A perspective into the expedited capital raising process in South Africa
July 2019 | EXPERT BRIEFING | CAPITAL MARKETS
Different stock exchanges around the world have come up with various ways in which issuers can raise capital on an expedited basis. For example, the Toronto Stock Exchange (TSX) has instituted the bought deal process which enables issuers to raise capital almost overnight in certain circumstances, and the Australian Stock Exchange (ASX) has established an expedited placement process which allows issuers to raise capital within three weeks in certain circumstances.
In an effort to meet the expectations of issuers listed on the Johannesburg Stock Exchange (JSE) and conform to international trends, the JSE introduced the accelerated specific issue for cash, which allows issuers to raise capital on an expedited basis in certain circumstances.
From a JSE perspective, the most common and efficient route for issuing shares is a private placement offering, which is also known as a specific issue for cash, which is made only to certain investors, such as key institutions, and which requires shareholder approval in the form of an ordinary resolution requiring a 75 percent majority vote. A specific issue for cash, however, requires approval through a circular, the bulk of which relates to the strategy and use of proceeds.
One of the criticisms levelled by issuers in relation to the specific issue for cash process is that the process is extremely lengthy, taking approximately 10 to 12 weeks prior to an issuer being able to successfully raise capital. One of the causes of this delay is attributed to the circular approval process used by the regulator – the JSE – which takes approximately three to six weeks. In an effort to address this concern, with effect from 18 December 2017, the JSE introduced the concept of an accelerated specific issue for cash. This is a process which is applicable only in relation to a vanilla specific issue for cash without any complexities. The only difference between the normal specific issue for cash and the accelerated specific issue for cash is that, with an accelerated specific issue for cash process, the issuer is not required to issue a detailed circular which needs to go through a lengthy JSE approval process, but in substitution for the JSE approved circular, which can take a lengthy period of time, the issuer is only required to complete a template term sheet or circular, the form of which has been approved by the JSE, for submission to the JSE and the JSE is required to approve the term sheet within 48 hours of submission.
Similar to a specific issue for cash, an accelerated specific issue for cash requires approval in the form of an ordinary shareholder resolution requiring a 75 percent majority vote, however with an accelerated specific issue for cash the relevant shareholder approval can be obtained through a written shareholder resolution as per section 60 of the Companies Act No. 71 of 2008. The issuer must further ensure (i) that the accelerated specific issue for cash is issued from a class of shares already in issue; (ii) that it is issued for cash without any other impact on the financial statements; (iii) that the shares to be issued are not convertible; and (iv) that the issuer will not contravene sections 41(1) and (3) of the Companies Act. An accelerated specific issue for cash can be made to a related party, however the price at which the shares are issued may not be at a discount, and will only be allowed by the JSE where an issuer has the necessary liquidity in order to calculate a weighted average traded price of such equity shares measured over a 30 business day period.
There are a number of takeaways from the introduction of the accelerated specific issue for cash in the market. The introduction of this process has granted issuers the ability to raise capital relatively quickly and cost effectively from specifically targeted investors, which reduces the exposure to market risks. The additional add on is the ability of issuers with a relatively small group of major shareholders, holding 75 percent of the issued share capital, being able to obtain the shareholder approval for the accelerated specific issue through a round robin of written resolution, without a need to hold an extraordinary or general meeting of shareholders.
Since the introduction of the accelerated specific issue for cash, there have been a couple of issuers which have successfully managed to utilise the process, as to some it is a relatively quick and less cumbersome means of raising capital.
Although issuers have commended the regulator for its efforts to assist them with providing efficient avenues for raising capital, there are a number of pitfalls levelled against the accelerated specific issue for cash process by issuers.
First, only vanilla specific issues for cash can be implemented with this process, such as shares issued only through a cash settlement. If the settlement is through options, including settlement by way of issue of securities convertible into shares, this process is not available.
Second, although the JSE rules set out circumstances where this process can be followed, the JSE is the final arbiter in relation to whether a transaction can be implemented through an accelerated specific issue for cash and there are circumstances where issuers applying for a term sheet approval of an accelerated specific issue for cash are directed by the JSE to issue a normal circular and follow the requirements for a specific issue for cash.
Third, issuers seeking shareholder approval through written or round robin resolution need to ensure that this is permitted in terms of their respective memorandum of incorporation. The requirement for written resolutions, pursuant to section 60 of the Companies Act, can be altered in a company’s memorandum of incorporation. Accordingly issuers seeking to obtain approval with a written resolution need to ensure that their memorandum of incorporation does not expressly prohibit written resolutions or include a provision to the effect that all written resolutions require unanimous approval of all shareholders, as such a prohibition would mean that the issuer cannot obtain the relevant approval through a written or round robin resolution.
Fourth, listed companies have a number of public shareholders and thus it can be an administrative nightmare and a burdensome process for them to procure signatures or approval through a written resolution and consequently issuers continue to obtain shareholder approval for their placements through general or extraordinary meetings of shareholders.
Fifth, constitutional documents of issuers may contain certain pre-emptive rights for the existing shareholders. If such restrictions do exist, the issuer would need to include, as part of the shareholder approval process, a special resolution amending the constitutional documents to permit the shares to be issued on a non-pre-emptive basis, thus leaving this process entirely in the hands of the shareholders, irrespective of the views of the board and management of the company in relation to the specific issue.
One of the key issues which needs to be addressed in relation to the accelerated specific issue for cash is the ability for issuers to use the process in relation to all their capital requirements irrespective of the settlement methods for the capital raise or the complexity of the transaction and without shareholder approval in certain circumstances.
In contrast to the JSE rules where shareholder approval is required for a specific issue for cash and accelerated specific issue for cash, under Canadian securities laws, in circumstances where an issuer wishes to issue securities without a prospectus, an issuer can undertake a private placement, so long as it is able to satisfy one of the criteria of applicable Canadian securities law that would allow securities to be issued without a prospectus. Such criteria include, but are not limited to, offerings to ‘accredited investors’, being investors who are deemed, due to certain monetary or other thresholds, to be sophisticated enough to invest without the benefit of a prospectus, offerings to non-individuals if the investment of each non-individual exceeds C$150,000, offerings limited to certain family, friends and business associates, offerings limited to employees, executive officers, directors and certain consultants, and offerings by way of an offering memorandum.
In circumstances where an issuer is required to issue a prospectus, Canadian securities law has the concept of a bought deal process which can be implemented with a base shelf prospectus. The Canadian exemptions for shareholder approval and prospectus requirements cater for a number of transactions, irrespective of the complexity thereof.
It remains to be seen whether the JSE will be taking steps in the near future to amend the JSE rules to address certain of the concerns noted above. The JSE should consider amending the JSE rules in an effort to adopt the efficiencies noted under the Canadian securities laws, particularly in relation to exemptions for shareholder approval and the prospectus requirement.
Stimela Mokoena is a partner at Fasken Martineau DuMoulin LLP. He can be contacted on +27 11 586 6074 or by email: firstname.lastname@example.org.
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