ASX has significantly liberalised key capital raising rules
Today ASX announced finalised listing rule changes that will allow smaller and mid-size companies to issue 25% of their share capital in 12 months, rather than the standard 15% that has long applied to ASX-listed companies.
We see the new capital raising rules as offering world-leading flexibility for companies whose market capitalisation would otherwise require them to seek specific shareholder approval to every meaningful capital raising.
ASX has also relaxed the 'spread test' that applies to IPO applicants, potentially addressing a significant hurdle to first listing and one of the key drivers of backdoor listing activity.
At the same time, ASX has increased the net tangible assets test for admission from $2 million to $3 million. This slightly raises the bar for new micro-cap listings, but should not be relevant to the majority of listings as the test can be satisfied by the cash raised on IPO.
The new capital raising rules will take effect from 1 August 2012 and the new admission test rules will apply to new admission (and recompliance) applications lodged after 1 November 2012.
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New 25% issue capacity
Eligible smaller and mid-size companies will be able to seek a shareholder mandate to permit them to issue up to 25% of their share capital by way of placements over a 12 month period. Issues under the 25% mandate cannot be discounted by more than 25% to the company's 15 trading day VWAP.
To gain the benefit of the 25% mandate, approval needs to be sought at the AGM by special resolution, requiring 75% of shareholders who vote to be in favour. The 25% mandate has a 12 month shelf-life and will therefore need to be refreshed on a yearly basis. We expect that a 25% mandate resolution will become a regular feature of the AGMs of eligible companies.
To be eligible, at the time the AGM is held a company needs to:
- have a market capitalisation of $300 million or less; and
- not be included in the S&P/ASX 300 Index.
ASX recommends companies seeking a 25% mandate provide a draft calculation of market capitalisation when giving their draft AGM notice to ASX for review. There may be some uncertainty for companies dispatching their AGM notices as to whether they will meet the eligibility tests on the date of their AGM, given potential fluctuations in market capitalisation. However, there can be no embarrassment in seeking a 25% mandate which turns out to be unavailable due to the happy circumstance of share price appreciation. Resolutions can be made responsive to this issue through drafting them to be conditional on eligibility.
Most companies will hold their AGMs in November and therefore will have certainty as to their inclusion in the S&P/ASX 300 Index, which is published on the first Friday of March and September.
Specific information requirements apply for the meeting documentation when seeking a 25% mandate, including the risk of dilution to existing shareholders, the company's 25% mandate share allocation policy and the purposes for which 25% mandate shares may be issued. This information needs to be disclosed again with the Appendix 3B announced after the issue of 25% mandate shares. We expect that companies will often publish relatively broad statements on these matters, allowing them flexibility to issue shares to a range of investors and apply the funds raised for a variety of purposes.
As to the limitation on discounting, shares issued under a 25% mandate must not be issued at a price that is less than 75% of the volume weighted average price - or VWAP - of the securities over the 15 trading days on which trades in those securities were recorded immediately before:
- the date on which the issue price of the securities is agreed, or
- the issue date (if the securities are not issued within 5 trading days of the date on which the issue price is agreed).
The VWAP figure and the source of the VWAP data must be disclosed when announcing an issue of shares under a 25% mandate.
Some transactions will need to be carefully structured if the intent is to rely on a 25% mandate. While vanilla financial investor placements will always be executed within 5 trading days of agreeing the issue price, more nuanced corporate-to-corporate share issues may often have longer settlement times. For example, issue of share-based consideration for acquisition of an asset may well be delayed more than 5 trading days from agreeing the issue price.
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Spread test relaxed
Shareholder 'spread tests' for IPO applicants are a common feature amongst securities exchanges around the globe. ASX' spread test has been at the higher end of the spectrum and the changes bring ASX in line with international norms.
Under the new rules, IPO applicants need to meet one of the following spread tests:
- 400 shareholders;
- 350 shareholders and at least 25% of the shares held by non-related shareholders (excluding restricted securities held by the non-related security holders); and
- 300 shareholders and at least 50% of the shares held by non-related shareholders (excluding restricted securities held by the non-related security holders).
In all cases, the shareholders counted toward the thresholds must hold parcels with a value of at least $2,000 (excluding restricted securities).
The relaxed spread tests may address a significant hurdle to first listing that has to some extent been inhibiting smaller-cap IPO activity in current market conditions. The inability to attract retail investment and therefore generate the required shareholder spread has driven many businesses seeking ASX listing towards backdoor listings. A backdoor listing involves the sale of a business to an already listed company, generally without a significant business of its own, but which is able to offer its existing shareholder base to satisfy the spread test.
It will be interesting to observe whether the new rules affect the relative attraction of backdoor listings or whether the underlying difficulties with obtaining spread will continue until a return to greater optimism for retail investors.
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