Ultimately listed companies’ boards are accountable for capital raising decisions. Boards have a duty to consider the interests of all shareholders when assessing their capital raising choices and to communicate the reasons for their decisions to shareholders.
In addition to communicating the reasons for capital raising decisions, the NZSA wants boards to voluntarily disclose the individual particulars of institutional placements; when those share placements have not been made more widely available. In our opinion, by disclosing these details, it aids transparency and allows shareholders to form a view of the appropriateness of the board’s decision making process.
Boards should wherever practical avoid inequitable dilution of existing shareholders.
Companies should always attempt to offer shares to existing shareholders on a pro rata basis, on equal or more favourable terms, before the shares can be offered to anyone else. NZSA favours renounceable rights issues as the preferred method of raising equity.
The "Same Class" regime introduced in April 2014 facilitates this as a cost and time effective solution for most issuers of both equity and debt.
The NZSA Position
Pro rata Rights offer
1. A renounceable pro rata rights offer should be the preferred starting option for any listed company seeking additional equity funding. This method allows the company to offer all shareholders additional equity in proportion to their current holding.
The benefits of this method are:
• All shareholders have the opportunity to share proportionally in any issue.
• All shareholders have the opportunity to avoid dilution of their shareholding.
• Where capital is required quickly, the company can accelerate the institutional component of the offer, using an accelerated rights issue with a follow up offer to other shareholders on the same or better terms.
While ideally, all shareholders who wish to take up additional unsubscribed rights should have that opportunity pro rata, we recognise that for companies with a large number of small holdings, this may not be cost effective. Therefore, as a minimum, companies offering a pro rata entitlement offer should provide a sale facility for renounceable entitlements whether on market or via other mechanisms such as a book build. This allows shareholders who do not, or are unable to participate to still potentially realise some value from their entitlement. Shouls a book build option be chosen, any overhang rights should be available to brokers as well as institutions in order to facilitate further retail investment.
The Same Class rules have simplified and dramatically reduced the cost of rights issues. However, other cost considerations, e.g. the discount level judged necessary for the rights issue to succeed, may at times justify using other alternatives such as share purchase plans (SPP’s) and placements. Each of these has disadvantages from a shareholder perspective and should not be the first choice.
2. Share Purchase Plan (SPP)
A share purchase plan is a less acceptable way of raising capital from shareholders since it:
• Is disproportionate and may not allow larger shareholders the opportunity to avoid dilution of their holdings.
• Equally, if poorly designed, it may reward shareholders with very small holdings with a disproportionate amount of equity.
Companies who choose to offer an SPP should:
• Use best endeavours, consistent with prudent capital management to honour all subscriptions in full. Where this is not possible, scaling taking into account the size of the holdingand the amount of capital applied for should be instituted. The effect should be aimed at moderatingany inequalities that would otherwise arise.
• Set a minimum parcel size to ensure retail investor requests are not prorated to an insignificant parcel in the case of over subscriptions. Such minimum to be at a level consistent with entitlements due for typical or average retail shareholdings on the company register at that time.
• Where any funds are held for an excessively long period and then reimbursed, pay a market rate of interest on those funds for the period held.
There may occasionally be circumstances where a company needs to use a placement despite its disadvantages to small shareholders caused by diluting their holdings.
An example could be where companies need to move very quickly to take advantage of an opportunity arising (such as an acquisition), within a time frame that would negate raising the capital from all shareholders. Another example could be where an opportunity arises to introduce significant new capital at a figure that is substantially less than the discount that may otherwise be necessary if a more general offer was made to all shareholders.
Where a company decides to raise capital by way of a placement, it should as soon as practical, offer
shareholders a renounceable pro?rata entitlement at the same or a discounted price as the placement.
In the interest of transparency, where a company has undertaken a placement, the NZSA expects it to disclose to the market the following information:
• The name of the recipients, the number of shares and percentage of issued capital issued to
each recipient of more than 5% of the total placement.
• The names of any advisors or underwriters involved in the placement, a brief description of
the work carried out and the total fees paid to each advisor/underwriter.
• A detailed explanation about what alternative methods of capital raising were explored and
why the chosen method was preferred.
4. Share placements in lieu of dividends
This is a useful way in which investors can gradually increase the amount of equity in a company while at the same time providing gradually increasing capital to the company. However they are dilutive over time to those who do not take them up (often associated with a need for income). Companies must be careful to explain this to investors and offer part dividend/part shares as a way to mitigate this effect. Before instituting such schemes, boards must be able to quantify that the additional capital can generate sufficient returns to at least maintain earnings per share going forward. If this is not the case, dividends should be paid in cash.
5. Provisions for receiving funds
Shareholders find their own financial managementcan be compromised by the insistence that funds accompany any committment to subscribe to an offer at the time documentation is returned. this can lead to a situation where most subscriptions are received at the very end of the offer period. Where possible, companies should provide (via their registry), an opportunity to have funds remitted via an irrevocable direct debit at a time close to the close of the issue. this has an advantage for companies in that committments will be confirmed earlier in the process and decisions to close or extend an offer will be better informed.
Where this is not possible, any funds that are held for an extended period should pay a market rate of interest for the period held.
6. NZSA voting of discretionary proxies
If a company has undertaken a capital raising in a manner which is significantly and unreasonably in conflict with this policy statement, the NZSA would generally take the following actions with regard to voting discretionary proxies at a meeting of the company:
• Vote against any resolution seeking shareholder approval for the capital raising.
• Vote against any director seeking election or re-election who was a member of the board at the time the decision was taken.
(Updated March 2015)