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Rights issues which have, or are likely to have, an effect on control or the acquisition of a substantial interest in a company may be unacceptable if not managed appropriately. The Takeovers Panel’s recent decision in Tempus Resources1 (Tempus Resources Decision) together with ASIC’s report of having intervened in recent rights issues in which control may have passed to an underwriter serve as a timely reminder of this. In this article we take a look at the key factors the Takeovers Panel takes into account in these situations.
The fact that control is affected by a rights issue does not of itself give rise to unacceptable circumstances. Shareholders invest in the knowledge they may be diluted if they do not participate in capital raisings and companies are entitled to manage their capital as they see fit. However, there are situations where the Takeovers Panel considers rights issues may give rise to unacceptable circumstances.
In general directors should still carefully consider all reasonably available options to mitigate any effect on control.
The Panel considers, among other things, whether the control effect exceeds what is reasonably necessary for the fundraising purpose. In considering whether a rights issue gives rise to unacceptable circumstances, the Panel considers:
To mitigate potential control effects of a rights issue, the Panel notes a company may consider:
A dispersion strategy can also mitigate potential control effects by either:
In the Panel’s experience, where there is a clear need for funds, a rights issue resulting in a control effect will generally not be unacceptable as long as it is structured appropriately with an appropriate dispersion strategy.
The initial Panel declined to conduct proceedings based on a lack of support for the various assertions made. In its review application, the applicant made slightly different claims, including that the company had no need for funds, people associated with the underwriting and sub-underwriting intended to seek control of the company and that there were issues with the disclosures made in relation to the rights issue. These claims were made in circumstances where it appeared the rights issue had been launched around the time a requisition for a shareholder meeting to change the board had been received. These claims were rejected by the review Panel, which affirmed the decision of the initial Panel and declined to conduct proceedings.
On investigation by the Review Panel, the assertions did not turn out to be substantiated, including because the company did indeed require funds, the underwriter was a professional firm without any particular reason to support the company and the requisition for a general meeting to change the board was received after the rights issue launched.
However the Panel has previously found there to be unacceptable circumstances due to the timing of a rights issue in relation to a shareholder meeting. MMA Offshore Limited2concerned an equity raising that was announced just before the annual general meeting. The timeline for the equity raising provided that allotment and normal trading of new shares issued under the placement and institutional entitlement offer would occur before the meeting but the allotment of new shares under the retail entitlement offer would occur after the meeting. This meant that the shares issued to investors in the institutional component and placement would carry voting entitlements, but not the shares issued under the retail entitlement offer. The Panel considered that the size and timing of the accelerated component of the equity raising would cause control issues. It emphasised this was particularly so where some institutions would obtain or increase substantial holdings as a result of the placement and institutional entitlement offer. The Panel found that the timing of the equity raising had the potential to distort voting at the meeting and that this was unacceptable. In lieu of making orders, the Panel accepted an undertaking from the company that it would postpone the annual general meeting.
ASIC noted in its Corporate Finance Report published in September 2023 that it had intervened in pro rata rights issues undertaken by listed companies that may have resulted in control in the company passing to the underwriter. The underwriter in each case was a substantial shareholder or related party of the company.
ASIC noted that it will examine a rights issue closely if it is underwritten by a person who already controls the company, or is likely to control the company after the transaction on the basis that it considers that a transaction designed to give control to a holder or underwriter that is presented to the holders and the market as a rights issue will generally be contrary to the purposes in section 602 of the Corporations Act 2001 (Cth) (Corporations Act). ASIC noted it expects issuers to explore reasonable options and take available steps to minimise the potential effect of the rights issue on control of the issuer, including making genuine attempts to procure alternative underwriting arrangements.
The interventions mentioned above resulted in issuers agreeing to extend the offer period, procure additional sub-underwriters and provide further disclosure.
ASIC also noted that seeking approval from shareholders in accordance with item 7 of section 611 of the Corporations Act is another way that issuers can address the potential that a rights issue or underwriting may have an unacceptable control effect.
The Takeovers Panel’s decision in Energy Resources Australia (ERA)3 is an example (among others) of where this issue has been assessed before. The Panel made a declaration of unacceptable circumstances in relation to the affairs of ERA and its pro-rata renounceable entitlement offer, which was fully underwritten by North Limited, a wholly owned subsidiary of ERA’s largest shareholder, Rio Tinto4. The underwriting agreement contained a number of very long dated unusual undertakings from ERA in favour of the underwriter and if no other shareholders took up their entitlements, Rio Tinto would acquire voting power in ERA of approximately 95.6% in reliance on item 10 of section 611 of the Corporations Act.
The following measures were taken to assist with mitigating the control effects of the raise:
However, the Takeovers Panel found that the following factors meant that the above measures were insufficient:
When considering a rights issue that could have potential control implications, companies should note that:
Associate (Admitted in Ireland, England and Wales, not admitted in Australia), Sydney
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2024
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