JSE eases restrictions on issuing shares for cash

Unclear what oversight measures there will be to ensure there’s no abuse of the rule change.
Image: Moneyweb

This story has been updated to include additional comment from the JSE.

Three days after former Investec CEO Stephen Koseff called on the JSE to amend listing rules to allow companies to issue shares “without interference from shareholders” the stock exchange regulator moved to accommodate his request. On 29 May it sent a letter to company secretaries, sponsors and designated advisers informing them that a key listing requirement had been suspended and listed companies could now issue shares for cash without holding a shareholders’ meeting. The rule change does not remove all shareholder “interference” but it ensures shareholders will have no ability to quiz management on the circumstances around the issue.

Corporate governance analysts have reacted to the unexpected move with concern; while they acknowledge the current extremely difficult circumstances they query whether it is appropriate and point out that giving directors the authority to issue shares for cash has always been a sensitive issue for shareholders. The resolution rarely secures the 75% approval needed at shareholder meetings.

At this stage it is unclear what oversight measures there will be to ensure there is no abuse of the rule change. “Presumably shareholders won’t wake up one day to discover they have a new major shareholder,” said one investor who worried about the quality of disclosure around share issues under the more relaxed regime.

The change, which has already been implemented, sees a critical JSE listing requirement being lifted so that the resolution needed to approve the issue of shares for cash can be done in written form instead of requiring a vote at a meeting of shareholders. “The JSE is of the view that such a measure could significantly assist Main Board issuers with the raising of capital on a more expeditious manner,” said the JSE’s director of issuer regulation Andre Visser in a letter to company secretaries, sponsors and designated advisers, dated 29 May.

Visser explained that in its engagements with the market regarding the impact of the covid-19 pandemic on the business and operations of listed companies, “the JSE has been approached by a number of issuers, sponsors and advisers exploring possibilities on how capital can be raised quicker and more efficiently.”

Although the obligation to hold a physical meeting of shareholders is a JSE listing requirement and therefore entirely within the JSE’s control, Visser said they sought, and secured, approval from the Financial Sector Conduct Authority (FSCA) for the exemption.

The FSCA’s Jurgen Boyd said, in a market notice issued on 28 May, that the covid-19 lockdown had put the South African financial markets under immense strain and that capital raising was critical in ensuring the continued viability of a company as a listed entity and going concern. One of the most effective capital raising measures for a listed company is to issue shares for cash, said Boyd, adding that this diluted the interests of existing shareholders and the value attached to their shares. “This is one of the important reasons underpinning the requirement that an issue of shares for cash resolution must be approved by achieving 75% majority of the votes cast by shareholders, subject to certain exclusions.”

Chief investment officer of Aeon Investment Management Asief Mohamed says it’s evident that companies are under huge pressure right now, “But it isn’t a good time to announce a share issue, the share price would be smashed.” He said a lot of listed companies were currently turning to private equity for funding.

Boyd said the shareholders’ meeting required by the JSE was no longer viable due to the closing of the SA Post Office as part of the lockdown restrictions as well as social distancing regulations. He said given these circumstances and the unprecedented consequences of the Covid-19 pandemic the FSCA believed it would not be contrary to the public interest to allow the issue of shares for cash to be passed by written resolution.

Boyd told Moneyweb that listed companies are still required to keep the market informed of share issues. In addition, “where written resolutions are being proposed issuers must release an announcement on SENS within 24 hours and with details of the written resolutions after the written resolutions have been distributed.” Shareholders will be given 20 business days to vote on the resolution and up to 30% additional shares can be issued.

Despite the fact meetings need only 10 days notice and that virtual shareholder meetings had proven to be effective and speedy alternatives to physical meetings during the lockdown, Boyd said the written resolution would be “more expeditious” and that shareholders could start voting as soon as they’d received the written resolution. “Once the requisite majority (75%) has been achieved, an issuer would be able to implement the authority obtained,” said Boyd.

Visser told Moneyweb that regulators in the UK and Australia have allowed companies to issue shares for cash without getting any shareholder approval. He also stressed the exemption expired at the end of December 2020.

What remains unclear is how shares not voted on by day 20 will be treated by the company. One corporate law adviser said it was likely companies using the exemption would include a cover note advising shareholders they could vote ‘yes’ or ‘no’ and that a non-response would be treated as support for the resolution. However in a subsequent response to Moneyweb the JSE stressed the 75% majority was of all shareholders entitled to vote. “This means there is an ‘effective’ higher majority when using section 60 written resolution,” the JSE told Moneyweb. This will provide considerable protection for minorities. But the law adviser countered that given the difficulty of making contact with 100% of shareholders using written resolutions was unlikely to expedite the process of issuing shares for cash.

Robert Lewenson, head of ESG engagement at Old Mutual Investment Group told Moneyweb he was concerned the well-intended move by the JSE and FSCA would be used by some companies to dilute existing shareholders. He said it was important to monitor developments closely.

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Given the JSE’s record of tracking and exposing abuse in the past this must seem like a gift to companies who prefer to avoid having to deal with tiresome shareholders.

As a time limited emergency measure I think it makes sense to ease the requirements somewhat, as long as there is disclosure as to why it was appropriate to issue equity rather than other sources of capital and shares are issued in a way that does not prejudice existing shareholders (e.g., issuing cheap equity to specific parties only should not be allowed). Prorata rights of shareholders should be respected. The need to raise emergency cash should be balanced by a commitment to reduce bonuses to executives as it might imply a non sufficiently conservative capital structure going in.

Here’s an idea, let’s throw the whole companies act out as well. There is a reason why these laws exist.

Does this ‘permission’ at the ‘sole discretion of the JSE’ have a sell-by date?

And can I in the meantime send my lawyer a ‘standby and watch this space’ request?

Damned if you do, damned if you don’t. Too much v too little regulation. Cannot have it both ways.

Shareholders get a right to approve share issuances at the AGM. The terms should be set down there. If a company issues shares then existing shareholders have a pre-emptive right to subscribe for the new shares. If the existing shareholders don’t like the terms or rationale for the offer don’t subscribe. The bottom line is that Investors should do their own DD and not follow the herd as is too often the case with institutional investors. The exchange is not running the company.

Is the relaxation absolute or limited in relation to the percentage dilution? Also assume the rules apply about pricing the shares for cash?

End of comments.

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