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Navigating major shareholder transactions: Corporations Act and ASX Listing Rules

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There are several regulatory hurdles that companies must consider when planning and undertaking a transaction that involves a major shareholder, with these being particularly important for ASX-listed companies.

This article focuses on the key considerations under Chapter 6 of the Corporations Act 2001 (Cth) (Corporations Act) (Takeovers) and Chapter 10 of the ASX Listing Rules (Transactions with persons in a position of influence) when undertaking capital raisings and transactions involving substantial assets. 

Takeovers

Listed companies and companies with more than 50 shareholders are subject to the takeover provisions under Chapter 6 of the Corporations Act. 

Section 606 of the Corporations Act provides that a person must not acquire a relevant interest in issued voting shares in a company that is subject to the takeover provisions if as a result of the acquisition of shares that person’s or someone else’s voting power in the company:

  1. increases from 20% or below to more than 20%; or
  2. from a starting point that is above 20% and below 90%,

(the Takeovers Prohibition). 

Some of the exceptions to the Takeovers Prohibition will be explored separately.1

Chapter 10 of the Listing Rules

Chapter 10 of the Listing Rules applies to certain transactions between a company (and, where applicable, its subsidiaries) and a person in a position of influence.  Transactions to which Chapter 10 applies will require shareholder approval, unless an exception applies.

Capital raisings

For many listed companies the first consideration in a capital raising is the appropriate structure for the raising, with two common options being a placement or rights issue.

Placement

A placement involves a new issue of securities to one or more investors selected by the company. 

Companies have a limited capacity under Chapter 7 of the Listing Rules to issue securities in any 12 month period, known as a ‘placement capacity’.  All companies have the ability to issue securities up to 15% of what the company’s share capital was 12 months prior to the proposed issue date (adjusted for permitted issuances)2, with companies outside the S&P/ASX 300 Index and with a market capitalisation less than $300 million having the ability to issue an additional 10% of ordinary securities provided the company obtains the approval of its shareholders for the additional capacity3.

The key factors that a company must consider when undertaking a placement involving major shareholders are:

1. Does Listing Rule 10.11 apply to the major shareholder? 

Often, the rule will apply because a person that controls the shareholder is also director of the company undertaking the placement (Listing Rule 10.11.1), the shareholder holds 30% or more of the voting power (Listing Rule 10.11.2), or the shareholder holds 10% or more of the voting power and has a nominee director on the company’s board under a relevant agreement (Listing Rule 10.11.3).  There are some exceptions to the requirement to seek shareholder approval in the case of a placement to such a party, which include:

  1. the issue of securities is approved for the purposes of item 7 of section 611 Corporations Act (addressed later in this article)4;
  2. the agreement to issue securities was either entered into before the company was listed and the material terms of the agreement were disclosed in the prospectus lodged with ASX, or after it was listed and complied with the Listing Rules when it did so5;
  3. the agreement to issue the securities is conditional on shareholder approval before the issue is made6; and
  4. the agreement to issue securities to the person was entered into before the person became subject to Listing Rule 10.117.

2. Will the issue result in a breach of the Takeover Prohibition, and if so, do any exceptions apply?

These considerations can be best demonstrated through the following example:

Company A has a major shareholder (Shareholder B) with 22% of the voting shares and a nominee director on the board of Company A – the nominee in this scenario was appointed under a contractual right Company A granted to Shareholder B in an earlier placement.

Company A is undertaking a placement to several new and existing institutional investors, including Shareholder B.  Under the placement, Shareholder B is expected to increase its voting power in Company A from 22% to 24.5%.

Listing Rule 10.11

As a starting point, Company A would require the approval of its shareholders under Listing Rule 10.11 before issuing the new shares to Shareholder B, but because the voting power of the shareholder would also increase from a starting point above 20%, the Takeovers Prohibition prevents Shareholder B from participating in the placement, unless an exception to the Takeovers Prohibition is available to Shareholder B.

Takeovers Prohibition

There are two common exceptions to the Takeovers Prohibition that Shareholder B may seek to rely upon in these circumstances:

  1. The ‘creep’ exception allows a shareholder that has held at least 19% for 6 months (and not fallen below 19%) to increase its voting power in a company 3% higher than what its voting power was 6 months prior to the date acquisition.8 
    • Because Shareholder B is increasing its voting power by 2.5% under the placement, and assuming it has held more than 19% voting power in Company A for at least 6 months and acquired no other securities in that time, then Shareholder B could rely on the creep exception to increase its voting power in Company A under the placement.
  2. Company A obtains the approval of its shareholders at a general meeting for Shareholder B to acquire shares under the placement.9 
    • Generally, this option would only be pursued if Shareholder B had exhausted or would exceed its capacity under the ‘creep’ exception or the placement would result in Shareholder B increasing its voting power in Company A by more than 3%.  Reliance on this exception involves:
      • the preparation of a notice of meeting containing all information known to Company A, its associates and Shareholder B that is material to a shareholder’s decision on how to vote on the resolution to approve the acquisition;
      • the preparation of an independent expert report for inclusion with the notice of meeting that analyses the proposed transaction and includes an assessment of whether the transaction is fair and reasonable to shareholders; and
      • ensuring the notice of meeting is clear, concise and effective, and shareholders have adequate time to consider the information, including any new information that arises after dispatch of the notice.
    • Shareholder B is not entitled to vote on the resolution to be considered by Company A’s shareholders.

Given the extensive disclosure requirements for the notice of meeting and the minimum 28 days notice (21 days for unlisted public companies) that must be given to shareholders to call a general meeting, companies are less likely to pursue this option where the risk of any contravention to the Takeovers Prohibition can be minimised by limiting the major shareholder’s participation in the placement (e.g. maintain its voting power or allowing participation within the ‘creep’ exception).

Rights Issue

A rights issue involves an offer of new securities in a company to existing shareholders on a pro rata basis.  Entitlements to new shares are calculated based on an offer ratio having regard to the number of shares held by an existing shareholder.  For example, if a company were to undertake an offer of 1 new share for every 4 existing shares held and a shareholder held 400 shares, that shareholder’s entitlement would be to subscribe for up to 100 new shares.

Key benefits and treatment of foreign shareholders

Structuring a capital raising as a rights issue provides several benefits for ASX-listed companies from a regulatory perspective, including:

  1. securities issued under the rights issue (including to an underwriter) do not count towards a company’s placement capacity under Listing Rule 7.1 or 7.1A10;
  2. even though the offer of securities will be made to both sophisticated and retail shareholders, the company can rely on reduced disclosure requirements under the Corporations Act for the offer of securities without the need to issue a prospectus (referred to as a ‘low-doc’ offer), provided the company first satisfies the requirements for relying on those provisions11.

The key feature of a rights issue is that it involves an offer by the company on a pro rata basis to every person who holds securities in the class of securities that are offered under the rights issue.  Many ASX-listed companies have shareholders with addresses recorded on its register that are outside Australia (i.e. foreign shareholders).  In order for a company to make an offer of securities to a foreign shareholder, the company must first consider and comply with the securities laws applicable in the jurisdiction in which the shareholder receives the offer.  For some companies, obtaining the necessary advice from foreign counsel and complying with any foreign regulatory or filing requirements may be too onerous or cost prohibitive. 

A company can still exclude certain foreign shareholders and undertake a rights issue that does not count towards the company’s placement capacity and can be made under the ‘low-doc’ provisions, provided the company:

  1. offers securities under the rights issue to all holders with registered addresses in Australia or New Zealand;
  2. decides that it is unreasonable to make the offer to all holders with a registered address outside Australia and New Zealand having regard to:
    • the number of holders in the place where the offer would be made;
    • the number and value of securities the holders would be offered; and
    • the cost of complying with the legal requirements, and requirements of a regulator, in the foreign jurisdiction;
  3. sends each holder to whom it will not offer the securities details of the issue and advise that the company will not offer securities to the holder; and
  4. in the case of a renounceable rights issue (i.e. where a right may be assigned), the entity also appoints a nominee to arrange for the sale of the entitlement and remit the net proceeds of the sale to the holder, and the company advises the holder of the same.12

Listing Rule 10.11

A shareholder that is subject to Listing Rule 10.11 (e.g. a major shareholder) is permitted to participate in the rights issue without the need for the company to first obtain shareholder approval, which includes:

  1. the shareholder taking up its entitlements under the rights issue13; and
  2. underwriting (or sub-underwriting) the shortfall in applications for securities offered under the rights issue14. 

For completeness, Listing Rule 10.11 does not provide an exception to acquire shares that form part of any shortfall under the rights issue, which includes participating in a top-up or oversubscription facility available under the offer or a placement by the company of any shortfall shares after completion of the offer. 

Companies may also need to consider the related party provisions under Chapter 2E of the Corporations Act when entering into any underwriting or sub-underwriting agreement.

Takeovers Prohibition

A shareholder (including an underwriter or sub-underwriter to the offer) is permitted to increase its voting power in the company under a rights issue in circumstances that would otherwise contravene the Takeovers Prohibition, provided the company satisfies certain conditions in relation to the structure of the rights issue15.  Similar to Listing Rule 10.11, the exception does not extend to an acquisition under a top-up or oversubscription facility.

In circumstances where a company is seeking to limit foreign shareholder participation, and assuming the company has satisfied the conditions for excluding certain foreign shareholders, reliance on the rights issue exception may be unnecessary where certain shareholders can rely on the ‘creep’ exception.  It is important to also note that an increase in a shareholder’s voting power under a rights issue can still occur even where the shareholder only takes up its entitlements – for example, where there is a shortfall in applications that is not taken up via oversubscriptions from other shareholders or an underwriter.  In this situation, an increase in the shareholder’s voting power may result in a contravention of the Takeovers Prohibition.

For a company to exclude foreign shareholders (other than those in New Zealand) from a rights issue and for the rights issue exception to apply, the company must appoint a nominee approved by ASIC16 that will hold the securities that would have otherwise been issued to the foreign holders who accept the offer or entitlements to acquire those securities.17  It is also possible for the company to seek relief from ASIC from the requirement to appoint nominee in relation to a non-renounceable issue where:

  1. the company can demonstrate an urgent need for capital;
  2. there are only a very small number of foreign shareholders and they hold only a very small number of shares; and
  3. it is unlikely that any proceeds from the sale of the securities will be remitted to the foreign shareholders.18

Companies should be aware that regardless of whether it is applying to ASIC for its consent to the appointment of a nominee or relief from the requirement, ASIC will likely scrutinise the structure of the rights issue and any associated arrangements (e.g. underwriting). 

As a starting point, the rights issue exception is designed to be limited to an offer to issue securities to every person who holds securities in the relevant class so that each holder has an equal opportunity to participate in the offer and it is less likely that any one holder’s proportionate holding will increase substantially19.  Seeking to rely upon the rights issue exception in circumstances where certain shareholders are not permitted to participate is prima facie contrary to the underlying principles of the exception. 

Of particular concern to ASIC will be whether the structure of the rights issue and any underwriting arrangements are designed to avoid the requirements of the Takeovers provision or may otherwise give rise to unacceptable circumstances that are inconsistent with the Takeovers principles20.  For example, a structure that is likely to give rise to unacceptance circumstances would be:

  1. the offer ratio is highly dilutive (e.g. one new share for every existing share held), where lower participation is likely to amplify any increase in voting power for those shareholders that do participate in the offer;
  2. the offer price is equal to or at a premium to the company’s most recent trading price, which may discourage shareholders from participating in the offer; and
  3. the company does not employ an effective dispersion strategy to mitigate the potential control effects, such as engaging a professional underwriter, using several sub-underwriters, allowing oversubscriptions from shareholders under a top up facility, and/or ensuring the offer period allows sufficient time for shareholders to consider the offer and potential effects.21

Where a company is intending to undertake a rights issue and it has one or more major shareholders that hold close to or more than 20% of the voting power, it should undertake an assessment of its register early in the planning process to determine the level of foreign ownership.  If a major shareholder’s participation is critical to the success of the offer but it is likely to result in a contravention of the Takeovers Prohibition, then the company will need to determine whether it is possible to extend the offer to shareholders in those foreign jurisdictions or consider applying to ASIC for consent to appoint a nominee (or alternatively, seek relief) to ensure a major shareholder has the benefit of the rights issue exception.

Substantial holder notices

Transactions of the nature discussed in this article will invariably involve shareholders holding more than 5% of a company’s securities.  It is important to remember that a substantial holder notice must be lodged as and where required by the Corporations Act and, in the context of this article, parties should not overlook the requirement to disclose a copy of any document that contributed to the need to provide a substantial holder notice (e.g. a placement agreement)22.  Although the obligation to give a substantial holder notice falls on the shareholder, companies and their boards should independently monitor these changes.

  1. Section 611 Corporations Act. ↩︎
  2. Listing Rule 7.1. ↩︎
  3. Listing Rule 7.1A. ↩︎
  4. Exception 6, Listing Rule 10.12. ↩︎
  5. Exception 10, Listing Rule 10.12. ↩︎
  6. Exception 11, Listing Rule 10.12. ↩︎
  7. Exception 12, Listing Rule 10.12. ↩︎
  8. Item 9 section 611 Corporations Act. ↩︎
  9. Item 7 section 611 Corporations Act; ASIC Regulatory Guide 74: Acquisitions approved by members ↩︎
  10. Exceptions 1 and 2, Listing Rule 7.2. ↩︎
  11. Section 708AA Corporations Act. ↩︎
  12. Listing Rule 7.7; section 9A(3) Corporations Act.  ↩︎
  13. Exception 1, Listing Rule 10.12. ↩︎
  14. Exception 2, Listing Rule 10.12. ↩︎
  15. Item 10 section 611 Corporations Act. ↩︎
  16. ASIC will consider a person suitable as a nominee if that person is an Australian financial services licensee authorised to provide financial services in relation to the relevant class of securities or is a nominee of such person (ASIC Regulatory Guide 6 – Takeovers: Exceptions to the general prohibition, RG 6.114). ↩︎
  17. Section 615 Corporations Act. ↩︎
  18. ASIC Regulatory Guide 6, RG 6.122. ↩︎
  19. ASIC Regulatory Guide 6, RG 6.104. ↩︎
  20. Section 602 Corporations Act; ASIC Regulatory Guide 6, RG 6.117 ↩︎
  21. Takeovers Panel Guidance Note 17: Rights issues, paragraph 8. ↩︎
  22. Section 671B Corporations Act. ↩︎