Corporate Finance Update – Issue 2
Issue 2, September 2020
To make sure the market is operating effectively, we are monitoring the nature and size of capital raisings during the COVID-19 pandemic.
In total, between 20 March and 27 August 2020, 180 listed entities have sought to raise $36.3 billion of secondary capital (offers over $10 million). This compares favourably on an international basis given the size of our market: A$28.6 billion raised on the LSE, A$88.6 billion on the NYSE and A$93.0 billion on NASDAQ via secondary raisings (placements and rights offers).
Most capital during this time has been raised through placements ($23.7 billion), with the remainder by entitlement offer ($8.1 billion) and share purchase plans ($4.5 billion).
The average discount offered under:
- placement was 16.1% to the last closing share price
- entitlement offer was 27.2% to the last closing share price.
The average day one premium for placements was 17.8%.
On 13 July 2020, ASX announced an extension of Class Waiver Decision – Temporary Extra Placement Capacity until 30 November 2020, to account for:
- ongoing uncertainties of the COVID-19 pandemic
- likelihood of substantial fundraising activity during the upcoming reporting season, where companies have an extra month to lodge final accounts.
Many issuers, regardless of whether they are relying on the ASX waiver, are disclosing their intention to conduct placements on a pro-rata basis. While pro-rata allocation can help to ensure fundraisings are conducted fairly, boards may have legitimate reasons for employing different strategies depending on the best interests of the company.
Regardless of how a capital raising is conducted, transparency around fundraising decisions is important for market efficiency. Our review of allocation spreadsheets for offers relying on ASX’s waiver has confirmed that placements have been conducted in line with announced placement policies.
In the six months to 30 June 2020 we raised various concerns with issuers – focusing on statements that may be false or misleading, including claims by issuers that they have a potential treatment or remedy for the virus. You are reminded that any forecasts or forward-looking statements must have a reasonable basis.
- Case study 1: We required a company to remove statements from the chairman’s letter about the community’s ‘heightened awareness of the need for immunity with COVID-19’, where it was preceded by statements that its nutraceutical product strengthened the body’s immune system and, by implication, improved a consumer’s immunity to COVID-19.
- Case study 2: We issued an interim stop order to limit the risk of investor harm, where an issuer’s prospectus contained forecasts at the time the COVID-19 outbreak was beginning to impact business operations and there was a high level of market volatility. The forecasts no longer had a reasonable basis and we required them to be removed because they were misleading.
- Case study 3: We issued an interim stop order on a property investment company ‘targeting an annual return of 15%’ and stating that it was suitable for investors looking for a ‘strong investment income’. This appeared to be contradicted by statements that dividends were unlikely to be paid. Extensive disclosure changes were required. Ultimately, the offer was unsuccessful.
There has been a significant decrease in the number of original disclosure documents lodged with ASIC from January to June 2020 (198 lodged, $2.18 billion funds sought) compared to the previous period of July to December 2019 (307 lodged, $6.93 billion funds sought).
This decrease was caused by the impact of the COVID-19 pandemic on IPOs ($132 million, down from $4.53 billion in the previous period) – as well as hybrid, capital note or other security offerings under a prospectus.
It also reflects the increased popularity of ‘low doc’ capital raisings, which grew significantly during the period as companies sought to manage the effects of COVID-19. These raisings have largely taken place through institutional placements and retail offerings via share purchase plans and entitlement offers without a disclosure document. Find out more.
We also saw a significant decrease in the size of the fundraisings completed under disclosure documents, with the total amount raised from the top 10 fundraisings falling from $4.49 billion to $1.01 billion. The largest offer in the period was a capital notes issue by Macquarie Bank for $400 million, which was oversubscribed by $241 million.
While primary capital markets have been subdued in the first half of the calendar year, we understand some companies are considering listing in the next six months.
Larger companies seeking to list often include forecasts in their disclosure documents. However, the COVID-19 pandemic has had many negative and positive impacts on companies across industries – the ongoing effect and duration of which is hard to predict.
This makes it difficult to compile forecasts that comply with Regulatory Guide 170 Prospective financial information, particularly in demonstrating that assumptions are based on reasonable rather than hypothetical grounds. The use of hypothetical assumptions can render a forecast unreliable, reducing its relevance for potential investors.
There may be ways for issuers to deal with these uncertainties, including:
- shortening the duration of forecast periods
- increasing the prominence of sensitivity analysis
- if unable to provide a forecast, disclosing in more detail:
- the most recent trading of the issuer before lodgement
- the key factors and variables that will affect the company’s prospects.
We are happy to work through these issues with potential issuers or advisers.
We are also aware of issuers including valuation metrics using annualised revenue figures (e.g. enterprise value or annualised quarterly revenue) in their key offer statistics for technology IPOs. While we appreciate the high growth nature of many of these companies, these forecasts may mislead investors in the absence of comprehensive, independently reviewed forecast information. Where we identify statements that may mislead investors, we will take action.
Non-IFRS profit measures are frequently used in disclosure documents and market announcements.
While companies should disclose and analyse the impact of the COVID-19 pandemic on their results, the use of non-IFRS profit measures to demonstrate results if the COVID-19 pandemic had not occurred is hypothetical and misleading.
Presenting a split of profit or loss between pre-COVID-19 pandemic and COVID-19 pandemic periods is problematic because:
- the cut-off point is difficult to identify clearly
- the pre-COVID-19 pandemic period may not be representative of future performance
- the effects of the COVID-19 pandemic are unlikely to be:
- the only factor contributing to changes between pre-COVID-19 and COVID-19 pandemic results
- constant or uniform in the COVID-19 pandemic period.
We will closely scrutinise any non-IFRS profit disclosures of this nature. For more information, read our COVID-19 FAQs.
ASIC has issued regulatory relief to help reduce red tape for companies undertaking an initial public offer (IPO).
ASIC Corporations (Amendment) Instrument 2020/721 amends ASIC Class Order [CO 13/520] to facilitate voluntary escrow arrangements under an IPO so that the relevant interests of an issuer, professional underwriter or lead manager arising from the escrow agreement are disregarded for the purposes of the takeover provisions, but not the substantial holding provisions, in the Corporations Act 2001.
ASIC Corporations (IPO Communications) Instrument 2020/722 facilitates non-promotional communications to security holders and employees of a company proposing to undertake an IPO prior to lodging a disclosure document with ASIC.
The relief is provided subject to the issuers meeting certain requirements and conditions of the relief.
In response to the COVID-19 pandemic, we have granted novel relief to allow the shareholders of a company to participate in a proposed share purchase plan (SPP) – even if they had participated in an SPP in the last 12 months.
Without relief, ASIC Corporations (Share and Interest Purchase Plans) Instrument 2019/547 (LI 2019/547) limits the participation of shareholders in SPP offers to a maximum of $30,000 in the last 12 months. In this case, five months had passed since the company completed its last SPP offer and it was now intending to use the temporary increased placement capacity of 25% under ASX Listing Rule 7.1 by conducting a placement and SPP offer. Without relief, many of the company’s shareholders would not be able to participate in the proposed SPP offer (in part or in full) because they had participated in the earlier SPP.
We granted the relief to ‘reset’ the $30,000 limit under LI 2019/547 because:
- the primary purpose of the capital raising was to ensure the company had a sufficient cash buffer against the effects of the COVID-19 pandemic
- the SPP would help to mitigate the dilutive effect of the concurrent placement on the holdings of retail shareholders.
We also granted similar relief to allow a managed investment scheme to conduct an SPP in reliance on LI 2019/547.
Following the onset of the COVID-19 pandemic, we temporarily extended the maximum suspension requirement in the Corporations Act 2001 (Corporations Act) to allow companies to rely on the ‘low doc’ fundraising regime where they have not been suspended for more than 10 trading days: ASIC Corporations (Trading Suspensions Relief) Instrument 2020/289.
We recently granted individual relief to allow a company to conduct a ‘low doc’ fundraising despite an expected suspension of 15 trading days. In this case, the company applied for relief to increase the requirement by five trading days while still in suspension.
In this instance, the decision to grant individual relief was made after considering the:
- industry sector, which sustained a significant and early hit to revenue because of the pandemic
- geographical spread of the company’s operations, which complicated its response to the pandemic
- company was finalising its capital raising requirements during the early stages of the Government’s economic response.
Electronic dispatch of target’s statement
In light of the COVID-19 pandemic, we granted relief to allow a company subject to a hostile takeover bid to dispatch its target statement electronically to shareholders.
Although section 648C of the Corporations Act requires takeover documents to be sent to security holders in hardcopy by post or courier, relief was granted because:
- of the effects of the COVID-19 pandemic on the postal system, including significant delays and potential transmission of COVID-19 through physical delivery of documents
- arrangements were made to send a postcard with the target statement URL to shareholders who had not elected to receive company documents electronically, and an email with a link to the target statement to shareholders who had elected to receive company documents electronically.
Reduction in market bid price
The takeover provisions provide limited instances where a bidder may vary its offer, including raising the bid price and extending the offer period in certain circumstances. We recently refused relief to modify section 649A of the Corporations Act to permit a bidder to reduce the offer price of its market bid during the offer period.
The bidder sought relief to allow a proportionate reduction of the offer price where the target announced and completed an issue of bonus shares to eligible holders in the bid class during the offer period.
In coming to the decision, we considered:
- the limited protections afforded to bidders and the legislative recognition that bidders assume the risks of certain events occurring and that they may be unable to vary their bid
- that the situation did not unfairly prejudice shareholders who had already disposed of their shares because the legislation contemplates holders receiving differing consideration in market bids – for example, where the offer price is increased during the offer period, holders who have already accepted into the offer (at the lower price) are not entitled to the increased consideration.
The COVID-19 pandemic has severely affected M&A activity across the board:
- January to June 2020 – 15 independent control transactions (10 takeover bids and five schemes) estimated at $14.43 billion
- June to December 2019 – 40 independent control transactions (16 takeover bids and 24 schemes) valued at $9.02 billion.
While the volumes were lower, the value of the transactions was greater (e.g. the TPG–Telecom transaction made up $8.2 billion of the $14.43 billion this period).
Most transactions in this period were takeovers – a departure from the recent trend towards schemes. However, given the abnormally low volume of activity and unique circumstances, we do not believe this is an indication of change in preferred acquisition mechanism.
During this period, our regulatory interventions have centred on schemes of arrangement and other (item 7) control transactions. Going forward, we will continue to focus our M&A activities on structural and conduct elements of transactions.
- Case study 1: We identified that the acquirer in a proposed scheme transacted in the scheme company’s shares with select counterparties via an off-market special crossing. The acquirer purchased these shares at prices above the consideration offered under the scheme itself. We raised concerns with the scheme proponent and the acquirer because we were concerned that all the shareholders of the company would not be treated equally unless the scheme consideration was increased. Ultimately, this scheme was terminated due to the announcement of a competing offer. We will closely scrutinise transactions and intervene where we consider all shareholders are not being treated equally.
- Case study 2: We acted to ensure that the views of the independent board committee on the transaction had enough prominence in comparison to a recommendation of the conflicted directors. We would generally expect conflicted directors to refrain from making a recommendation to shareholders. This issue should be considered at the time a scheme implementation agreement is executed and conditions about director recommendations should be crafted appropriately.
- Case study 3: We took action in relation to a material delay to a proposed scheme where third-party regulatory approval requirements were received months after shareholders voted on the scheme. The scheme proponent addressed our concern that the shareholders’ vote had become stale by reissuing its booklet disclosure and agreeing to hold a ‘ratification’ meeting. Where there has been a lengthy delay between the vote at a scheme meeting and the approval court hearing, or where any supervening events may be considered material, the company needs to consider whether supplementary disclosure should be provided and confirmatory approval should be sought. Where possible, practitioners should consider obtaining approvals for conditions precedent to the implementation of the scheme dependent on obtaining third-party approvals before commencing the scheme process.
As the uncertainty around the COVID-19 pandemic eases, we expect M&A activities to increase. We recognise that upcoming deals may incorporate novel structures and terms to deal with the risks of the COVID-19 pandemic so we encourage you to talk to us early in the planning phase of these deals.
In Issue 1, we outlined the temporary conditional relief that allows companies to convene investor and creditor meetings online, provide information required for the meeting electronically, and allows officers to use an electronic signature to execute a document.
The conditional relief has now been extended for six months until 21 March 2021. For more information, read our guidance on the appropriate approach to calling and holding meetings using virtual technology.
We have approved ASIC Corporations (COVID-19 Email Lodgement Service—ASIC Corporations (Wholly-owned Companies) Instrument 2016/785) Instrument 2020/612 to facilitate the electronic signing and lodgement of documents for the purposes of obtaining financial reporting relief under ASIC Corporations (Wholly-Owned Companies) Instrument 2016/785. The relief will apply while the Treasurer’s conditional relief remains in force.
Lodging parties must comply with the terms of the ASIC Email Lodgement Service: User Agreement for ASIC Corporations (Wholly-owned Companies) Instrument 2016/785.
For more information, including instructions on how to use a cloud-based signature platform, read Information Sheet 24 Deeds of cross-guarantee.