ANNA FUGLESTAD, SHAREHOLDER ENGAGEMENT
Over the past year as companies have taken advantage of buoyant equities market and COVID related exemptions to undertake capital raisings, retail shareholders have jumped on the opportunity to increasing their holdings through Share Purchase Plans.
FIRST Advisers recently analyzed all Share Purchase Plans that occurred between March 2020 and February 2021. How companies in this group acted with the over-subscriptions varied significantly. Some only accepted the targeted amount to be raised, others accepted all the valid applications received, and others still were somewhere in between.
As has been apparent in the media, Boards of companies who have scaled back applications have come under significant scrutiny regarding the fairness of their allocation policies on existing shareholders. For many of the SPPs reviewed by the FIRST Advisers team it appeared questionable as to how much analysis and consideration went into determining the scale back policy and final allocation formula, if any!
Outlining Scale back policy upfront
Many SPP booklets leave the scale back policy unclear, often merely stating that the allocation policy will be done at the Boards absolute discretion. While this is an easy policy to draft, it could give the impression the Board is giving little upfront thought to protecting shareholder value when implementing any scale back, even though this may not be true.
Where written policies are vague and given little upfront thought, once the Offer closes, Boards have only a very limited time between knowing the final value of applications received and making an informed decision regarding allocations. And it is for these SPPs, where FIRST Advisers noted that scale backs were too often implemented crudely, such as using ‘first-come-first-serve, or ‘straight pro rata to application size’, which unfortunately resulted in maximizing shareholder dilution and often adverse media attention.
Further, stating that an Offer may close early, risks unnecessarily disenfranchising many shareholders who intend to participate but may be unable to submit their application early. For example, with currently delayed post, many shareholders now only receive their SPP documentation mid-way through the Offer period, and therefore have little time to participate. Others may set their payment instructions in their bank to occur on, or close to, the Offer close date, providing them with time to obtain the required funds, or limit their funds being tied up for any longer than necessary.
There are many things for Boards to consider, with a vague policy not necessarily acting in the best interest of retail shareholders. While it is very difficult to define allocation formula until all the applications are received, it is possible to retain complete discretion for Boards while indicating a policy which seeks to achieve one or more of the following:
- minimize/optimise the dilution or accretion impacts;
- achieve meaningful minimum allotments;
- reduce the number of unmarketable parcels;
- reward shareholders who have held for a particular timeframe (particularly useful where share prices have changed materially over that timeframe); or
- avoid double dipping by shareholders who seek to game the SPP by splitting holdings, or who have already participated in a preceding placement.
Consideration of Scale Back Formula Options
There is no one-size-fits-all method of implementing a scale back and the possibilities available to Boards are endless. In an ideal world, Boards should outline a considered policy upfront, which, among other things, considers the size of the Company, likelihood of oversubscription and the composition of their shareholder base.
This then provides them with the opportunity to receive and consider a detailed analysis of actual scale back scenarios, based on the number, value and identity of applications received, in the very limited timeframe following the close of the offer and allotment.
Although not every shareholder will be perfectly happy with any scale back, at least there is a pathway to minimize the chance of implementing a poor allocation formula and demonstrate to all shareholders the Board is keeping their interests front of mind.