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Bulletin | Covid-19

Written Resolutions to approve Specific Issues of Shares for Cash: A further boost for expedited equity capital raisings on the JSE during COVID-19?

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Against the COVID-19 crisis and the devastating financial consequences of the extended lockdown, the Financial Sector Conduct Authority (FSCA) published FM Notice 3 of 2020 under the Financial Markets Act No. 19 of 2012 and the Financial Sector Regulation No. 9 of 2017 exempting certain listed companies from convening in-person meetings (the "Notice") and allowing resolutions to approve a listed company raising capital by way of a specific issue of shares for cash to be passed by way of written resolution. In doing so, the FSCA appears to have recognized the plight of financial markets which have been put under immense strain as a result of the COVID-19 pandemic. The FSCA acknowledges that listed companies’ ability to embark on capital raising measures is critical in ensuring their continued viability as a listed entity and going concern.

Despite the risk of dilution to existing shareholders, a specific issue of shares for cash (or a private placement offering) can be an effective way to raise equity capital for listed companies on the JSE. It is made to only certain investors on a non-preemptive basis (i.e. to key institutions) with no limit on the discount at which the shares can be issued. Shares can be issued to public and non-public shareholders and if shares are issued to related parties, a fairness opinion is usually required unless a JSE exemption is granted. The company’s constitutional documents would need to be reviewed to ensure no restrictions exist on issuing shares on a non-preemptive basis. Irrevocable undertakings are usually obtained from key shareholders or investors both in relation to voting and take up so as to minimize market risk. Underwriters would also usually insist on broadly drafted market out provisions in their underwriting arrangements to further reduce market risk.

Yet in the past, this capital raising process for JSE issuers and investors has been particularly time consuming in comparison to jurisdictions such as Canada where equity capital can sometimes be raised on an overnight basis through a “bought deal” process with underwriters.  The JSE timetable has historically been impacted by the notice period to hold a shareholders' meeting and the JSE informal and formal approval process in connection with the accompanying circular.

In 2017, the JSE initially sought to expedite this process by introducing the concept of an accelerated specific issue of shares for cash where approval from the JSE can be obtained within 48 hours on the submission of a term sheet (in the prescribed form) and notice of shareholders' meeting. Shares issued to related parties cannot be issued at a discount. At that time, the JSE initially also proposed to allow the accelerated specific issue of shares for cash to be approved by shareholders by way of written resolution but withdrew this proposal to protect shareholders against potential dilution.

In the early stages of COVID-19 in South Africa, the JSE first sought to demonstrate its recognition of the challenges faced by issuers through correspondence to sponsors on 17 April 2020 in which they were advised to contact the JSE where quicker capital raisings required a quicker review and approval process. Such requests were to be considered on a case by case basis.

Under the current challenges presented by the COVID-19 pandemic and the resultant restrictions on movement and social distancing requirements, the FSCA is now of the view that the JSE’s request for Main Board issuers to approve a specific issue of shares for cash via a written resolution for a limited period between 28 May 2020 and 31 December 2020, would not be contrary to the public interest (the "Exemption"). This Exemption is intended to enable companies listed on the Main Board to raise capital quickly, effectively and with due regard to the rights of all affected. Although the Notice and the JSE letter dated 29 May 2020 granting the Exemption do not refer to meetings being held by electronic communication or virtually instead, this option remains available to listed companies in terms of section 63 of the Companies Act, subject to the provisions of their MOIs.

While the introduction of the temporary Exemption is to be welcomed as a further step by the JSE to expedite equity capital raisings for distressed companies impacted by COVID-19, it remains to be seen whether certain listed entities will be able to pass the written resolution (requiring a 75% approval threshold) timeously, particularly listed entities with a broad shareholding base and taking into account the fact that key participating shareholders would be unable to vote on the underlying resolution.

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