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Competition at the heart of ASX move

PLANNED revisions to Australian Stock Exchange listing rules are likely to change capital raising activity and may also affect takeover tactics, a recent seminar in Perth has been told.

The changes have received a positive reception although their precise impact remains unclear.

Clayton Utz partner Mark Paganin told the Securities Institute seminar the changes were a positive response by the ASX to market changes.

He said there were two key proposals.

First, the percentage of issued capital that may be issued without shareholder approval is to increase from 15 per cent to 20 per cent.

Second, shareholders may grant an unlimited discretion to directors to raise extra capital for a period of up to 13 months.

ASX State manager Brendan O’Hara said the changes to the listing rules were designed to facilitate more flexibility in the structuring of capital raisings.

The changes also reflect the international competition facing stockmarkets.

Poynton and Partners managing director Mark Barnaba said the changes were required to keep the Australian market competitive.

He noted that the London Stock Exchange’s Alternative Investment Market, which was highly flexible and had a relatively easy listing and capital raising process, was the world’s fastest growing major exchange.

As a result, it had taken business that would otherwise have gone to other exchanges.

“The exposure draft changes are evolutionary, rather than revolutionary, and are in line with global capital market trends,” Mr Barnaba said.

He said the new rules would lead to larger and more frequent capital raisings, especially for smaller companies and high-growth companies.

Mr Barnaba also predicted a renaissance of renouncable rights issues, which over the years have been eclipsed by share placements.

He said companies were likely to adopt the model used by ANZ in its recent $3.6 billion rights issue, which had two significant innovations.

In that case the underwriters had to give preference in the subbing to existing ANZ shareholders, and the proceeds from “mopping up” any shortfall went to the existing shareholders, rather than the underwriters.

The attractiveness of rights issues will be helped by a shortening of the timetable from 40 business days to a standard 23 days.

Freehills partner Justin Mannolini agreed that usage of renounceable rights issues was likely to increase, especially for large and fairly predictable transactions.

However, he also believes “jumbo” placements will continue to be used.

“I can see a number of situations where you would still need to look at jumbos, particularly for competitive acquisitions,” Mr Mannolini said.

Mr Barnaba described the proposed 13-month rule as a double-edged sword for directors.

It gave them broad discretion to raise extra capital but made the discharge of their duties more onerous.

Mr Paganin agreed that directors who obtain a “blank cheque” to raise extra capital were taking on extra responsibility.

He said the ability of directors to communicate their strategy and plans to shareholders would be critical.

It was more likely that smaller, growth companies would be able to win shareholder support.

Even in these cases, conditions may be added by shareholders or directors to provide safeguards.

For instance, the discretion may be for a period of, say, nine months and may be limited to 40 per cent of issued capital.

Mr Mannolini believes shareholders will be wary of granting a blank cheque to directors.

“In the current environment, I think most shareholders, especially institutional shareholders, would be reluctant, except in the most exemplary of circumstances,” he said.

Mr Paganin said the 13-month rule could affect takeover tactics. In particular, it could potentially allow companies that are the subject of a takeover bid to bypass current restrictions on raising capital.

That, in turn, could lead to appeals to the Takeovers Panel to determine whether the capital raising was legitimate under the 13-month rule or if it was designed to frustrate the takeover bid.

Mr Paganin said the wording used by directors would be a critical factor when they sought the 13-month discretion from shareholders.

Mr Mannolini said the ASX needed to think very carefully about the rules surrounding the general mandate. He suggested that listing rule 7.9, which restricts capital raisings by takeover targets, should take precedence.

“One option is that, unless it is specifically authorised, the general mandate should terminate in the event of a takeover,” he said.

 

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