Continuing our tradition of contributing to the public debate about the practical applications of governance principles in the Australian market, CGI Glass Lewis is pleased to release a new white paper, “ASX Listing Rule 7.1A: Much to dilute about nothing?” in which we discovered an unexpected negative price signal from corporate requests for this authority, among other findings.
In this white paper, we examined the impact of ASX Listing Rule 7.1A, which went into effect in August 2012 and gave mid to small cap companies the ability to raise additional equity capital. At the time, some market participants raised concerns with, inter alia, the control and dilution implications the additional authority would bring, especially to retail shareholders who might be shut out of institutional book builds.
For the purposes of our study, we evaluated the equity capital raising practices of 47 mining companies that were in the All Ordinaries index and eligible to seek the authority at their FY2012 AGM.
Some of the key findings of the study include:
• Companies that sought 7.1A authority performed worse in terms of changes of market capitalisation than companies that did not in the 12 months after their FY2012 AGM, with such companies being more likely to subsequently drop out of the All Ordinaries index. A 7.1A authority on ballot thus could be a negative price signal of difficult share trading conditions over the year to come.
• Use of the additional authority was rare, with no evidence that the authority was being abused.
• Companies that sought 7.1A authority were considerably more likely to raise capital in the 12 months following their FY2012 AGM than those that did not. A 7.1A authority resolution on ballot thus appears to be a signal to the market that a company will raise additional equity in the short term.
We strongly encourage clients, issuers and other stakeholders to contact CGI Glass Lewis to provide feedback, input or engage with us in response to this paper. You can email CGI Glass Lewis at any time at CGIGL@glasslewis.com or call +61 (2) 9299 9266. To purchase the full report please click here.