New capital raising rules

The ASX has recently introduced temporary changes to its rules to facilitate emergency capital raisings against the current backdrop of the COVID-19 pandemic including:

• increasing the placement capacity for listed companies to 25% of their share capital, subject to the placement being fully paid ordinary shares and there being a follow-on accelerated pro rata entitlement offer or share purchase plan offer (SPP). Where small or mid-cap companies already have an additional 10% capacity approved under Listing Rule 7.1A, the aggregate maximum remains at 25%, but companies can choose to use the Listing Rule 7.1A capacity or the new increased Listing Rule 7.1 capacity
• waiving Share Purchase Plan requirements for the number of shares issued to be limited to 30% of the issued capital and the issue price to be at least 80% of VWAP which are replaced with a requirement that: for follow on SPPs, the issue price must be equal to or lower than the placement price; and for stand-alone SPPs the issue price may be determined by the Board
• a waiver of the one for one cap on non-renounceable entitlement offers
• permitting back to back trading halts whereby a listed entity may request two consecutive trading halts allowing in total up to four trading days in halt, to consider, plan for and execute a capital raising.

These temporary measures will expire on 31 July 2020 unless ASX decides to remove or extend them.

The Australian Securities and Investments Commission (ASIC) is also providing temporary relief allowing ‘low doc’ placements, rights issues and SPPs where a listed company has been suspended for a total of up to 10 days in the previous 12 month period rather than this being limited to five days.

This follows similar moves by the New Zealand Stock Exchange to assist companies who need to raise capital to cope with the impact of the pandemic.

Boards of ASX listed entities will be hoping that Australian capital markets will provide access to funds during the current COVID-19 disruptions as they did during the GFC. Directors of impacted companies will need to look beyond the immediate impact of the COVID-19 shutdowns and consider the potential longer term consequences of a downturn in the economy when deciding if and when to raise capital.

With highly volatile market conditions, Boards will need to weigh up a number of matters including the speed, certainty and cost of the capital raising options before them also bearing in mind the difficulty of obtaining underwriting of capital raisings in the face of the COVID-19 threat.

An overview of the key equity capital raising options for listed companies including the current timing, raising size and pricing limits based on the new temporary rules is set out in the below table.

New FIRB thresholds - impact on capital raising and M&A

The Treasurer of Australia announced on 29 March 2020 temporary changes to the foreign investment review framework, designed to protect Australia’s national interest. Whilst these temporary measures are in place, Australian companies looking to firm up additional funding from foreign investors or vendors seeking to sell Australian businesses or companies to foreign investors, are now more likely than ever to require Foreign Investment Review Board (FIRB) approval before these investments or acquisitions can take place. The time-frame for obtaining the approval has also been extended to up to six months.

Effective from 10.30pm AEDT on Sunday, 29 March 2020, the threshold amounts which determine whether FIRB approval is required for particular investments by foreign persons have all been reduced to $0. From the perspective of capital raisings, companies will need to be cognisant of these new thresholds as they may limit the ability of existing significant foreign shareholders or new investors to cornerstone or underwrite fundraising rounds. For Australian companies looking to divest subsidiaries or assets to assist in managing their financial situation, the new rules could result in significant delays if sales are proposed to be made to foreign purchasers.

For further information on these changes, refer to our recent article, Foreign Investment Review Board (FIRB) – COVID-19 changes and impact on capital raising and M&A.

Other issues for listed companies

COVID-19 - What do we need to disclose to the market?

Whilst not all companies will need to raise capital immediately, Boards will need to carefully monitor the impact of COVID-19 on their business. In addition to assessing the practical impact of the virus and associated restrictions on the operation of the business, Directors will need to consider what they need to disclose to the market about the repercussions of the pandemic on their company under their continuous disclosure obligations.

Under ASX Listing Rule 3.1, once a company is or becomes aware of any information that a reasonable person would expect to have a material effect on the price or value of the company’s securities, it must immediately tell ASX that information.

Given the ongoing updates to COVID-19 recommendations, restrictions and uncertain market conditions, ASX listed companies may find it difficult to ascertain with any certainty the quantum of the COVID-19 disruptions on the company and its operations and the duration of the impact. Given this, companies may still be safe to rely on the carve outs to disclosure under Listing Rule 3.1A for information that comprises matters of supposition or is insufficiently definite. ASX reinforces this view in its recent COVID-19 compliance update, acknowledging the disclosure challenges and confirming that a listed entity’s continuous disclosure obligations do not extend to predicting the unpredictable.

However, there are circumstances which are likely to be market sensitive and require disclosure such as:

• a significant disruption or cessation to operations such as wholesale closure of outlets;
• termination of a material contract such as a material customer contract, manufacturing contract or supply contract;
• significant disruption to supply chain; and
• large scale redundancies or employees being stood down.

Such matters would typically require disclosure to the ASX, however, companies should ensure that any forecast impact that these matters have on the company’s financial or future performance are based on reasonable grounds (again a matter reinforced by ASX in its recent COVID-19 compliance update). Any statements not based on reasonable grounds are deemed misleading and may result in civil and criminal liability for the company and its directors.

Companies should also monitor any impact the COVID-19 disruptions have had or may have in the context of earnings guidance the company has already released on the ASX , to determine whether any update to that guidance is required. We have already seen a range of companies withdraw their earnings guidance from the market in light of COVID-19.

The ASX has provided some practical guidance to ASX listed entities on disclosure obligations in its recent COVID-19 compliance update dated 31 March 2020 which can be accessed here.

Financial reporting

Quarterly reporting

With the first quarterly cash-flow and activities reports since the onset of COVID-19 in Australia due by the end of April, quarterly reporting companies will need to carefully consider their cash-flow facilities and requirements particularly in light of the new Appendix 4C which is required for the 31 March quarter. This requires a company that has less than two quarters of funding available to disclose whether it expects to be able to continue its operations and whether it expects to need to raise further funding, which of course may be substantially impacted by the limitation on revenue generation caused by COVID-19 shutdowns. ASX is unlikely to agree to any extension for the filing of quarterly cash flow or activity reports as these are not generally audited or reviewed.

Half and full year reporting

ASX has not yet made any determination and not seen any demand from listed companies with a 30 September, 31 December or 31 March balance date requesting an extension to the deadlines for filing their financial statements for the half or full year. ASX has advised that any such requests will be looked at by ASX on a case by case basis and will generally only be granted where there has been an unavoidable delay in having financial statements audited or reviewed and subject to certain conditions including ASIC agreeing to grant an extension under the Corporations Act and the auditor confirming in writing to ASX that they will not be able to complete their audit or review by the deadline.

ASX is keeping the situation for listed entities with a 31 May or 30 June balance date under review to determine whether there is a need for any relief from the reporting deadlines for those entities.

Insolvent trading – COVID-19 safe harbour

On 22 March 2020, the Federal Government announced amendments to the insolvent trading provisions of the Corporations Act 2001 which are aimed at providing further relief for financially stressed businesses, including an additional 'safe harbour' from insolvent trading liability in respect of debts incurred during the next six months 'in the ordinary course of the company's business'. For further information on this safe harbour, refer to Maddocks previous article, Softening the financial blow of COVID-19: Sweeping temporary changes made for directors and debtors.

Annual General Meetings

COVID-19 restrictions may also impact an ASX listed entities ability to hold its next Annual General Meeting in compliance with the Corporations Act or to hold shareholder meetings where required for example to approve capital raisings. ASIC has recently issued its no action position on shareholder meetings, facilitating hybrid or virtual meetings, which is outlined in our previous article, Holding shareholder meetings under COVID-19 restrictions.

If a listed entity has already dispatched its notice of meeting, ASX and ASIC are both supportive of the company sending supplementary information to its security holders about the meeting and voting procedures electronically via their website and the ASX announcement platform.

Maddocks has produced guides to a range of legal issues raised by the coronavirus (COVID-19). You can access these guides here.

Capital raising options

The table below outlines the key requirements, limitations and disclosure requirements for the main capital raising alternatives under the new changes to the ASX Listing Rules and Corporations Act 2001.