The ASX now allows SMCs to seek a 12-month advance mandate from shareholders to issue up to 10% of the company’s capital without further approval, writes DLA Piper’s Simon Davidson.
Recently, the ASX has enhanced the capital raising environment for small and mid cap companies (SMCs) listed on the ASX. These are companies with a market capitalisation of AUD300million or less and are not included in the S&P ASX 300 Index.
The ASX now allows SMCs to seek a 12 month advance mandate from shareholders to issue up to 10% of the company’s capital without further approval. This is in addition to the standard 15% of the company’s capital which companies are able to issue without shareholder approval under the ASX Listing Rules.
This change is very significant for SMCs and potential investors, particularly in sectors like mining/resources and life sciences, where there are numerous small and mid cap companies which require substantial amounts of capital for their development.
This article briefly looks at:
• What exactly is the new rule?
• What are the advantages of the new rule?
• What is not changing?
• Will the new rule alter the capital raising opportunities for SMCs?
What exactly is the new rule?
New Listing Rule 7.1A enables a SMC to seek shareholder approval at its annual general meeting to issue up to 10% of its issued capital without further approval, provided that the issue is not at a discount of greater than 25% to the market price.
As mentioned above, this placement capacity is in addition to the 15% currently permitted under existing Listing Rule 7.1 without shareholder approval.
The maximum discount of 25% is to the average market price over the 15 previous actual trading days immediately prior to the issue. The method of calculating the discount is designed to avoid incongruous results arising out of nil trading days.
The mandate will be effective for 12 months (unless the company obtains shareholder approval under the Listing Rules to undertake a significant transaction) and remains valid even if the company no longer qualifies as a SMC at any time during that 12-month period.
Additional disclosure obligations apply in relation to both the notice of meeting seeking shareholder approval, and the disclosure notice at the time, of an issue under the new rule.
Any shareholder who has agreed to participate in a placement under this new mandate may not vote on a resolution whether or not to adopt the mandate.
What are the benefits of the new rule?
The new rule gives directors of a SMC the option of obtaining a forward looking capital raising mandate. As a result, it allows directors flexibility to undertake capital raising opportunities on short notice without the need to obtain further shareholder approval, which would otherwise effectively impose a 35-40 day delay on effecting any such opportunity. This is particularly important in the current environment where market volatility means that placements need to be executed quickly to reduce risk for the company and its investors.
The ability to issue up to 25% of issued capital at a 25% discount allows SMCs with flexibility beyond that which is available on other markets such as Hong Kong and Singapore Stock Exchanges.
This change should also make it easier to provide a cornerstone investor with the ability to take up a significant position in an SMC (subject to the takeovers laws noted below).
What is not changing?
The new rule does not override existing obligations under the Listing Rules to obtain specific shareholder approval to make placements to related parties at or around the time of the placement.
Further, the changes have no impact on the Corporations Act requirements regarding takeovers and shareholders and investors still need to be conscious of the 20% threshold which is the basic trigger for compulsory takeovers under Australian law.
Will the new rule alter the capital raising opportunities for SMCs?
SMCs in Australia tend to follow a well-worn path, particularly in sectors such as mining/resources or life sciences. They list on the ASX as SMCs with sufficient funding to take them through 18-24 months of further exploration or development, during which time they will seek to prove a resource or obtain licensing or other revenues to continue their development.
Retail investors who support IPOs of these companies see their investment as speculative – looking for the blue sky return – and understand the inherently risky nature of their investment. As a result, they are generally not interested in follow on investment.
However the nature of such companies means that funding is required to take projects through various stages. This funding can be significant, as each development stage requires a greater amount of funds. As noted above, this funding often has to come from new investors. Accordingly, there is a reliance on placements ahead of alternatives involving existing shareholders such as rights issues and share purchase plans.
Given the time and effort required to raise funds through a placement, and the fact that those funds are often substantial in the context of an SMC’s market capitalisation, it is extremely important for SMCs and their investors to be able to reduce the completion risk of a placement. The changes implemented by the ASX achieve this goal and as a result are a welcome addition to the fund raising options available to such companies. ■
*Simon Davidson is a partner with DLA Piper Australia. Simon’s primary expertise is equity capital markets (encompassing public capital raisings, including global and other institutional raisings), IPOs, dual listings as well as private placements) with his experience covering Australia, UK, North America and the Middle East. Additionally, Simon has considerable experience in private equity/venture capital, where his clients have included both institutional and private investors, as well as investee companies and management teams. Simon’s expertise also includes mergers and acquisitions, corporate restructuring, general corporate advisory and foreign investment. Simon also has sector experience in life sciences and mining.
Before joining DLA Piper’s Dubai office in 2008, Simon was Special Counsel at Minter Ellison. He also worked for Eversheds in London from 1998 to 2000.