Company directors must balance timeliness and fairness in their company’s need to raise capital - for all investors.

Australia’s six million retail shareholders will have different perspectives on the increase in equity capital-raisings during COVID-19, and whether to take up the offers or let them pass.

The considerations will likely go beyond deciding if the offer is a sound investment decision. Retail shareholders are faced with a decision process with a number of unknowns above and beyond the uncertainty about how companies will fare through COVID-19.

They include:

• Which raising to apply for with so many being open at once and more to come?
• Can the shares be bought on market at a cheaper price?
• Does the lower discounted volume-weighted average price (VWAP) alternative price offset a falling share price?
• How will any scaleback be applied? 
• Have I got a spare $30,000 to take up the full share purchase price (SPP) entitlement?

There is an added complication for those shareholders who prefer hard copies of the application documents: postal delays. How do I make sure my application is in by the due date? It may be time to switch to online applications and payment by BPay.

Many retail shareholders maintained higher cash balances into 2020 as share price and company valuation metrics became stretched. Many will see the offers as a chance to lift their holdings at a reasonable price or avoid their interest being diluted.

They have lived through the dilutive effects of emergency capital-raisings during the GFC. Crises like the GFC saw many offers being directed at a subset of institutional investors to the exclusion of other shareholders.

Retail shareholders are aware that the deeper the price discount, the greater the dilution if they are not able to participate, and fear it will happen again.

There are other shareholders who have seen their retirement income cashflow fall away with the deferral and cancellation of dividends. They are trying to decide which shares to sell to fund their living expenses and feel they cannot participate due to lack of funds.

There will be another cohort flat out dealing with the employment, health and life consequences of COVID-19. They have had to put any investment decisions on hold as they navigate these unusual times. They cannot participate due to lack of time and personal bandwidth.

ASA’s view

The Australian Shareholders’ Association (ASA) emphasises that despite the crisis, company directors need to balance timeliness and fairness in the company’s need to raise capital with being awake to the possible dilution of retail and other classes of existing shareholders.

They should be aware of the make-up of their share register and know that some retail shareholders who have built large holdings over the years will not be classified as “sophisticated and professional investors”.

These shareholders will be unable to participate in the placement and will be diluted if the company offers an SPP that is limited by the regulated 12-month limit to $30,000 per individual investor.

We prefer capital to be raised via renounceable pro-rata issues of shares because that offers all shareholders a proportionate number of new shares and allows the compensation of non-participating shareholders (via sale of rights and repatriation of proceeds).

Where that is not feasible due to risks to timing and uncertain markets, ASA looks to placements with associated SPP or pro-rata issues. These issues need to be of a sufficient size to prevent dilution of those shareholders who have not participated in the placement.

In judging whether the setup of such offers is fair, ASA considers the proportion of retail holders on the register and compares it with the SPP size.

Whichever choice is made, the ASA representatives for the companies we monitor will contact the company and ask how the capital-raising decision was made, and where necessary ask that the cap be lifted (the starting cap is usually skinny), and that pricing be set at the lower of the price the institutional investors paid and a discount to Volume Weighted Average Price (VWAP).

We also ask that companies contact their shareholders to remind them the offer is closing and an investment decision is required.

Capital raising examples

ASA contacted Cochlear (COH) when it announced an $800-million placement, upsized to $880 million, and a SPP of $50 million.

The announcement indicated the SPP cap may be lifted as the company affirmed on contact, but with a placement and SPP price of $140 compared to a market price (16 April 2020) of $195, we expected the cap would be exceeded many times and the scaleback for retail shareholders would be severe.

We have all seen SPPs where applications are severely scaled back, where investors make an application for $30,000 worth of shares and receive $3,000 value of shares and a refund of $27,000. This is doubly disappointing when the funds could have been invested elsewhere during the time.

For COH’s capital-raising, at the close of SPP the cap was upsized to $220 million. There was still 47 per cent scaleback but retail shareholders as a class were not diluted.

The company announced the SPP offer was made to 36,724 eligible shareholders and valid applications totalling about $417 million were received from 16,651 of those shareholders. This represents a participation rate of about 45 per cent of eligible shareholders and average SPP application amount was about $25,000.

Pro-rata issues

Non-renounceable pro-rata issues can be dilutionary if participation is low. We expect any pro-rata issues that accompany a placement will allow “overs”; that is, additional investment by shareholders who take up their full entitlement.

As an example, Qube (QUB) offered applicants the chance to apply for additional shares equivalent to 100 per cent of their entitlement for the retail component of its 1-for-6.35 accelerated non-renounceable pro-rata entitlement offer of new QUB shares at $1.90.

The $236-million QUB retail offer was fully subscribed, with 83 per cent of shareholders taking up their entitlement, and applications for overs more than covering the remaining entitlements.

Conclusion

From a company’s point of view, Australia’s six million direct retail investors provide stability to a share register and can be a solid contributor of new capital, and should be treated fairly and given the right opportunity.

ASA will continue to call out unfair capital-raisings and work with companies and regulators.

From a retail shareholder’s viewpoint, being ready to evaluate and take up these capital- raisings can boost their wealth and it is worth setting aside the funds, time and energy to make those decisions.