1. 630 Keeping good companies November 2012
News and Views
The practical effects of new
Listing Rule 7.1A
By Caroline Raw ACSA, Senior Associate, Bartier Perry
In April 2012, the Australian Securities Exchange (ASX)
released its consultation paper Strengthening Australia’s
Equity Capital Markets.
ASX sought comment on proposed changes to its Listing Rules to:
• raise the placement limit for small- to mid-caps to 25 per cent
• update the admission requirements
• relax the spread test and
• improve disclosure to investors in the resources sector.
This article focuses on the increased placement limit for small- to
mid-cap entities and explores the practical effects of the new rules.
The motivation for increasing the placement limit was the limited
access of small- to mid-cap entities to venture capital and debt
funding. Smaller listed entities are considered speculative and have
a narrow shareholder base, making rights issues a less useful means
for capital raising. These entities tend to rely mostly on placements
as their source of secondary fundraising. An analysis by ASX in
2011 showed that placements accounted for almost 70 per cent of
the secondary capital needs of small- to mid-cap entities.1
The feedback on the proposed Listing Rule changes was persuasive
enough resulting in several amendments to the original proposals.
The new capital raising rules came into effect on 1 August 2012.
The new rules have been put in place with the intention of striking
a balance between protecting the interests of shareholders and
facilitating timely capital raisings by listed companies.2
Under Listing Rule 7.1 (the 15 per cent rule), an entity can
place up to 15 per cent of its issued share capital in any rolling
12-month period without seeking member approval. Any issues
exceeding the ‘15 per cent threshold’ and not exceptions to
Listing Rule 7.1 require member approval which can be a costly
and time-consuming process for smaller listed entities, especially
when there is an urgent need for funds. The new rules have been
designed to alleviate the cost and time burdens associated with
having to call a general meeting.
New Listing Rule 7.1A has increased the placement threshold for
small- to mid-caps by ten per cent. There are conditions though,
and many of them.
Eligibility and member approval
1. To be eligible, an entity must not be included in the SP/
ASX300 index and its market capitalisation must be equal to
or less than $300 million.3
2. An entity must seek member approval to utilise the additional
ten per cent placement capacity by passing a special
resolution (at least 75 per cent of votes) at the entity’s annual
general meeting (AGM).4
3. The approval lasts for the earlier of 12 months and the date
members approve a change in the nature or scale of the
business (Listing Rule 11.1.2) or a disposal of the entity’s
main undertaking (Listing Rule 11.3).5
• New ASX Listing Rules have increased
placement limit from 15 per cent to 25
per cent for small- to mid-cap entities
• New capital raising rules aim to balance
protecting shareholders’ interests and
facilitating timely capital raisings by
listed companies
• Conditions apply regarding eligibility
and approval, maximum discounts and
disclosure

2. 631
Maximum discount
4. The maximum discount that can be applied to securities
issued under the extra ten per cent placement capacity is
25 per cent of the volume weighted average price (VWAP)
calculated over the 15 trading days on which trades in those
securities were recorded immediately before:
• the date on which the issue price of the securities is
agreed or
• the issue date (if the securities are not issued within five
trading days of the date on which the issue price is agreed).6
There is no corresponding limit on the issue price for
securities issued within the 15 per cent limit or with
approval under Listing Rule 7.1.
Meeting disclosure
5. The key disclosures required in the notice of meeting for the
AGM are:
• the minimum issue price of securities
• a statement of the risk of economic and voting dilution
of existing holders, plus a table setting out the potential
dilution of holders on the basis of at least three different
assumed variables
• details of the entity’s allocation policy
• comprehensive details of securities issued in the 12 months
before the meeting including, if the securities were issued
for cash, how much has been spent (and on what) and the
entity’s intentions for the remainder of the money and
• a voting exclusion statement.7
Disclosure at time of issue
6. When securities are issued under the extra ten per cent,
entities need to:
(a) disclose to the market immediately:
• details of the dilution to existing holders as a result of
the issue
• an explanation of why the securities were placed and not
as or in addition to a pro rata issue and
• details of any underwriting arrangements and fees paid to
the underwriter or otherwise in connection with the issue8
and
(b) issue an Appendix 3B and complete new sections 6a to 6i
and new Annexure 1.9
Expert’s report may be required
If an entity decides to accept scrip over cash for an issue of
securities under the additional placement capacity, the entity must
release to the market a valuation of the non-cash consideration to
ensure that the price paid for the securities does not exceed the
maximum 25 per cent discount rule (see item 4, above).
The report may be provided by an independent expert unless the
board has the expertise (and time) to prepare one to the same
standard. It makes sense that investors need to understand the
value of the exchange. However, the cost of the independent
expert’s report (depending on how detailed it is and who prepares
it) could outweigh any cost saving of not having to call a meeting.
There is no corresponding requirement for an expert’s report for
non-cash consideration under the 15 per cent rule.
Voting exclusion
The voting exclusion requirement excludes from voting on a
resolution to increase an entity’s placement capacity:
• anyone who may participate in the placement and
• anyone who might obtain a benefit if the resolution is passed
(except a benefit solely in the capacity of a member).
It would be virtually impossible to determine in advance whose
votes should be excluded if an entity is seeking the approval just
in case and the entity has not considered the detail of the offer.
Fortunately, ASX has considered this issue and has stated that
the words ‘anyone that may participate in the issue’ require more
than ‘the mere possibility that the person will participate in the
issue’. If it is not known whether a person will participate in the
issue, that person’s vote will not be excluded.10
What about managed investment schemes?
Managed investment schemes (MISs) are the ones that seem
to lose out from the new capital raising rules. It is questionable
whether MISs were properly considered when the new rules were
drafted then redrafted. The rules require member approval at
the entity’s AGM; however, MISs are not required to hold AGMs.
Feedback from ASX on this point is that the rules are intended to
apply to MISs as follows.
• Schemes can utilise the additional placement capacity by
calling and holding an AGM in much the same way as a public
company is required.
• The meeting should be held around the time it would need to
be held if the scheme were a public company.
• The scheme meeting will also need to consider the usual items
of business of an AGM, such as consideration of the scheme’s
financial reports.
The policy objective behind the new placement rules was to
reduce the compliance costs and time involved to raise capital
by placements but in practice this is not likely to be the case for
managed investment schemes. For companies, adding an extra
resolution in its notice of AGM is straightforward and inexpensive,
given that an AGM must be held anyway.

3. 632 Keeping good companies November 2012
News and Views
It will be interesting to see if any listed scheme calls and holds an
AGM to utilise the additional placement capacity. In all probability
schemes will call a unitholders’ meeting to approve a placement
(where approval is required) as and when the decision to conduct a
placement is made. If a scheme meeting has already been scheduled
for another purpose and that meeting happens to fall in AGM
season, schemes may find it useful to turn that meeting into a
makeshift AGM and seek the additional placement capacity approval.
Related parties aren’t included
ASX makes it clear that member approval to utilise the additional
placement capacity does not apply to securities issued to related
parties. This also applies to approval under Listing Rule 7.1 (the
15 per cent rule). The requisite approvals under Chapter 10 of
the Listing Rules must be obtained if securities are proposed to be
issued to related parties.
Therefore, ASX has continued to apply its policy on issues to related
parties to the new placement rules. The problem that entities might
face though, especially small- to mid-caps, is that a fair amount of
the funds is likely to come from related parties. If this is the case,
the entity will need to call and hold another meeting to obtain
member approval for the issue of securities to related parties
which defeats the cost and time saving of seeking the additional
placement capacity approval at the AGM. The upside is that the
entity can proceed with part of the placement for non-related
parties immediately if the need for funds is urgent and the balance
from related parties once approval is obtained.
Member approval is not member approval
The initial reaction from some clients regarding the increased
placement capacity was ‘Why is member approval required to
get the extra ten per cent placement capacity when we already
needed member approval to go above the 15 per cent?’.
This reaction is understandable but mitigated by the fact that
companies need to hold an AGM anyway so including one more
resolution is an easy ask. But entities do not have the all-clear
after passing a special resolution.
The approval to increase an entity’s placement capacity to
25 per cent under Listing Rule 7.1A is not akin to approval for the
purposes of Listing Rule 7.1 which is required for issues exceeding
the 15 per cent threshold.
For the latter, the approval is absolute and the issued securities
do not eat into the 15 per cent limit. For the former, ASX will not
consider securities issued under the extra ten per cent to be issued
with member approval although an entity has already passed a
special resolution at its AGM. If securities are issued within the
extra ten per cent, they will eat into the extra ten per cent
until their issue has been ratified under Listing Rule 7.4 or 12
months has passed since their issue. In practice, this means two
resolutions are required — one to get access to the extra
ten per cent and another to ‘refresh’ the extra ten per cent.
Entities that have issued securities under the extra ten per
cent placement capacity should remember to include another
resolution in the following year’s meeting papers which ratifies the
issue of those securities for the purposes of Listing Rule 7.4. This
is particularly so if an entity issues securities under the extra ten
per cent towards the end of the 12-month approval period, say
September 2013 (assuming that approval is obtained at an entity’s
November 2012 AGM). If an entity forgets to do this and only
seeks approval for the extra ten per cent placement capacity at
its 2013 AGM, it cannot use the full ten per cent until September
2014, 12 months after it issued the securities.
Conclusion
All in all, the increased placement limit for small- to mid-cap entities
should be welcomed by the market. For most ‘companies’ including
an additional resolution in their AGM papers to approve the extra ten
per cent placement capacity just in case they need it at some stage
over the next 12 months is easy.
That said, the new rules have not made it any easier or cost
efficient for managed investment schemes to raise capital
through placements. Likewise, if companies are seeking capital
from related parties, another meeting will need to be held to
get related party approval which diminishes the time and cost
effectiveness of having the extra ten per cent placement capacity.
Again, if securities are issued under the extra per cent for non-
cash consideration, the cost of an expert’s report could outweigh
any cost saving of not having to call and hold a meeting.
ASX has committed to reviewing the new rules after two years.
It will be interesting to see what the market makes of the new
placement capacity rules over the next 24 months.
Caroline Raw can be contacted on 0405 147 375 or by email at
craw@bartier.com.au.
Notes
1 ASX, 2012, Strengthening Australia’s Capital markets: ASX proposals
and Consultation
2 ASX, 2012, ‘Helping Australian companies raise capital’, media
release, 25 July
3 Listing Rule 19.12, definition of ‘eligible entity’
4 Listing Rule 7.1A
5 Listing Rule 7.1A.1
6 Listing Rule 7.1A.3
7 Listing Rule 7.3A
8 Listing Rule 3.10.5A
9 Listing Rule 3.10.5
10 Listing Rule 14.11.1