Investors call on companies to protect existing shareholder value in capital raising

Investors are calling on ASX300 companies to act in the best interest of their existing shareholders when using new capital raising rules during the COVID19 crisis.

The Australian Council of Superannuation Investors (ACSI) has sent a letter to the Board of every ASX 300 company, highlighting the minimum expectations from investors for Boards when managing capital raisings.

The letter comes in response to the ASX’s new rules on Temporary Emergency Capital Raising which grants companies increased discretion in raising capital in the period to 31 July 2020.

Major equity capital raisings have the potential to destroy shareholder value. They can increase the potential for conflicts of interests between long-term shareholders, Boards and the investment banks employed to raise capital.

ACSI CEO Louise Davidson said investors expect all ASX300 Boards to provide appropriate oversight of capital raisings.

“The ASX has responded to unprecedented market conditions to provide temporary emergency capital raising relief. Investor protections must return swiftly once the temporary period ends.”

“Crucially, directors must carefully consider the impact of any capital raising on the company’s long-term shareholders. Otherwise, the new Class Waivers could lead to costly capital raisings that destroy shareholder value and dilute existing investors.”

“Just because companies can place up to the new 25% limit doesn’t mean they should. Companies need to raise capital in a way that serves the interests of their shareholders not the transaction industry.” She said.

The letter highlights the following issues that boards need to actively manage:

  • The impact of dilution – Accelerated entitlement offers can provide investors protection from dilution while allowing companies to raise capital quickly. Where placements are required, companies must provide preference to their existing shareholders. Please only use the new 25% placement capacity where it is absolutely required.
  • Be in the room during allocations – Where placements occur, company representatives must be in the room ensuring existing investors are the first offered to at least their pro-rata position. Boards must not simply outsource this process to the investment banks and expect their investors to be protected. We recommend you make contemporaneous disclosure of the portion of stock allocated to new and existing shareholders on a non pro-rata basis to engender confidence in your oversight of this process.
  • Discounts – Where possible we favour some form of price discovery (e.g. by way of bookbuild).
  • Fees – A commercial approach must be applied to underwriting and sub-underwriting fees. These fees should be contemporaneously disclosed and reflect the time your underwriter is genuinely on market risk. Lower fees should be expected for steeply discounted placements.
  • Control implications – Large capital raisings have the potential to deliver very large shareholdings to individual shareholders. The allocation of placements, together with sub-underwriting processes, can create or boost significant block holdings in the company. Boards should consider these impacts as they may have significant control implications or remove a takeover premium.

For additional information please contact:
Nathan Robertson
P: 0423874662
E: nrobertson@acsi.org.au

About ACSI

Established in 2001, ACSI exists to provide a strong, collective voice on environmental, social and governance (ESG) issues on behalf of our members. Our members include 41 Australian and international asset owners and institutional investors. Collectively, they manage over $2.2 trillion in assets and own on average 10% of every ASX200 company.

Our members believe that ESG risks and opportunities have a material impact on investment outcomes. As fiduciary investors, they have a responsibility to act to enhance the long-term value of the savings entrusted to them. Through ACSI, our members collaborate to achieve genuine, measurable and permanent improvements in the ESG practices and performance of the companies they invest in.

ACSI staff undertake a year round program of research, engagement, advocacy and voting advice. These activities provide a solid basis for our members to exercise their ownership rights.

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