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Exemptions for listed share purchase plans and rights offers. Discussion document [2008] NZSecCom 12 (23 December 2008)

Last Updated: 15 November 2014

DISCUSSION DOCUMENT

EXEMPTIONS FOR LISTED SHARE PURCHASE PLANS AND RIGHTS OFFERS Summary

The Securities Commission seeks comment on options for exemptions to assist listed issuers to raise capital through limited offers to existing shareholders.

Our consultation arises from a proposal made by the Capital Markets Development Taskforce (CMDT) to extend the Commission’s existing class exemption for share and unit purchase plans. This exemption allows listed issuers (companies and unit trusts) to issue further shares or units to existing security holders without a registered prospectus or investment statement, to a maximum value of $5,000 per security holder per year.

This paper discusses three options for extending exemption relief for listed issuers to raise further capital from existing security holders. These options are:

(a) To raise the annual limit under the existing class exemption

(b) To grant an exemption so that listed issuers can issue shares up to 10% of their market capitalisation in any year, with a fixed amount offered to each shareholder and without a prospectus or investment statement

(c) To grant an exemption allowing listed issuers to make pro-rata rights offers up to 10% of the number of shares already on issue, without a prospectus or investment statement.

The Commission’s initial preference is to grant an exemption for pro-rata rights offers, as described in (c) above, with similar disclosure requirements to those in the existing class exemption for share purchase plans.

We seek comment on each of these options, and in particular:

• How the exemptions described would produce benefits for capital-raising by listed issuers, and quantification of these benefits; and

• Whether the proposed conditions of exemption would provide adequate information to allow for an informed decision to be taken by retail investors who are existing shareholders, or what further or alternative conditions should be required.

We also welcome any suggestions for alternative approaches, bearing in mind that the Commission’s ability to grant exemptions must be used to promote the existing general policy and objects of the Securities Act, rather than as a law reform tool.

Please provide comments before the close of 30 January 2009, addressed to Liam Mason

(liam.mason@seccom.govt.nz).

Background

The CMDT interim report – context for this discussion paper

1. The CMDT was established in July 2008 to develop a blueprint to improve New Zealand’s financial system. It is due to report in September 2009, but produced an interim report on 27 November 2008, containing measures that it recommends be considered in response to the current financial crisis.

2. The CMDT’s interim report includes proposals for broader changes to securities law to build on the continuous disclosure regime for listed issuers and to relieve those issuers from requirements to produce offer documents when making a new offer of securities. The interim report notes that changes to the Securities Act might subsume some of the specific suggestions made by the CMDT.

3. This discussion paper does not seek comments on law reform. It is concerned only with the relatively more modest changes that are appropriately made by exemption. The Commission notes that any change to the Commission’s class exemption would be likely to be overtaken by any proposed reform of the disclosure rules for listed companies.

4. The Commission is consulting on possible changes to its share purchase exemption to help it decide whether there are useful changes that can be made in the very short term to assist capital raising by listed firms, within the current policy of the law. We are also working with government officials on the other proposals made by the CMDT.

5. The CMDT interim report also contained recommendations for changes to the NZX Listing Rules. NZX has published a consultation document on these changes, and intends to submit proposed amendments to the Minister of Commerce by the end of December 2008. The Commission will provide advice on those rule changes under the Securities Markets Act. As such, this paper does not invite comment on the listing rule proposals and nothing in this discussion paper should be taken as pre-empting the Commission’s statutory advice.

The existing class exemption

6. Under the Securities Act 1978 and the Securities Regulations 1983 any public rights offer by a company (listed or unlisted) must be made in a short-form prospectus and an investment statement.

7. The Securities Commission introduced a class exemption for small share and unit purchase plans in 2005 (the Securities Act (NZX – Share and Unit Purchase Plans) Exemption Notice 2005). The purpose of the exemption is to allow listed issuers to extend small offers to existing shareholders¹ without requiring the production of a registered prospectus and investment statement.

8. The exemption provides broad relief from the usual disclosure requirements of the

Securities Act 1978, but applies only to a limited range of offers.

¹ The exemption applies equally to offers of shares in listed companies and offers of units in listed unit trusts. For convenience we refer only to “share offers” and “shareholders” in this paper.

9. To qualify for the exemption an offer must:

(a) be made only to existing shareholders (and be of the same class as shares already held);

(b) be made to all shareholders (except overseas holders where legal restrictions exist) on the same terms;

(c) be limited to $5,000 of securities per year to any shareholder (extending to beneficial owners through custodians);

(d) not be renounceable;

(e) be at a price lower than the market average during a set period within 30 days of the offer or allotment date; and

(f) be priced before allotment.

10. If an offer qualifies, then it can be made without a registered prospectus or investment statement. Instead of these documents, each subscriber must receive a document that:

(a) is signed by or on behalf of each director of the issuer; (b) contains an offer to subscribe for the shares;

(c) states the price of the shares or describes the procedure for fixing the price;

(d) describes the relationship between the subscription price and the market price, and warns of the possibility of market price changes after subscription; and

(e) informs investors that the most recent annual report and financial statements are available free of charge.

11. The NZX issuer must, immediately after setting the price for the offer, publish (through NZX) the price along with a certificate signed by or on behalf of each director attesting that at the date the price was set the NZX issuer had no information not publicly available that would be likely to have a material effect on the market price of the shares if the information were publicly available.

12. Shares offered under the exemption notice also cannot be allotted if at the date of allotment the issuer has any information not publicly available that would be likely to have a material effect on the market price of the shares if the information were publicly available.

Rationale for the exemption

13. The class exemption was granted on the application of NZX, after the Commission had granted two individual exemptions to the same effect. The idea for those exemptions had come from parallel relief granted by the Australian Securities and Investments Commission (ASIC) in 1998 for ASX listed companies.

14. The rationale behind the exemption was that share purchase plans offering limited numbers of shares to existing holders were akin to dividend reinvestment plans. In

Australia dividend reinvestment plans are exempted by law from the usual prospectus requirements of the Corporations Act. In New Zealand dividend reinvestment plans have the benefit of a long-standing Commission exemption notice² that provides relief from the prospectus and investment statement.

15. Dividend reinvestment plans and small share purchase plans are exempted from the usual requirement for disclosure documents because the fixed costs associated with the preparation of offer documents can be disproportionately high for smaller offers, so that the benefits of disclosure can be outweighed by the cost of compliance. The benefits achieved by disclosure for these offers takes into account the (relatively) lower risk to investors in cases where they are already holders of the securities being offered, and where their subscription is limited.

16. The current limit under the share purchase plan exemption of $5,000 per shareholder per year is the same figure as that currently used in Australia. The Commission considered that an annual cap of $5,000 would both limit the risk to individual shareholders and would mean that any fund raising that was significant from the issuer’s perspective should be undertaken with full offer documents.

17. The Commission consulted publicly before granting its exemption in 2005. We said in our discussion document that an important policy consideration was that the proposed exemption should apply only to relatively small offers. Submitters were almost all in favour of the exemption.

Options for exemptions

Option 1 – extend the existing limit on subscriptions per shareholder per year

18. The CMDT interim report suggests that the existing $5,000 per shareholder per year limit in the class exemption notice be raised to $25,000.

19. This change would clearly extend the potential for the exemption to be used as a means by which listed companies could raise further capital without incurring the costs of a prospectus and investment statement.

20. An important policy consideration for the Commission when it granted this exemption was that it apply only to relatively small offers of securities, so that the individual risk for each shareholder was comparatively low. We think that this exemption should maintain a balance in this regard. Extending the limit in the share purchase plan exemption from $5,000 to $25,000 may undermine the current rationale for this exemption, in that it may be difficult to regard investments of $25,000 per year as small investments for retail investors.

21. A criticism that has been made of the share purchase plan exemption is that it is significantly more useful (as a capital-raising tool) to companies with a wide shareholder base than it is to those that are closely held, or that have significant institutional ownership. The reason for this is that the limits are set on a per- shareholder basis. Raising the per shareholder limit would not reduce this disadvantage for some companies.

²The current exemption is the Securities Act (Dividend Reinvestment) Exemption Notice 1998.

22. Setting a cap on a per shareholder basis can result in distortions to proportionate shareholding, in that the ability to participate in an offer is not proportionate to the number of shares held in the company. A smaller cap is more likely to benefit the relative holdings of small shareholders. Raising the cap may reduce the distortionary effect to some degree by making it more worthwhile for larger investors to participate in an offer. In practice however it could result in a different distortion, in terms of the ability of investors to participate (the higher the cap, the less likely it is that a retail investor can take up all of his or her entitlement).

23. The Australian Securities and Investments Commission (ASIC) is currently consulting on a proposal to increase the annual cap in the equivalent Australian exemption (also currently set at $5,000)³. That proposal stems from an application by the Securities and Derivatives Industry Association (SDIA) made in August 2008, which sought to have the annual limit raised to $20,000. The ASIC consultation paper notes four arguments put forward in favour of the extension:

(a) The rise in the value of the market since the last increase in 2002 justifies a substantial increase in the monetary limit;

(b) The level of share ownership in Australia is high (46% of Australian adults own shares directly or indirectly);

(c) Self-managed superannuation funds (which are treated as retail investors in Australia if their assets do not exceed $10 million) are a growing vehicle to build retirement savings and require substantial investment options; and

(d) Share purchase plans offer a low-cost capital raising option for companies.

24. ASIC proposes to increase the annual limit under its exemption to $15,000. Its reasons for this proposal include the matters put forward by the SDIA. ASIC also notes that:

(a) under Australian law any investment below $15,000 is treated as a “small investment” for the purposes of an exemption from the requirement for an investor to be given a Statement of Advice when receiving investment advice; and

(b) research undertaken by the ASX found that the average trade value by retail investors in 2006 was just under $15,000.

25. New Zealand law does not have an equivalent to the “small investment” exemption in the Corporations Act, and does not have the same retail investor treatment for small superannuation schemes. New Zealand also has a lower level of share ownership than does Australia, but we would treat this as having less relevance, as the exemption only relates to offers made to people who are already shareholders in the company concerned.

26. As the current cap in the exemption notice was set by reference to that in Australia, there may be advantages, in terms of trans-Tasman co-ordination, if the limit continues to reflect that used in Australia, or is set by reference to the same factors.

³ ASIC Consultation Paper 103 – “Review of share purchase plan threshold”, published 18 December 2008.

We welcome comments on the use of factors such as the average value of retail trades to determine the appropriate limit for New Zealand purposes.

Option 2 - exemption for fixed offers with up to 10% of market capitalisation

27. Another option, raised in NZX’s recent consultation on its listing rules, would be for the Commission to grant an exemption to allow NZX issuers to issues shares to existing shareholders to a maximum annual limit of 10% of their market capitalisation, by way of an offer of a fixed amount per shareholder per offer.

28. This option would, like the existing exemption, limit the size of the fund-raising from the point of view of the issuer. However, it would not limit the size of the offer in relation to any individual investor, and so would depart from the rationale of the existing class exemption.

29. This exemption also has the potential to create distortions in the ability of investors to participate, though these distortions would work to the opposite effect of the existing exemption (companies that are closely held could offer more per shareholder than those that are widely held, and so would be more likely to be able to raise significant amounts from institutional holders).

30. As this exemption is likely to appeal to companies with a different shareholding profile than those who would benefit from the existing exemption, there may be advantages in this exemption being available as an alternative to the existing exemption (whether the cap is raised or not). We welcome comments on this.

Option 3 - exemption for pro-rata offers up to a set cap

31. The Commission’s initial preference for an exemption to facilitate fund raising by listed companies would be to grant an exemption for small pro-rata rights offers, subject to a cap on the overall amount that could be raised using the exemption in any

12 month period. We suggest that an annual cap of 10% (by number of shares) would strike an appropriate balance in that it would provide companies with a useful level of additional capital while limiting the individual exposure for shareholders to a relatively modest proportion of their existing investment.

32. The appeal of this approach is that it maintains proportionality. This means that from the point of view of the individual investor this option would limit the risk by reference to the size of the shareholder’s existing investment. It would allow more capital to be raised from institutional shareholders while maintaining a proportionate opportunity for investment by smaller investors. It would also overcome the distortion produced by the dollar cap that means companies with wider shareholding can raise more money than those with closer holdings.

33. Under Australian law listed companies can already undertake pro-rata rights offers, with no limit, merely by filing a “Cleansing Notice” to certify that the company has disclosed all material information. The Commission’s existing class notice already requires an equivalent certification (see above). This proposed exemption would broadly match the situation under Australian law, but would be limited to relatively modest additional investments.

34. The Commission’s existing exemption for share purchase plans applies only to non- renounceable share offers. The Australian “Cleansing Notice” regime (which is contained in the Corporations Act) applies to any rights offer, whether renounceable or not. If a share offer is renounceable this means that a shareholder can decline to subscribe for some portion (or all) of his or her entitlement, which can then be taken up by any other person, whether or not the eventual subscriber is already a shareholder of the company.

35. It is the Commission’s initial view that exemption relief for pro-rata rights offers (as for the other options discussed in this paper) should remain limited to non- renounceable offers, so that only existing shareholders, who have some familiarity with the company and with the continuous disclosure regime, can take up an offer that is made without the usual offer documents. It is our initial view that any extension of this policy to offers made to non-shareholders would be more properly covered by legislative review. However, we welcome comment on this also.

36. We should note that whether or not the exemption is available for renounceable offers would not affect the ability of issuers to subsequently offer unallocated shares by private placements.

Conditions of exemption

37. The class exemption for share purchase plans requires an offer to be priced below the average market price over a set period within 30 days of either the offer or the allotment. This requirement increases the benefit of the exemption for shareholders by giving them access to shares at a discount to the market price. We would propose to maintain this as a requirement of any further exemption, and welcome comments on this.

38. We propose that an exemption for pro-rata rights issues should be subject to disclosure and other conditions generally consistent with those in the share purchase plan exemption. This would require an issuer to send to each investor a brief document, signed by or on behalf of each director, that:

(a) contains an offer of the securities and describes the terms of the offer;

(b) sets out the subscription price or a description of the process by which the price will be set;

(c) contains a warning about the possibility of market price changes and the effect of this on price or value of securities the investor could receive;

(d) advises that the most recent financial statements (and half-yearly financial statements if applicable) of the issuer (or trust) are available free of charge;

(e) certifies that the directors have no information material to the offer (or the price of the securities) that has not already been disclosed to the NZX or set out in the document.

39. This document would be an advertisement in terms of securities law, ensuring that every director is liable for the truth of the statements made to investors.

40. We also propose that, as is the case for the class notices for dividend reinvestment schemes and share purchase plans, shares could not be allotted if at the date of allotment directors have any material non-public information.

41. We welcome comments on these proposed conditions of exemption, and whether they provide investors who are existing shareholders with sufficient information to allow them to make an informed investment decision, taking into account the relatively small size of the offers proposed for this exemption.

Comments and further consultation

42. Please send comments to Liam Mason, general counsel, by email – liam.mason@seccom.govt.nz, or by post to PO Box 1179, Wellington. Comments must be received by 30 January 2009.

43. If the Commission decides to amend its existing class exemption, or to grant any new exemption, we intend to consult further on the drafting of an exemption notice. It is our intention to have any changes in place in February 2009. Please indicate in your response to this discussion document if you would like to be consulted on the drafting of any notice.

44. Any comments received will be subject to the Official Information Act 1982. It is the Commission’s usual practice to make all submissions available on request and where appropriate to draw attention to them in any further report. If you would like us to withhold any information included in comments on this paper please state this clearly in your response. Any request to have information withheld will be considered in accordance with the Official Information Act.

23 December 2008