When capital markets are volatile, issuers undertaking a rights issue are exposed to the risk of adverse market movements occurring during the offer period, which may affect the success of the offer, the costs to the issuer, and the willingness of shareholders to accept their entitlements and of underwriters to support the offer.
On 3 July 2012, the Australian Securities Exchange (ASX) issued a Consultation Paper Modernising the timetable for Rights Issues: facilitating efficient and timely rights issues (Consultation Paper). The Consultation Paper sets out a number of proposals for shortening the timetable by leveraging off advancements in technology, systems and operational processes.
In this Alert we highlight the key ASX proposals to modernise the rights issue timetable.
Background to ASX Proposals
On 3 July 2012, the ASX issued the Consultation Paper to seek market feedback on proposals for reducing the timetable for conducting traditional rights issues. The current Listing Rules timetables for traditional rights issues extend over a period of 26 days, with variations depending on whether the offer structure involves a renounceable or non-renounceable offer.
In recent years, the desirability and feasibility of undertaking rights issues has been affected by volatile equity market conditions. Where market conditions, including the trading price of securities in an issuer, may move sharply, the issuer may be exposed to pricing risks, the possibility that the offer may not be supported by shareholders and increased transaction costs. In contrast, an institutional placement may be completed within 24 to 48 hours, raising substantial capital quickly while market conditions are favourable. Placements also reduce the risk for underwriters to an offer by substantially reducing the risk of adverse market developments, and may provide the issuer with greater certainty and rapid execution where the offer is made to support an acquisition or other transaction.
However, the use of placements to institutional investors has been widely criticised for excluding retail investors from the opportunity to participate in equity raisings. In the Consultation Paper ASX explains that it aims to strike "a better balance between listed companies' need for timely capital raising mechanisms and the opportunity for existing shareholders to participate in the capital raising. A shorter timetable [for rights issues] is expected to help reduce costs, market execution risks, and the size of the discount required to raise the necessary capital, and so remove any unnecessary disincentives to the offering of rights issues by listed companies".
The Consultation Paper is concerned with traditional offer structures contemplated by the timetables in the Listing Rules. ASX is also proposing amendments to the Listing Rules to allow for non-traditional accelerated offer structures, but these amendments will not be implemented until the proposals in the Consultation Paper have been considered.
Proposed timetable amendments
The Consultation Paper proposes a number of ways in which the standard timetable may be reduced to 16 days from the current minimum 26 days (which in some cases may be extended to allow for document processing and delivery delays).
In most cases, the proposed reductions in the timetable are achieved by truncating the periods required for regulatory or system reasons such as the period between announcement and ex dates (from 2 business days to 1), or from ex date to record date (from 5 business days to 3), but also reducing the minimum offer period and, in the case of renounceable rights issues, reducing the minimum trading period. The ASX's summary of the proposals is set out below.
|Announcement date to ex date
||2 business days (day 0 to day 1)
||1 business day (day 0) |
|Ex date to and including record date
||5 business days (day 2 to day 6)
||3 business days (day 1 to day 3) |
|Trading period for renounced rights (renounceable offer only)
||14 business days (day 2 to day 15)
||8 business days (day 1 to day 8) |
|Day after record date to and including date that documents are sent to holders
||4 business days (day 7 to day 10)
||3 business days (day 4 to day 6) |
|Day after documents are sent to holders to and including acceptances close date
||10 business days (day 11 to day 20)
||7 business days (day 7 to day 13) |
|Day after acceptances close date to and including issue date
||6 business days (day 21 to day 26)
||3 business days (day 14 to day 16) |
||26 business days
||16 business days |
Other proposals include:
- facilitating wider use of electronic lodgement and processing of acceptances, and payment of subscription money; and
- amendment of various processing and settlement mechanics to facilitate the shortened timetables.
While non-traditional rights issue structures (accelerated renounceable and non-renounceable structures) are now widely used, the traditional structures may still be more attractive for issuers whose shareholder base comprises mostly retail shareholders (as they will not derive great benefit from accelerating the institutional component) or who perceive the accelerated structures as involving additional complexity.
The proposals in the Consultation Paper may limit the ability of foreign shareholders to participate in a rights issue, given the shortened period for delivery of documents and the time to submit acceptances, while the reduction in the minimum offer period may limit the ability of domestic shareholders to consider whether they wish to participate and respond.
ASX acknowledges that the proposals may involve some trade-offs between the advantages of a shorter timetable and the ability of market participants to respond to information, such as to use the cum entitlement period to join or exit the share register of the issuer or to receive and process market information after each stage in the offer.
The shortened timetable may also present challenges for the settlement and processing systems of market participants.
In addition to the reduction of market risk, other potential benefits of the proposals include:
- reduction of the period during which the issuer will need to disclose to the market information that may otherwise be within an exception to the continuous disclosure obligations in the Listing Rules; and
- the issuer will receive capital raised under the offer sooner, while greater liquidity will be provided for investors at an earlier date, providing similar benefits to accelerated offer structures.
More information and submissions
We've included the link to the Consultation Paper here. The ASX will accept submissions on the proposals in the Consultation Paper until 14 August 2012.
Please speak with one of the listed contacts from our Capital Markets team to discuss the Consultation Paper or the issues discussed in this Alert.