Australia: ASX latest comments on class waivers and other capital raising instruments

In brief - 1 May 2020 announcement provides further clarification on how ASX determines whether to allow listed entities to rely on the class waivers announced on 31 March 2020 (Class Waivers), when to notify the ASX, and raising capital through the issue of convertible notes

Many listed entities are facing constrained cash flows causing an increased need for capital brought on by the COVID-19 pandemic. This latest announcement sheds light on pressures being faced by the ASX as it faces an accelerated number of capital raisings. It also illustrates some of the thinking behind the ASX's decision making.

It appears that the ASX is attempting to balance companies' current needs for quick and efficient capital with the interests of existing shareholders. In our experience, keeping interests of existing shareholders in mind when raising money will often lead to a better outcome.

Based on this latest announcement, listed entities should consider:

• whether their proposed capital raise is to address issues arising in relation to the COVID-19 health crisis and/or its economic impact
• whether the capital raising has been structured equitable from the viewpoint of existing security holders
• engaging early with the ASX about any capital raising plans that rely on the Class Waivers, and
• whether the terms that apply to the class of securities are appropriate and equitable

What should listed entities proposing to raise capital relying on Class Waivers consider?

To receive the benefit of the Class Waivers, listed entities must explain the circumstances of the capital raise to the ASX. The explanation must include details of "whether the Class Waiver is proposed to be used to raise urgently needed capital to address issues arising in relation to the COVID-19 health crisis and/or its economic impact or for some other purpose".

The ASX has clarified that the Class Waivers may be used by listed entities for reasons not connected to COVID-19. However, where a proposed capital raising has "inequitable features from the stance of existing security holders, ASX is likely to withhold the benefit of the Class Waivers for that capital raising, especially (but not only) where the capital raising is not specifically COVID-19 related and not urgently needed".

On the other hand, "where a capital raising appears to ASX to have been structured equitably from the stance of existing security holders, ASX is unlikely to withdraw the benefit of the Class Waiver even where the capital raising is not specifically COVID-19 related or urgently needed".

This would result in the capital raising having to be made under the limitations existing prior to the ASX announcing the Class Waivers. This may include a requirement for the listed entity to obtain shareholder approval or restructure the capital raise.

Companies also need to engage early with the ASX to have the full advantage of the Class Waivers. The ASX states that it has received last-minute notifications from entities wishing to rely on the temporary emergency Class Waivers the night before a proposed announcement and launch of a capital raising. According to the ASX, "this is a risky strategy, especially for entities where the purpose of the capital raising is not directly related to raising urgently needed capital to address the financial effect to the entity of the COVID-19 health crisis".

Convertible notes, collateral securities and listing rule 6.1

The ASX has also reminded companies of the requirement in listing rule 6.1 that "the terms that apply to each class of securities must, in ASX's opinion, be appropriate and equitable".

The ASX refers listed entities to Guidance Note 21 The Restrictions on Issuing Equity Securities in Chapter 7 of the Listing Rules, which includes comments that:

If the terms applicable to the new equity securities are especially favourable to the holder, the ASX will expect announcements about the issue to explain the surrounding circumstances, including:

• why the entity needs to issue the securities in question on such terms
• the alternative funding raising options (if any) that were considered by the entity before it decided to enter into the relevant arrangement relating to the issue
• if alternative funding raising options were considered, the reasons why the relevant arrangement was determined by the entity to be preferable to other funding options
• if alternative funding raising options were not considered, why not, and
• where an entity has agreed to enter into a deed of charge or some other form of security arrangement and to issue "collateral shares" to a convertible noteholder or other financier, why the collateral available under the deed of charge or other security is not sufficient to secure the debt

Listed entities considering raising capital through the issue of convertible notes must be aware that the listing rule 6.1 requirements apply regardless of whether these convertible notes are quoted on the ASX or not.

Read our other articles on the previous ASX announcements

ASX Compliance Update, which looks at the announcement made on 31st March 2020 by ASIC and the ASX on temporary emergency capital raising measures with two class order waivers.

ASX announces amendments to emergency capital raising relief, which looks at the ASX's 22nd April 2020 announcement on changes to the emergency measures to address concerns that the Class Waivers were being used to the disadvantage of existing shareholders.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.