There is a significant change underway in the way listed companies raise capital. The entitlement offer is making way for institutional placements combined with share purchase plans.
Compared with entitlement offers, placements are quick and relatively cheap to arrange. However, not all shareholders feel they are treated equally.
King & Wood Mallesons partner Joseph Muraca says there were 11 placements by ASX200 companies in 2017/18, rising to 23 in 2018/19. So far this financial year there have been eight.
The number of entitlements has dropped off over the same period.
The majority of placements (86 per cent) over the past couple of years have been accompanied by security purchase plans, which typically have been priced at the lower of the placement price and the volume-weighted for five days up to conclusion.
Muraca says 55 per cent of SPPs since July 2017 have been oversubscribed.
A common complaint about placements accompanied by SPPs is that they disadvantage small shareholders. Commenting on the issue in the Sydney Morning Herald, Intelligent Investor research director Nathan Bell, says “many share issues diddle small shareholders at the expense of the big end of town.”
Bell says a renounceable entitlement offer is the fairest way to raise capital because it’s pro rata; shareholders are entitled to acquire new shares in proportion to their existing holding. And because it’s renounceable, shareholders can usually sell their entitlement on market.
“So why don’t all companies use renounceable entitlement offers? Because the Corporations Act requires a prospectus for each offer. They’re slow and expensive. It can take six weeks or more to conduct an entitlement issue, exposing the company to market declines,” he says.
A Share Purchase Plan (SPP) avoids the need to issue a prospectus but because it has, until recently, been limited to no more than $15,000 of shares per existing shareholder in a 12-month period, small shareholders have felt they were being treated unfairly.
In August, ASIC increased the participation limit for security purchase plans from $15,000 to $30,000 or each investor. The change is likely to increase the appeal of placements and SPPs because it overcomes the common complaints that the previous limits disadvantaged small shareholders.
Bell says: “A placement is an issue of shares to one or more large shareholders (existing or otherwise). As investment banks typically control which clients receive stock – as well as the issue price – it’s the least transparent of all the capital raising methods and can be used as a way of handing out favours at small shareholders expense.
But hundreds of millions of dollars can be raised in little more than an afternoon – particularly useful when making acquisitions, takeovers, or repaying debt.
Placements tend to be dilutionary to small shareholders because institutions get to buy new shares at a discount and small shareholders don’t. While some companies try to overcome this by combining an institutional placement with an SPP, it’s simply combining two inadequate capital raising mechanisms. The option remains the poor cousin of the renounceable entitlement issue.
King & Wood Mallesons says the new $30,000 limit will go a long way to overcoming these complaints.
It says: “There are some benefits to security holders in entitlement offers that are not available under the institutional placement and SPP alternative. Entitlement offers allow eligible securityholders to participate for their pro rata share of new securities, meaning that they are not diluted and there is less likelihood of the capital raising having control impacts.
“Renounceable entitlement offers give existing securityholders the opportunity to obtain some value for their entitlements if they determine not to participate or if they are ineligible because they are located in a foreign jurisdiction.
“However, $30,000 is a fairly high amount, particularly for issuers with large numbers of securityholders. The flexibility the higher threshold creates for issuers may also lead to greater uncertainty as to how much will be raised. This may result in lower thresholds or total SPP offer caps being set or greater scale back taking place.”