Publications / Corporate Advisory
In a boost for small-cap companies, ASX has recently announced changes to the Listing Rules making it easier for eligible companies to raise capital. From sectors across the board including:
- resources, and
where innovation and growth opportunities often require capital injections, the changes will provide significant flexibility and potential cost savings.
From 1 August 2012, eligible companies can now, with shareholder approval, issue up to 25% of their issued share capital by way of placements in a 12 month period.
ASX has also announced changes to admission requirements effective from 1 November 2012. The first major change is to slightly lower the shareholder spread test, which will benefit companies which may attract a narrower pool of investors. The second change is not as favourable, increasing the net tangible asset requirement for companies listing under the ‘assets test’, although it is not as significantly as originally proposed.
Amendments to capital raising rules
Following a consultation process earlier this year, ASX has added new Listing Rules 7.1A and 7.1B to allow eligible companies to issue an extra 10% of their share capital by way of placement to sophisticated investors. This is in addition to the ‘15% limit’ otherwise available under Listing Rule 7.1.
To take advantage of this new rule, a company must:
- be an ‘eligible entity’
- seek and obtain approval to use the additional placement capacity from the company’s shareholders at an Annual General Meeting (AGM), and
- provide the disclosure required by the Listing Rules.
To be eligible, the company must satisfy the following criteria at the time the relevant AGM is held:
- must have a market capitalisation of $300 million or less, and
- must not be included in S&P/ASX 300 Index.
Approval by shareholders
Approval under Listing Rule 7.1A must be by way of a special resolution at the AGM. The approval will be valid for 12 months from the date the approval is given or when the shareholders vote to approve a change in the activities of the business in accordance with ASX Listing Rules.
The Listing Rules also require disclosure of certain items in the notice of the AGM including:
- the minimum price at which the equity securities may be issued under the placement
- the risk of economic and voting dilution to the existing ordinary security holders that may result from an issue of equity securities under a placement (a table setting out potential dilution of the existing security holders must be presented in the notice)
- the date by which the equity securities under the placement may be issued (i.e. the earlier of 12 months from the date of approval or when shareholders approve a change in the activities of the business)
- the purpose for which the equity securities may be issued, including whether the eligible entity may issue any of them for non cash consideration
- details of the eligible entities allocation policy for issues under the approval, and
- the number of securities which were previously issued in reliance upon the additional placement capacity.
If the company anticipates that by the time of the AGM that it may exceed $300 million market capitalisation or be included in S&P/ASX 300 Index, the resolution in the notice of AGM should be expressed as being conditional on the company satisfying the eligibility criteria.
A placement under Listing Rule 7.1A also requires additional disclosure in the applicable Appendix 3B announcement, including:
- details of the dilution to existing shareholders caused by the issue
- where securities are issued for cash, a statement of the reasons why the entity issued securities as a placement under Listing Rule 7.1A and not as (or in addition to) a pro rata issue or other type of issue in which existing shareholders would have been eligible to participate
- details of any underwriting arrangements, including any fees payable to the underwriter; and
- any other fees or costs incurred in connection with the issue.
Securities issued under Listing Rule 7.1A must not be issued at a price that is less than 75% of the volume weighted average price (VWAP) of the securities (calculated over the 15 trading days on which trades in those securities were recorded) immediately before:
- the date on which the issue price of the securities is agreed, or
- the issue date (if the securities are not issued within five trading days of the which the issue price is agreed).
Amendment to admission requirements
Securities holders spread test
Condition 7 of Listing Rule 1.1 has been amended to include a third alternative spread test as well as lowering the spread requirements generally. The new spread test will be relevant to all companies applying for admission to the official list of ASX on or after 1 November 2012.
The three alternative spread tests are:
- the company must have 400 holders of securities in the main class, each holding parcels of securities in the main class with a value of at least $2,000 (excluding restricted securities). There is no minimum percentage of the issued capital that non-related parties must hold
- the company must have 350 holders of securities in the main class, each holding parcels of securities in the main class with a value of at least $2,000 (excluding restricted securities), and at least 25% of the securities in the main class are held by non-related security holders (excluding restricted securities held by the non-related security holders), or
- the company has 300 holders of securities in the main class, each holding parcels of securities in the main class with a value of at least $2,000 (excluding restricted securities), and at least 50% of the securities in the main class are held by non-related security holders (excluding restricted securities held by the non-related security holders.
A company seeking admission to the Official List of ASX need only comply with one of the three alternative tests.
The third alternative test will potentially make it less onerous for small to mid cap companies to be admitted to the Official List. Shareholder spread cannot, however, be obtained by artificial means and advice should be taken in relation to the status of pre-existing holdings, especially where restricted securities may be involved.
ASX has amended Listing Rule 1.3.1 to require a company to have net tangible assets (NTA) of at least $3 million (previously $2 million) after deducting the cost of fund raising or a market capitalisation of at least $10 million.
This amendment is only relevant to those companies seeking admission to the Official List under the ‘assets test’ and will not affect those companies seeking admission under the profit tests pursuant to Listing Rule 1.2.
The NTA test is seen as important in ensuring companies are of a sufficient size and nature to be listed on ASX. After significant debate, the original proposal to increase the amount to $4 million was the subject of some compromise, which is useful to companies in the sector that may be deemed to have intangible assets.
In light of the changes to the Listing Rules, small to mid cap listed companies now have greater flexibility to raise capital.
To take advantage of this additional placement capacity, small to mid cap companies thinking of raising capital in the near future should consider whether to include the relevant resolutions in the notice for their next AGM.
Companies considering listing on ASX on or after 1 November 2012, should take note of the updated admission requirements.
ASX has been active in regulatory development in recent times. In addition to the new measures discussed in this article, more specific proposals are currently being considered to streamline rights issue timetables. These steps are generally positive for market participants and will assist companies accessing capital as market activity levels increase.
Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.