Thinking | 1 April 2020
Raising capital amidst the COVID-19 crisis
We are all aware that the COVID-19 pandemic is having a massive impact on the business operations of many Australian listed companies and Australian and global securities markets. With many businesses needing additional capital to sustain or evolve their operations through the next six months (or longer), raising new capital will be crucial for the survival of many listed entities.
The law is adapting to address the need for capital raisings to proceed amidst distressed markets, and company directors should be aware of the additional options and protections available to them when raising capital in the current environment.
Temporary capital raising relief
Australian regulators have been swift in recognising the challenges currently facing the market, and recent legal developments show a willingness of both ASIC and the ASX to adapt to the rapidly changing environment. These recent developments include the following:
- Trading halts: ASX has permitted listed entities to request two consecutive trading halts, to allow for additional time to structure and undertake capital raisings. ASIC has also temporarily adapted the disclosure document obligations to reflect this position, allowing entities to undertake ‘low doc’ capital raises such as entitlement offers and share purchase plans without issuing a disclosure document where the entities have been suspended for up to 10 days in the preceding 12 months (rather than the ordinary five days).
- Additional placement capacity: ASX has increased the 15% placement capacity to 25% where the additional capacity is used in a single placement and in conjunction with a standard rights issue, an accelerated entitlement offer or offer under a securities purchase plan (where the price is no greater than the placement price).
- Entitlement offer ratio: ASX is permitting listed entities to undertake non-renounceable entitlement offers on a ratio that is greater than one security for each existing security (ie existing securityholders may be offered more than one security for each security they already hold).
These relief measures provide useful benefits to listed entities looking to raise capital, by providing greater flexibility around the structure and quantum of a raise. There are various criteria to be satisfied to obtain the benefit of the relief, including that listed entities wishing to take advantage of the class waivers must provide a written notice to ASX outlining the circumstances in which they are intending to rely on the waiver.
What about insolvent trading?
Under the Corporations Act, a company will be insolvent if it cannot meet its debts as and when they fall due. Company directors should always be conscious of the positive statutory duty imposed on them to prevent insolvent trading.
This is particularly important, given that they can be personally liable for debts incurred by the company if it trades while insolvent, and this awareness should be heightened in the current environment. However, there are ways that issues relating to insolvent trading can be managed in the context of a company raising capital where there are concerns regarding solvency.
Safe harbour protections
Even prior to the COVID-19 outbreak, directors of listed entities were relying on safe harbour protections to raise capital.
The safe harbour regime provides that directors will not be trading while insolvent if the relevant debts are incurred at a time when they were pursuing a course of action reasonably likely to lead to a better outcome for the company than liquidation. Where capital raisings are carefully prepared and managed in line with the safe harbour regime, directors may have the benefit of the safe harbour protections.
In our experience, continuous disclosure also needs to be carefully managed when directors are operating under the safe harbour regime (despite ASX providing guidance that operating under the regime itself does not require disclosure).
More information on the specific requirements of the safe harbour regime is outlined here.
Insolvent trading prosecutions
In line with its recent public announcements, the Federal Government has enacted temporary amendments to insolvency laws to address the issues being faced by businesses as a consequence of the COVID-19 outbreak.
The temporary changes provide relief from personal liability for company directors arising from insolvent trading in respect of debts incurred between 25 March 2020 and 23 September 2020. This applies only to debts incurred in the ordinary course of business if it is necessary to facilitate the continuation of the business.
For companies looking to raise capital, this means that there is potential protection available to directors in respect of debts incurred while the business continues to operate throughout the offer period, as well as for transaction costs associated with the raise, where the necessary criteria are met.
However, given the potential consequences of falling foul of the insolvent trading prohibitions, directors and senior executives must carefully manage operations and capital raising plans to ensure that they obtain the benefit of the safe harbour regime and any relief from insolvent trading.
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