ approach and, in our experience, well-advised Boards do consider a range of options.
Recently, particularly among the ASX 200, we have seen a shift towards more placements. These are typically coupled with SPPs to enable retail shareholders and others not invited to participate in the placement to also participate in the capital raising. Excluding placements to strategic cornerstone investors, we have seen a recent increase in the number of placements, with 32 placements launched by ASX 200 companies since 1 July 2018. In almost all of these cases (84%), the placements were coupled with SPPs.
As discussed in a separate note in this edition of “On Board”, ASIC has recently doubled the SPP cap to $30,000 per shareholder. This means that under an SPP offer, subject to scale backs, retail shareholders will often be able to take up more than their pro rata share. In that alert, we raised the question of whether the increase in the SPP cap might spell the end of the rights issue era. There are still a range of issues for directors to consider when structuring an SPP. These include the SPP price (and its relationship to any accompanying placement price), whether the SPP will be capped, what scaleback policy to adopt for overapplications, the maximum amount shareholders can apply for under the SPP (issuers are not compelled to offer the maximum $30,000) and the increments in which shareholders can apply.
What does this mean for directors?
As with all decisions brought before directors, directors should form a balanced view after careful consideration of available options. Typically, we would expect the lead manager or underwriter of the capital raising to provide insight on the range of available options, current market practice, an assessment of the appetite of investors and views on the best chance of a successful raising. Management should also provide a recommendation as to the preferred structure and commercial terms. If this type information is not presented to directors when asked to consider approving an equity raising then directors should request it – that is consistent with the level of engagement, monitoring and challenge that is expected of directors.
There may be legitimate reasons to adopt structures other than a renounceable rights issue, including:
- the need for speed and certainty of execution (placements are typically conducted over a shorter period and settle more quickly than rights issues, even accelerated rights issues);
- the purpose of the capital raising might lend itself more to a placement structure – acquisition funding might require a quicker settlement with less market risk as may need to raise capital to refinance debt. An associated purpose may also be a desire to expand the size and scope of the institutional register;
- more favourable underwriting terms, including as to price and termination events, may be available for a placement;
- the composition of the company’s register might be highly skewed to institutions and in the circumstances the SPP might offer more than a pro-rata opportunity for most other shareholders; and
- the company’s history of raising capital.
We do not in any way disregard legitimate concerns about the adoption of unfair capital raising structures, such as those expressed by the Australian Shareholders Association. And as reflected in ASIC’s Report 605 ‘Allocations in equity transactions’ released in December 2018, there is certainly a need for issuers to properly engage in decisions made regarding allocations regardless of the structure of any capital raising.
However, rather than automatically deferring to the conventional view of what is “fairest,” directors (and those who comment on their decisions) should form a balanced view by considering the pros and cons of each offer structure, and make a decision based on what is most appropriate in the company’s particular circumstances at the time.