When planning a material acquisition, one of the key matters for an ASX-listed entity to consider is whether the acquisition will be funded from existing cash resources, from debt, from the proceeds of a capital raising, or from the issue of scrip consideration to the vendors (or a combination of these sources).
Where the ASX-listed company is acquiring an unlisted company with fewer than 50 shareholders (i.e. a private M&A transaction) most vendors will resist any type of ‘subject to finance’ condition precedent in the M&A transaction documentation. As such, the acquiring ASX-listed entity will need to have a high degree of certainty at the point of agreeing binding terms for the acquisition that it will be able to fund the consideration on completion of the transaction.
In this article, we look at some of the key issues which can arise for ASX-listed entities conducting a private M&A transaction when some or all of the consideration for the acquisition is to be derived from a capital raising.
Certainty of funding
Once an ASX-listed entity executes binding transaction documentation for a material private acquisition (the ‘Sale Agreement’), it will need to announce the transaction to the market, even if the deal is subject to conditions precedent. It will also be bound to proceed with the acquisition, except to the extent that any of the conditions precedent are not satisfied or waived, or unless the ASX-listed entity can otherwise invoke a termination right in the Sale Agreement.
It is uncommon for private vendors to agree to a ‘subject to finance’ condition precedent in the Sale Agreement. One reason for this reluctance is that the vendors will not want to have the deal terms announced to the market (including the price that the ASX-listed entity will be paying), only for the deal not to proceed due to the acquirer being unable to obtain funds. This type of failed deal could make it difficult for the vendors to negotiate a sale in the future with other prospective counterparties.
Without a ‘subject to finance’ condition precedent, the ASX-listed entity will be ‘on risk’ of funding the deal from the point of executing the Sale Agreement and until completion of the deal. This period can be a matter of weeks or months after executing the Sale Agreement, depending on the nature of any third party or shareholder approvals that need to be obtained, and other matters that need to be achieved, in order to satisfy the conditions precedent to completion.
For the reasons set out below under the heading ‘Excluded Information’, it will usually be impracticable for the ASX-listed entity to conduct a capital raising before executing the Sale Agreement and announcing the deal. Instead, it is common to launch the capital raising immediately after having executed the Sale Agreement, with the aim of closing that capital raising as soon as possible in order to remove funding risk for the M&A deal.
This funding risk is also often managed by the ASX-listed entity arranging underwriting for the capital raising, to the extent that there are parties willing to underwrite the raise (usually the same investment banks or brokers that are lead managing the capital raising). Arranging underwriting will increase the costs of the capital raising, but will also substantially minimise the risk of the ASX-listed entity being unable to raise sufficient funds to complete the M&A transaction.
To the extent that underwriting is not available, the funding risk to the ASX-listed entity is higher, but can be mitigated to a certain extent through conducting market soundings with selected cornerstone investors ahead of the capital raising. Such soundings need to be very carefully controlled, including the timing, form and content of approaches, in order to ensure that risks relating to loss of confidentiality or insider dealing are appropriately managed. ASX listed entities should have regard to ASIC Report 393 (Handling of confidential information: Briefings and unannounced corporate transactions), including in relation to ASIC’s guidance on taking responsibility for protecting confidential information and being prepared for leaks (including having a formal leak policy and pre-prepared leak announcements).
Type of capital raising
Given the funding risk noted above, ASX-listed entities which are raising capital to fund an M&A transaction usually favour raising structures which have a high degree of certainty in relation to the amount to be raised and the timing of the offer. Accordingly, the most common raising types in connection with an M&A transaction are:
• a placement to institutional and sophisticated investors, which can be priced and completed in a matter of days; and/or
• an accelerated entitlement offer (either renounceable or non- renounceable), under which the institutional component of the offer can be completed in a matter of days, with the retail component taking 3 to 4 weeks.
Given the dilutive effect of a placement (which is usually conducted at a discount to the entity’s trading price), and the inability for retail shareholders to participate, a placement is often combined with a security purchase plan or an accelerated entitlement offer (both of which allow for retail participation).
Further information on these types of capital raising, and the temporary relief available to ASX-listed entities due to COVID-19, is available here.
Subject to satisfying certain eligibility requirements described in the linked article above, these capital raisings can be undertaken without a prospectus, provided that the listed entity instead lodges a Cleansing Notice.
When lodging a Cleansing Notice in connection with a capital raising, the ASX-listed entity must disclose to the market all ‘Excluded Information’.
Excluded Information is information that has been excluded from the ASX-listed entity’s continuous disclosure in accordance with the ASX Listing Rules and that investors and their advisers would reasonably require to make an informed assessment of:
• the assets and liabilities, financial position and performance, profits and losses and prospects of the issuer; or
• the rights and liabilities attaching to the issuer’s securities.
However, this information is only required to be disclosed to the extent to which it is reasonable for investors and their professional advisers to expect to find the information in a disclosure document.
Absent any Cleansing Notice requirement, there are many situations in which an ASX-listed entity can legitimately delay the disclosure of potentially material information under ASX Listing Rule 3.1A, provided that such information remains confidential. These include where the information concerns an incomplete proposal or negotiation (e.g. an M&A transaction that is in the process of being negotiated, but has not yet reached binding terms) or information comprising a matter of supposition or which is insufficiently definite to warrant disclosure, or where the information is generated for internal management purposes only (the ‘Disclosure Carve-Outs’).
The effect of the Cleansing Notice regime and the requirement to disclose Excluded Information is essentially that the Disclosure Carve-Outs cease to apply in respect of any information meeting the test of Excluded Information as referred to above.
This is one of the key reasons why a capital raising to fund an M&A transaction is usually conducted after the Sale Agreement has been executed and the M&A transaction has been announced to the market. If the ASX-listed entity sought to raise capital before signing the Sale Agreement, the Cleansing Notice regime would likely require disclosure of the M&A transaction to the market while negotiations were ongoing and before a deal had been agreed with the vendor.
The requirement to release all ‘Excluded Information’ as part of the capital raising will also need to be carefully assessed when preparing the disclosure materials to the market on the connected M&A transaction. The materials released to the ASX will need to contain extensive information in relation to the M&A transaction, including key risks identified in acquisition due diligence, to ensure that all ‘Excluded Information’ has been released to the market.
The ASX-listed entity will also need to assess the extent to which it is in possession of forward-looking information (including financial forecasts) regarding its business and the acquisition target and whether that information could be classified as Excluded Information requiring disclosure as part of the capital raising. The temporary amendments to the continuous disclosure rules due to COVID-19 will also be highly relevant in making this assessment.
While the capital raising offer remains open (which could be several weeks for an Entitlement Offer, or a few days for a Placement), the issuer will be subject to heightened disclosure requirements, and accordingly will need to carefully monitor any key developments in the issuer’s and the target’s business during that period to determine whether these developments need to be disclosed to the market. The issuer should ensure that the M&A transaction documents contain information and disclosure rights to enable the issuer to meet its ASX disclosure obligations.
What happens if the M&A transaction does not complete?
When undertaking a capital raising to fund an M&A transaction, the ASX-listed entity will need to carefully consider what will happen to the proceeds raised under the capital raising in the event that the M&A transaction does not complete, for example due to failure to satisfy any condition precedent. It will often be the case that the capital raising will complete substantially in advance of the M&A transaction, particularly where the capital raising involves acceleration of the institutional component.
Whilst in certain limited cases, ASX-listed entities have sought to structure their capital raise using bespoke securities to enable the capital raising proceeds to be refunded in the event the M&A transaction does not proceed (such as Convertible Unsecured Loan Securities, which only convert to shares if the M&A transaction completes, but are otherwise repaid as a loan, as used by Seven West Media in its acquisition of Seven Media Group in 2011), the more common approach is to include disclosure in the ‘risks’ section of the capital raising documents as to the ASX-listed entity’s intended use of proceeds if the M&A transaction does not complete. For example, such disclosure may state that the ASX-listed entity will consider other uses for the funds, or seek to return them to shareholders via a buyback or capital reduction. Whether investors who have invested due to the prospect of a particular M&A transaction would be happy for the capital raising proceeds to be deployed on a different project or acquisition is a matter for debate. As such, investors in this type of raising will need to carefully consider the conditions precedent to the M&A transaction, and make an assessment as to the likelihood of that transaction not proceeding when deciding whether to invest.
Private M&A transactions which require an Independent Expert’s Report
Certain private M&A transactions will trigger a requirement for the ASX-listed entity to obtain shareholder approval, and for the meeting materials sent to shareholders to be accompanied by an Independent Expert’s Report (‘IER’). This could include:
• a transaction whereby the vendors are being issued scrip consideration that would give them a holding of more than 20% of the ASX-listed entity, requiring shareholder approval under item 7 of section 611 of the Corporations Act; or
• a transaction between an ASX-listed entity and a related party or other person in a position of influence, requiring shareholder approval under Chapter 2E of the Corporations Act or ASX Listing Rule 10 (or both).
Shareholder meeting materials would typically be prepared and despatched to shareholders several weeks after signing the Sale Agreement and announcing the M&A transaction to the market.
However, the ASX-listed entity’s board may want to know what the Independent Expert’s opinion on the M&A transaction will be before it signs the Sale Agreement, in order to manage the risk referred to above of launching a capital raising to fund an M&A transaction that is conditional on shareholder approval. In that case, the ASX-listed entity would need to obtain the IER prior to agreeing binding terms for the M&A transaction and launching the associated capital raising. Whilst the IER is obtained for the sole purpose of enabling shareholders to consider whether to approve the M&A transaction, obtaining the IER prior to launching the capital raising also enables the issuer and the market to better assess the likelihood of that shareholder approval being obtained.
The IER is likely to contain highly material information and therefore be Excluded Information (as referred to above), meaning that the IER would initially need to be released on launch of the capital raising, which may be several weeks before the shareholder materials are to be despatched. Releasing an IER without the accompanying shareholder meeting materials is relatively uncommon (but not unprecedented) and needs to be carefully managed, having particular regard to ASIC’s guidance in RG 112 on releasing the conclusions of an IER, so as to ensure that no misleading information is released to the market. The IER will then need to be re-released to accompany the shareholder materials when they are despatched, and the IER may need to be updated at that point. Examples of where this approach has been taken are Seven West Media’s acquisition of Seven Media Group in 2011, Gloucester Coal’s acquisition of Donaldson Coal in 2011 and SeaLink Travel Group’s acquisition of the Transit Systems Group in 2020, a transaction in which Kain Lawyers advised SeaLink.
The alternative is to obtain the IER after signing the Sale Agreement and conducting the capital raising, but this increases the risk noted in the section above regarding the capital raising having taken place and then the M&A transaction not completing (due to an adverse IER opinion and shareholder approval not being obtained).
For more information or assistance with planning your M&A transaction or capital raise, please contact James Burchnall.