“The relaxation of the rules has allowed larger companies to restore balance sheets and top up liquidity in the face of the market volatility caused by COVID-19. Subsequent to this first wave of activity, the latest measures announced by the ASX, requiring detailed disclosure of how securities have been allocated, are no doubt in response to fears that retail investors were being left out of the action,” she explained.

“The initial flow of capital raising activity showed that the allocation of new capital during this first flurry of activity was primarily made to fund managers and institutional investors with retail investors being sidelined. The latest changes appear to be an attempt to balance the need for fairness to all classes of investors with the need to raise emergency capital quickly.”

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While the changes to the capital raising regime have been slated as temporary, it is likely, Ms Weatherstone submitted, that “some aspects” will remain following the pandemic.

“Given that the issue of transparency in share allocation policies has been on ASIC’s radar for a number of years now, the new disclosure requirements for the allocation of capital may be here to stay, and with a broader application. Further, given the damage to the economy that has taken place as a result of COVID-19, the emergency measures are likely to remain in place until the economy recuperates,” she argued.

“Further I would anticipate, in the near to medium-term, IPO activity will be largely off the table (in all but a few limited sectors) and perhaps replaced with a raft of backdoor listings and reverse takeovers. Employee incentive schemes and performance plans may also be back in vogue as companies look for alternative ways of retaining and engaging their workforces and management teams.

“While I believe we will continue to see a broad range of capital raising structures being used, it is likely that institutional placements, accelerated rights issues and placements followed by an entitlement offer or share purchase plan will enjoy continued popularity, as they did during the GFC.”

Hurdles to be overcome

Due to the complexion of the current market, Ms Weatherstone continued, lawyers will need to “apply a different lens” to advising on deals and be alive to the shifting risk profiles of our clients.

“Disclosure issues will be particularly pertinent. For example, for ‘low-doc’ capital raises there is no due diligence defence and lawyers will need to assist their clients to adopt systems and processes to mitigate the risk of misleading and deceptive conduct resulting from poor or inadequate disclosure, notwithstanding the pace of the transaction,” she explained.

“Further, lawyers will also need to keep on top of the swift regulatory changes taking place and be alert to the changing priorities and points of focus of our regulators in reviewing transactions.”

There will be no “one size fits all” solution to client needs, Ms Weatherstone advised.

“Multiple factors will need to be considered in planning a capital raise, including how urgent the need is for funding, market conditions when the raise is proposed to take place, the size of the raise and how it is to be priced, the interests of existing shareholders and determining the most suitable structure in light of those considerations,” she said.

“Boards will need the support of their lawyers in working through these considerations and making informed decisions on how best to proceed, particularly in light of the new requirements focused on transparency and fairness.”

Moreover, the recent changes announced by the Foreign Investment Review Board (FIRB) are also likely to have an impact on capital raising, which lawyers will need to be ready to advise on, Ms Weatherstone added.

“Where FIRB approval is required for a foreign investor to make an acquisition of shares, that approval may now take up to six months. Accordingly, the composition of the register will be another important consideration in structuring capital raising transactions,” she proclaimed. 

“With increased costs sensitivity, lawyers will need to be prepared to do more, and for less, providing our clients with practical, strategic and commercially oriented advice will be critical to ensure we are all still standing on the flipside.” 

A lawyer’s duties

Clients need their lawyers more than ever at this juncture, Ms Weatherstone posited, given the market instability caused by the pandemic and subsequent regulatory and legislative amendments that many companies and/or directors may not be entirely across.

“Despite some predictions that the new rules regarding disclosure of allocations would prompt a slowdown in capital raising activity, I see this as highly unlikely. While there remains a keen thirst for capital (and often at attractive discounts) there will be investors ready to participate,” she said.

“I believe we will see more reverse takeovers and backdoor listings, employee incentive schemes will see a comeback as a means of retaining and rewarding valued staff, private equity will snap up undervalued entities, and our clients will make strategic merger and demerger decisions and/or sell off non-key assets for survival.”

Lawyers, Ms Weatherstone said, must truly act as a “trusted adviser” for their clients, helping them “develop a Plan A (and then a Plan B)” to survive this crisis.

“Supporting and facilitating robust corporate governance processes, including encouraging boards to document the basis upon which decisions were made, will be an important role for lawyers as decisions made quickly and under high stress will be subject to the same, if not greater, scrutiny as they would be in more normal circumstances,” she noted.