25/07/2012 - 15:48

Analysis: What the new ASX capital raising rules mean

25/07/2012 - 15:48

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Analysis: What the new ASX capital raising rules mean

Australia’s smaller resources companies will have greater flexibility when it comes to raising capital to develop their projects under proposed ASX listing rule changes. 

In a bid to enhance the capital raising environment for listed mid and small cap companies, the ASX has proposed that they will be able to seek a 12 month mandate from their shareholders to issue up to an additional 10% of the issued capital of the company without further approval.  Given the market capitalisation of many ASX-listed resources companies, this proposal is very significant for the sector.

What exactly is the proposal?

Proposed Listing Rule 7.1A enables mid & small cap companies to seek shareholder approval to issue 10% of their issued capital, provided that the issue is not at a discount of greater than 25% of the market price.  This will be in addition to the 15% currently permitted without shareholder approval under existing listing rules. 

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 to undertake a significant transaction) and remains valid even if the company’s market capitalisation increases above the AUD300 million threshold during that 12 month period.

Additional disclosure obligations will apply to both the notice of meeting seeking shareholder approval of an issue under the new rule, and the disclosure notice at the time of issue.  The changes do not override the listing rule that covers placements to related parties which will still require shareholder approval before they can proceed.

What are the benefits?

The proposal gives directors of smaller companies the option of seeking a forward-looking capital raising mandate.  As a result, it allows directors flexibility to take advantage of capital raising opportunities as they arise on short notice without the need to obtain shareholder approval, which effectively imposes a 35-45 day delay on any such opportunity.  This is particularly important in the current environment where market volatility means opportunities need to be executed quickly. 

The combined effect of the existing and new listing rules (enabling the issue of up to 25% of issued capital at up to a 25% discount) goes further than the limits in other countries. Further, given that 15% can be placed at any price, it provides smaller companies with flexibility beyond that which they would achieve in comparable markets. 

Is there devil in the detail?

Beyond the 25/25 limit, the detail needs to be considered.  Firstly, the notice of meeting seeking approval for the mandate must include a statement of the purposes for which the securities may be issued.  This requires a level of foresight by the directors which may detract from the benefit of having flexibility to move quickly to raise capital.

In addition, there is a voting exclusion which prevents a person who may participate or otherwise obtain a benefit from the proposed issue under the mandate from voting on the mandate. This may cause difficulty where substantial existing shareholders wish to support a future placement, but have already voted on the granting of the mandate under the proposed new rule.

On completion of an issue using the mandate, the company must make an announcement to ASX which includes a statement as to why the company used its capacity under the mandate rather than undertaking a pro rata or other issue.   These statements will be scrutinised by shareholders in considering whether to renew such mandates in the future.  Given the ability to raise funds with "low-doc" rights issues and share purchase plans, directors may find it difficult at times to justify the use of the mandate. 

It is important to remember that the shareholder approval under the proposed new rule does not 'wipe the slate clean'.  Rather, as with the existing listing rule, a company must assess its placement capacity on a rolling 12 month basis, regardless of whether the relevant mandate has been obtained in the interim. 

Will the changes alter the capital raising process for mid & small cap resources companies?

Many small resources companies in Australia follow a well-worn path.  They list with sufficient funding to take them through a period of exploration, during which time they will seek to prove up a resource and find joint venture partners to develop prospective resources.

Retail investors who support IPOs in this sector see their investment as speculative – looking for the blue sky return – and understand the inherently risky nature of resources exploration.  As a result, they are generally not interested in follow-on investment. 

However, the nature of extractive industries means that funding is required to take projects through their life cycle. If development partners are not available, this funding often has to come from new investors.  Accordingly, there is a reliance on placements ahead of rights issues and share purchase plans.

Given the time and effort required to raise funds through a placement, and the fact that smaller companies by their very size are often looking to raise amounts which reflect a substantial portion of their market capitalisation, the changes proposed by the ASX are a welcome addition to the fund raising options available.

* Simon Davidson is a partner at leading business law firm DLA Piper

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