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Focus: Capital Markets – June 2008

ASIC extends disclosure relief for rights issues

In brief: The Australian Securities and Investments Commission has issued class order relief to extend the exemption that permits a traditional rights issue to be undertaken without a prospectus or a product disclosure statement to non-traditional rights issue structures. Partners Steve Clifford (view CV) and Robert Pick (view CV) and Lawyer Alex Brown consider the implications for issuers and market participants generally.

How does it affect you?

  • The issue of ASIC Class Order CO 08/35 extends the scope of the current rights issue disclosure exemption – which permits traditional rights issue to be undertaken without a prospectus or a product disclosure statement – to 'non-traditional' accelerated rights issues (such as accelerated entitlement offers or RAPIDS™ offers).
  • The relief also streamlines the process for issuing 'cleansing notices' that rely on the disclosure exemption.
  • The relief should facilitate the use by issuers of all entitlement offer structures and provide a greater opportunity for securityholders to participate in equity raisings.

Background

In July 2007 we reported on the introduction of the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007 (Cth). This legislation was designed to simplify the process for entities listed on the Australian Securities Exchange (ASX) to raise additional equity through rights issues.

The most significant legislative amendment was the introduction of a disclosure exemption for rights issues. Under this exemption (the disclosure exemption), ASX-listed entities are permitted to conduct a rights issue without the need to lodge a prospectus or a product disclosure statement (PDS), provided that certain conditions are satisfied. One of the key limitations to the disclosure exemption was that it extended only to so-called 'traditional rights issues' (ie entitlement offerings made on a pro rata basis to all securityholders on the same terms at the same time). The disclosure exemption did not extend to 'non-traditional' accelerated rights issue structures (often known as accelerated renounceable entitlement offer structures (or AREOs) or RAPIDS™ structures) (collectively referred to as accelerated rights issues). The disclosure exemption also did not extend to:

  • the disposal of shortfalls under a rights issue; or
  • rights issues of ordinary securities that are extended to convertible securityholders.

As noted in ASIC Regulatory Guide 189 (Disclosure relief for rights issues), an inherent weakness of the traditional rights issue structure is that it is often incapable of meeting an entity's fundraising needs. For example, a traditional rights issue structure does not permit an issuer to make an accelerated offer to institutions in order to receive funds quickly. If the benefit of the disclosure exemption was not extended to accelerated rights issues, the Australian Securities and Investments Commission (ASIC) was concerned that entities would seek to raise funds through institutional placements in preference to a rights issue (whether using a traditional rights issue structure or an accelerated rights issue structure). This outcome would be contrary to the underlying purpose of the disclosure exemption: namely, to encourage ASX-listed entities to use rights issues, to provide all existing securityholders (not just institutional securityholders) with an equal opportunity to acquire securities in the entity (the so-called 'equal opportunity principle').

In response to these concerns, ASIC released Consultation Paper 91: Non-traditional rights issues in September 2007, seeking comments on whether to extend the disclosure exemption to accommodate the deficiencies identified above. Following the receipt of submissions, ASIC has issued Class Order CO 08/35 (Disclosure relief for rights issues) (CO 08/35), which extends the disclosure exemption to rights issue structures that ASIC considers provide an equal opportunity for all securityholders to participate and does not compromise retail investor protection.

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Overview of class order relief

In basic terms, CO 08/35:

  • extends the disclosure exemption to accelerated rights issues, disposals of shortfalls under traditional rights issues and rights issues of ordinary securities that are extended to convertible securityholders;
  • streamlines the 'cleansing notice' requirements in connection with rights issues made in reliance on the disclosure exemption so that only one cleansing notice will be required; and
  • provides technical relief in relation to foreign holders, stapled securities and the rounding of entitlements.

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Accelerated rights issues

Before the introduction of CO 08/35, an accelerated rights issue did not fall within the disclosure exemption because its structure involved the offer proceeding in two distinct tranches, namely an institutional tranche and a retail tranche. This meant that offers under an accelerated rights issue were not made on the 'same terms' to each relevant holder because of the different offer periods and different dates of allotment, notwithstanding that the offer price and entitlement ratio for each tranche is the same. CO 08/35 modifies the disclosure exemption so that accelerated rights issues may now be undertaken without a prospectus or a PDS, provided that the allotment under the retail tranche occurs within two months after the institutional tranche allotment.

The rationale behind ASIC's decision to extend the disclosure exemption to accelerated rights issues appears two-fold:

  • First, although accelerated rights issues are made on terms that differ between retail holders and institutional investors, those differences are generally minimal and do not contravene the 'equal opportunity principle'.
  • Second, ASIC is of the view that the relief extended under CO 08/35 is 'likely to result in more retail investors having the opportunity to participate in rights issues than would be the case if accelerated rights issues had to be made under a prospectus or PDS'.

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Single cleansing notice

CO 08/35 also modified the disclosure exemption and the on-sale provisions of the Corporations Act 2001 (Cth) so that an issuer that relies on the disclosure exemption will now only need to give one cleansing notice (ie a notice confirming to the market that all 'excluded information' has been disclosed to the market) when the rights issue is announced to the ASX. Further cleansing notices will only be required if the issuer becomes aware of new 'excluded information' before the securities are issued under the rights issue or a defect in the cleansing notice is discovered.

This corrects the inefficiencies of the previous position, where an issuer was required to produce multiple, and essentially identical, cleansing notices in connection with an offer made in reliance on the disclosure exemption often within a relatively short period of time.

As noted in Regulatory Guide 189, this ensures that, in the context of a renounceable rights issue, investors have the benefit of the cleansing notice disclosure before rights trading starts.

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Disposal of a shortfall

CO 08/35 also provides relief so that, if a rights issue is not fully subscribed, the issuer may dispose of any shortfall without a prospectus or a PDS where the offer of the shortfall is:

  • made to the original offerees (ie to persons made offers under the rights issue); and
  • made no later than two months after the first offer under the rights issue.

Before the introduction of CO 08/35, disposals of shortfalls did not generally attract the benefit of the disclosure exemption because the subsequent offers of the shortfall were unlikely to be pro rata in nature. In practice, this meant that an issuer was compelled to either rely on another disclosure exemption under the Corporations Act (eg sections 708 or 1012D), or offer the shortfall under a prospectus or a PDS (a more time-consuming and costly process).

For a traditional rights issue, a bookbuild can be held at the end of the offer period. For an accelerated rights issue, the issuer may now conduct separate bookbuilds in respect of the shortfalls arising under the institutional and retail tranches. It is worth noting that CO 08/35 does not prevent an entity from relying on another disclosure exemption for disposal of the shortfall – for example, an entity may wish to offer the shortfall to institutional investors under either ss 708 or 1012D of the Corporations Act.

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Offers to convertible securityholders

Before the introduction of CO 08/35, the extension of a rights issue of ordinary securities to holders of convertible securities would not be able to be made without a prospectus or a PDS. CO 08/35 modifies this position, such that convertible securityholders may participate in a rights issue of ordinary securities (or other quoted securities or interests) if the terms of the convertible securities require rights issues to be extended in this way. It is a condition of the relief that:

  • the entity must make an offer to all holders with convertible securities that entitle them to participate in the rights issue; and
  • convertible securityholders are only able to participate in the rights issue to the extent necessary to prevent their holdings from being diluted.

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Additional technical relief

Finally, CO 08/35 provides additional technical relief, such that:

  • issuers and underwriters are provided with enhanced flexibility when dealing with non-residents' entitlements under a renounceable rights issue, including using a bookbuild process or a sale in accordance with the nominee procedure under s615 of the Corporations Act;
  • the disclosure exemption is extended to stapled securities; and
  • the rounding of fractional entitlements is now permitted.

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Comments

The move by ASIC to issue CO 08/35 should be welcomed, as its introduction effectively ends the anomalies identified when the disclosure exemption was first introduced. The issue of CO 08/35 should facilitate the use of all available rights issue structures, which should assist in ensuring that all securityholders are given an equal opportunity to participate in equity raisings.

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