The challenge in designing stock exchange listing rules for capital raising is to strike the right balance between the efficiency with which issuers can go to market and investor protections to maintain market integrity.
Too much red tape will stifle initiative; too little may undermine investor confidence in the market. Unclear at this stage is whether the changes ushered in by the NZX last week get that balance right. For that reason, the NZX's commitment to review the rule changes in 12 months is welcome.The rule changes directly affecting capital raising have:
raised the limit on placements without shareholder approval from 15% to 20% of a class ofequity securities in a 12 month period
allowed directors and associated persons to participate in a placement subject to the board certifying that this participation is in the best interests of the issuer and fair to shareholders not participating
reduced the time frames for completing a rights issue from six to eight weeks to just over three weeks, and
removed the requirement for NZX approval to the issue price for a placement or share/unit purchase plan at a greater than 10% discount to VWAP (volume weighted average price). Now a placement or share/unit purchase plan can be made at any price but if the discount is greater than 15 per cent to the VWAP over the last five business days, the board must certify that the offer is fair and reasonable to the issuer and to non-participating shareholders.
The greater flexibility to place capital without shareholder approval could lead to more dilution to the holdings of existing shareholders. A similar proposal considered by the Australian Securities Exchange before the global credit crunch was strongly resisted by Australian shareholder groups and did not proceed.
More controversial, because less linked to the financial crisis, are rule changes which do not directly affect capital raising. Among these is the decision to increase (from 5% of average market capitalisation to 10%) the threshold for entry into related party transactions without shareholder approval.
NZX has sought to reassure investors by inserting a new rule requiring disclosure to the market of related party transactions involving more than 5% ofthe issuer's average market capitalisation. But any moves to loosen the investor protections in this area seem at odds with the strong market reaction to the extent of related party deals undertaken by finance companies in the last few years.
Some submitters argued that relaxation of the listing rules would be counter-productive, because of the negative effect on investor confidence. Over the coming months, issuers' response to the changes will determine whether these concerns were justified, or whether the changes are a well-judged response to the credit crunch.