In the rapidly developing COVID-19 climate, and subsequent effect on the ability of many businesses to continue to operate, we expect to see many businesses relying heavily on equity funding in order to survive.
ASX has recently announced emergency relief measures for entities seeking to raise capital, including by increasing the 15% limit on placements under listing rule 7.1 to 25%. ASIC has similarly provided temporary relief by allowing some listed companies to utilise ‘low doc’ offers where they would otherwise have been prohibited.
ASX relief for emergency capital raisings
In its compliance update of 31 March 2020 (ASX Update), ASX recognised the anticipated need of listed companies to rely on capital raising to continue to operate and has announced temporary emergency measures to be implemented by way of class order waivers (Class Waivers) under listing rule 18.1. These temporary emergency measures include:
- Back-to-back trading halts – ASX will permit an entity to request two consecutive trading halts, allowing it up to a total of four trading days in halt to consider, plan for and execute capital raising. Back-to-back trading halts will not be permitted for other purposes and we note, pursuant to listing rule 17.1, ASX is not required to act on an entity’s request for a trading halt.
- Temporary uplift to 15% placement capacity in listing rule 7.1 – ASX will increase the 15% limit on placements under listing rule 7.1 to 25% (Temporary Extra Placement Capacity). However, the Temporary Extra Placement Capacity is conditional on entities making a follow-on pro rata entitlement offer under exceptions 1, 2 and/or 3 of listing rule 7.2 or a follow-on offer to retail investors under a Share Purchase Plan (SPP) at the same price or at a lower price than the placement price.
ASX has made it clear that this is a one-off measure and that once utilised, the Temporary Extra Placement capacity will not be able to be ratified or replenished under listing rules 7.1 or 7.4. Further, eligible entities that already have the extra 10% placement capacity under listing rule 7.1A can elect to use their existing 7.1A capacity or the extra placement capacity available under the Temporary Extra Placement Capacity, but not both. - Waiver of the one-for-one cap on non-renounceable entitlement offers – ASX has provided a temporary waiver for the one-for-one cap on non-renounceable entitlement offers in listing rule 7.11.3, which will apply to both accelerated and standard non-renounceable entitlement offers. ASX reinforces that it expects entities to choose a ratio for their non-renounceable entitlement offer that meets capital raising needs but is also fair and reasonable in the circumstances.
These Class Waivers will expire on 31 July 2020, unless ASX otherwise decides to remove or extend them. ASX also intends to keep these measures under review and notes that it may alter or replace them if they are not having the desired effect on capital raisings.
ASIC relief for ‘low doc’ offers
In its Media Release – 20-075MR Facilitating Capital Raisings during COVID-19 period (ASIC MR), ASIC also recognised the impending need for companies to raise capital due to the COVID-19 pandemic and has announced temporary relief under ASIC Corporations (Trading Suspension Relief) Instrument 2020/289 and ASIC Corporations (Amendment) Instrument 2020/290 for listed companies to raise capital quickly by way of ‘low doc’ offers. In particular, the relief allows some listed companies to utilise ‘low doc’ capital raising where they would otherwise have been prohibited for having been suspended for a long period while assessing the impact of COVID-19 on their business.
Entities will be able to rely on regulatory relief if:
- They have been suspended for up to 10 days in the 12 months before the offer, and
- They were not suspended for more than five days in the period commencing 12 months before the offer and ending 19 March 2020. It should be noted that ASIC takes the view that securities are not suspended during a trading halt.
ASIC will provide 30 days’ notice prior to revoking the relief.
Reminder of Market Integrity Rules
In addition to the relief outlined in ASIC MR, in its Market Integrity Update – COVID-19 special Issue (Market Integrity Update) ASIC took the opportunity to release a timely reminder to entities in its Market Integrity Update that, when deciding on the timing and structuring of any capital raising, ASIC expects directors to continue to act in the best interests of the company. In particular, ASIC reiterates that directors need to balance the need for quick capital and certain capital, and the cost to and possible dilution of existing shareholders.
In the Market Integrity Update, ASIC also reminds directors of the importance for issuers to consider fairness between shareholders (both institutional and retail) in capital raisings and to utilise pro-rata rights offers and share purchase plans where circumstances allow.
Directors are directed to ASIC Report 606 Allocations in equity raising transactions, released in December 2018, which contains a number of better practices that continue to apply during the COVID-19 pandemic. The report can be found here.
Disclosure obligations
Companies raising emergency capital should also ensure that they continue to comply with their disclosure obligations under the Listing Rules. In particular, capital raisings must be announced to the market under listing rule 3.10.3 as soon as the entity is committed to proceeding with the raising.
The company should also be mindful of its continuous disclosure obligations under listing rule 3.1, including whether the underlying circumstances that gave rise to the need for emergency capital should be disclosed to the market immediately. ASX has provided the following practical guidance on disclosures:
- Earnings guidance – ASX strongly encourages entities that have not yet reviewed their published earnings guidance in light of COVID-19 to do so. ASX also suggests that it may be appropriate for most entities to withdraw, rather than update, their earnings guidance.
- Material operational decisions – entities that make operational decisions likely to have a material effect on the price or value of its securities (for example, standing down a material number of employees) should immediately announce this decision to the market.
- Entities in financial difficulty – adverse developments affecting the financial condition of the entity that fall outside the carve outs of listing rule 3.1A which a reasonable person would expect to materially affect the value of the securities must be immediately disclosed under listing rule 3.1.
- Decisions not to pay a dividend or distribution – entities must notify ASX immediately if it makes a decision not to pay a dividend or distribution on a quoted security in respect of a period if it has previously announced its decision to do so or paid a dividend or distribution in respect of the prior corresponding period.
Recent Changes to the Foreign Investment Review Framework
Companies that are looking to raise equity from foreign investors should also be aware of the recent changes to foreign investment rules announced by the Foreign Investment Review Board (FIRB). These changes require FIRB approval for all foreign investments made on or after 10:30pm (AEST) on 29 March 2020 that are subject to the Foreign Acquisitions and Takeovers Act 1975 (Cth), regardless of the value of the transaction. Companies looking to raise foreign capital will need to keep these changes (including the potential framework and timing associated with the FIRB approval process) in mind. Further information can be found in our Focus Paper here.
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