Skip to content.

Home

Allens Arthur Robinson

Focus: Capital Markets – July 2007

Rights issue reform

In brief: Recent amendments to the Corporations Act 2001 (Cth) have the potential to simplify the process for ASX-listed companies and managed investment schemes raising additional equity through rights issues. Partner Robert Pick (view CV) examines the changes and considers the implications of taking advantage of this simplified approach.

How does it affect you?

  • ASX-listed issuers now have access to a simpler regime to make offers to existing securityholders under a rights issue without the need to lodge a prospectus or PDS.
  • Although the new rights issue regime will facilitate simpler offer documents and, potentially, shorter timeframes for the preparation of offer documents, the liability regime – and the availability of defences to liability – will differ from that which applies when an offer is made under a prospectus or PDS.
  • The desirability of taking advantage of the simpler regime will need to be considered in the circumstances of each issue and the purpose for which the issuer is raising funds.

The previous position

Prior to 28 June 2007, ASX-listed companies and managed investment schemes wishing to make offers under a rights issue (ie a pro rata offer to existing investors, which may be either renounceable or non-renounceable) had to make that offer under a prospectus or product disclosure statement (PDS) lodged with the Australian Securities and Investments Commission (ASIC). Depending on the length of time that the issuer had been admitted to the Australian Securities Exchange (the ASX), and subject to compliance with various other requirements of the Corporations Act 2001 (Cth), an issuer may have been able to take advantage of 'abbreviated' disclosure requirements for the prospectus or PDS contained in section 713 and 1013FA of the Corporations Act (noting that the abbreviated disclosure requirements for a prospectus and those for a PDS are different).  

Return to top

So what has changed?

The effect of the changes introduced on 28 June 2007 by the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007 (Cth) is to allow ASX-listed companies and managed investment schemes to raise additional equity via a rights issue by lodging a 'rights issue cleansing notice' with ASX – without the need to lodge a prospectus or PDS.

The content requirements for a rights issue cleansing notice (described below) are similar to, but not the same as, those for a 'placement cleansing notice' that ASX-listed issuers are required to lodge with ASX when undertaking an institutional placement of shares or units. 

Return to top

Who can use a rights issue cleansing notice?

To be entitled to rely on a rights issue cleansing notice, an ASX-listed issuer must be able to satisfy the following requirements (contained in s708AA and s1012DAA of the Corporations Act):

  • Satisfying the rights issue definition: The offer being made by the issuer must satisfy the new 'rights issue' definition. To fall within this definition, the terms of the offer to each existing securityholder must be the same and the offer must be:
    • an offer to issue to every person who holds securities in the class of securities being offered, or their assignee, a pro rata share of the total number of securities being offered (based on their existing holding of securities); or
    • if certain conditions regarding non-resident securityholders are satisfied (which conditions are consistent with the requirements of ASX Listing Rule 7.7) – such a pro rata offer to every person who holds securities in the class of securities being offered with a registered address in Australia or New Zealand.
  • Securities must be quoted: The securities being offered under the rights issue must be quoted when the offer is made.
  • No suspension: The securities being offered under the rights issue must not have been suspended for more than five days in total during the 12 months before the offer is made or during the period for which the securities have been quoted (whichever the shorter) (the relevant period).
  • No exemptions: During the relevant period, the issuer (or a director or auditor of the issuer) must not have been exempt from various continuous disclosure, financial reporting or audit requirements of the Corporations Act.
  • No ASIC determination: In the 12 months before the offer is made, ASIC must not have made a determination that the issuer has contravened various financial reporting, continuous disclosure or other relevant provisions of the Corporations Act.

Return to top

What does a rights issue cleansing notice need to say?

If the above conditions are satisfied, then an issuer will be able to issue a rights issue cleansing notice and will not need to lodge a prospectus or PDS to make offers under the rights issue.

A rights issue cleansing notice must be issued within the 24-hour period before an offer under the rights issue is made and (in addition to some statements regarding compliance with certain provisions of the Corporations Act) must contain the following information:

  • Information regarding the potential effect of the rights issue on the control of the issuer, and the consequences of that effect.
  • All 'excluded' information, being information which:
    • the issuer has previously withheld from disclosure to investors under its continuous disclosure obligations on the basis of the exceptions to disclosure contained in ASX Listing Rule 3.1A; and
    • investors or their professional advisers would reasonably require, and reasonably expect to be included in a disclosure document, for the purposes of making an assessment of the issuer's assets and liabilities, financial position and performance, profits and losses and prospects.

A rights issue cleansing notice must contain all the same information that a cleansing notice under s708A or s1012DA of the Corporations Act must include, but it has the additional disclosure requirement regarding the effect of the rights issue on the control of the issuer. This additional requirement is likely to be most relevant to those issuers with one or more shareholders who control the issuer or a significant proportion of the issuer's stock. In this respect, issuers will also need to have regard to guidance issued by the Takeovers Panel regarding rights issues that may impact on the control of an ASX-listed issuer (see Guidance Note 17 issued by the Takeovers Panel), and consider to what extent the rights issue cleansing notice will need to include disclosures to comply with this guidance.

In addition, the requirement that a rights issue cleansing notice contain all 'excluded information' is based on the disclosure requirement for a transaction-specific prospectus under s713(5) of the Corporations Act. Accordingly, in relation to key information regarding the issuer that is likely to have an impact on the value of the issuer's securities, the information disclosed in a rights issue cleansing notice and a prospectus is likely to be of a comparable standard.

Return to top

What to use – rights issue cleansing notice or disclosure document?

The amendments to permit the use of a rights issue cleansing notice rather than a prospectus or PDS are a welcome development to streamline the raising of capital by ASX-listed issuers via rights issues. However, issuers, their advisers and others involved in the rights issue (eg underwriters) will need to have regard to the following issues when considering whether to use a rights issue cleansing notice or a prospectus or PDS.

  • Liability and defences: The Corporations Act imposes primary liability for a defective prospectus or PDS on the issuer, its directors, the underwriters and others involved with the preparation of a prospectus or PDS. However, in addition, the Corporations Act also provides for 'due diligence' and other defences to that liability. If an issuer uses a rights issue cleansing notice, the liability regime applicable to prospectuses and PDSs will not apply, and neither will the defences. As such, those involved with a rights issue that relies on a rights issue cleansing notice will be subject to the general offence and liability provisions in the Corporations Act (relating to false information and misleading and deceptive conduct) and, potentially, other legislation and the common law – to which there are no defences.
    The absence of these defences may be of concern where an issuer is undertaking a rights issue for the purposes of acquisition funding where any disclosure in a rights issue cleansing notice will be dependent on the information provided by the vendors in connection with the acquisition. In such a case, issuers may feel more comfortable using a prospectus or PDS for the rights issue to provide them with a potential defence to liability (eg should the forecast outcome of the acquisition not be realised).
    The absence of defences may be of less concern where an issuer is undertaking a rights issue for repayment of debt or for working capital purposes – as, in those circumstances, to a large degree the issuer will be relying on information that it has generated itself.
  • Other pro rata offer structures: A rights issue cleansing notice will not be available for pro rata entitlement offerings that do not use the traditional rights issue structure. For example, accelerated entitlement offers and offers using the RAPIDS structure will not fall within the rights issue definition as the offer to each existing securityholder will not be the same – for example, due to the different treatment (from a timetable perspective) of institutional and retail shareholders. However, there would appear to be sound policy reasons to support an application to ASIC for relief to permit the use of a rights issue cleansing notice for such offer structures – on the basis that they are, from an economic perspective (in terms of offer price and pro rata treatment), equivalent to a rights issue.
  • Quoted securities only: A rights issue cleansing notice is only available for pro rata entitlement offerings of an existing class of quoted securities to securityholders in that class. So, for example, rights issues of options or hybrid securities to ordinary shareholders will only be able to be undertaken using a prospectus or PDS.
  • Additional cleansing statement required on issue: If a rights issue cleansing notice is used, the issuer will also need to issue a cleansing notice under s708A or s1012DA of the Corporations Act at the time the securities are issued under the rights issue to enable those securities to be freely tradable on the ASX from their date of issue. This second cleansing notice will need to contain any additional 'excluded information' that may have arisen since the date of the rights issue cleansing notice.
  • Timetable issues: One of the key advantages of the rights issue cleansing notice would appear to be avoiding the lead time required to prepare a prospectus or PDS. That said:
    • Issuers will still need to undertake some form of due diligence process in connection with the preparation of a rights issue cleansing notice to ensure that all relevant information, in particular 'excluded information', is included in the notice. We would expect that the due diligence process would be similar to that which is now undertaken by issuers when undertaking a placement.
    • Issuers will still need to prepare and issue an offer document that is sent to securityholders to enable them to understand and accept an offer under the rights issue.
    • We would not expect the rights issue timetables prescribed by the ASX Listing Rules to be amended in any material respect.
  • Multi-jurisdictional offers: Where a rights issue is to be extended to securityholders in jurisdictions outside Australia and New Zealand, issuers will need to have regard to the disclosure requirements for the rights issue in those jurisdictions (eg in some jurisdictions an offer under a rights issue may need to be accompanied by a formal disclosure document with prescribed information requirements). In those circumstances, issuers will need to consider whether a rights issue cleansing statement should be used in connection with offers to Australian and New Zealand securityholders in circumstances where more detailed information is provided to securityholders in other jurisdictions.

Return to top

The way forward

The key benefit of the introduction of the rights issue cleansing notice is likely to be a reduction in the preparation time and costs associated with making an offer under a rights issue as compared to the preparation time and costs of preparing a prospectus or PDS.

However, it will be interesting to see to what extent issuers take advantage of the rights issue cleansing notice given the different liability (and, importantly, defence) regime that will apply. The approach is also likely to be influenced by the approach that underwriters take – given that they will be the key party, other than the issuer and its directors, exposed to liability in the context of a rights issue.

Return to top

For further information, please contact:

Return to top

Bookmark with

What are these?

Recent Capital Markets publications