Australia has a relatively laissez faire system when it comes to capital raisings which has aided capital formation, but is subject to abuse. Our system has proven highly lucrative for advisers and under-writers (refer ownership-matters-research-paper/media/Ownership-Matters-research-paper.pdf” target=”_blank”>ownership-matters-research-paper) but also led to substantial dilution and value leakage for shareholders.
The first point to observe is that the opportunity to participate in a capital raising is a valuable right. However this right can easily be rendered worthless where directors exercise their discretion to issue shares in ways that dilute existing owners through placements or non-renounceable entitlement offers. Wherever possible, capital raisings should be pro-rata and respect the pre-emptive rights of owners. Owners should be given the opportunity to ‘renounce’ their entitlement to buy shares in companies they own by selling their rights on the open market.
The $100 billion of capital raisings in the 2008 and 2009 GFC period featured many placements and non-renounceable offers which helped issuers raise capital quickly but were often regarded as unfair to incumbent investors.
The lack of disclosure about who was issued these placed shares remains a problem today. Why not require public disclosure of any recipient of shares in a non pro-rata offer?
Prospectus requirements have subsequently been loosened since the GFC but should be abandoned altogether in order to encourage more pro-rata renounceable offers to be conducted in an efficient and timely manner.
The emergence of the PAITREO (Pro-rata Accelerated Institutional with Tradeable Retail Entitlement Offer) –(refer ownership-matters-research-paper/media/Ownership-Matters-research-paper.pdf” target=”_blank”>ownership-matters-research-paper) – has balanced the desire for speed of raising with fairness and should be further encouraged. However, over the past two years the likes of ANZ, Slater and Gordon and Cardno have failed to follow the lead of issuers like JB Hi Fi, Origin, NAB, CBA and AGL which have conducted PAITREOs when raising capital.
There are still too many selective placements, frequently at a discount to the prevailing share price, which often lack transparency.
As it stands, a company is able to place 15% of its issued capital to a non-shareholder without shareholder approval. There is no limit to the discount that can be applied. This would be unthinkable in the UK, which has the world’s most robust culture and regulations respecting pre-emptive rights of owners (refer Pre-emptive Group Guidelines UK: Disapplying Pre-emption Rights).
A notable example of the Australian system from 2013 was when Alumina placed 15% of it issued capital to the state-owned Chinese investor CITIC, raising $452 million at $1.235 a share. The independent shareholders did not get a say in the transaction which introduced CITIC as the largest shareholder, putting it in the box seat to block any future third party bid for Alumina.
The rules are even looser for companies outside the ASX300 which are able to place up to 25% of the company’s capital provided there has been prior shareholder approval for the additional 10%. However, some of the same major shareholders pre-approving this additional 10% are also likely to benefit from the change.
Another problem with the current system relates to the disclosure of under-writing fees, which appear excessive for the risk being taken. The full costs of capital raising are often not explicitly disclosed (refer ACSI discussion paper: Underwriting of rights issues) and it was disturbing to see costs actually rise (refer ownership-matters-research-paper) in the post-GFC period.
Shorter time-frames, the removal of prospectus requirements and encouragement of directors to market test pricing, potentially from alternative providers to conventional investment banks, are all avenues through which value leakage from capital raisings could be reduced.