While many companies who had to raise equity capital due to COVID-19 have already done so, we expect additional capital raises on the ASX in the next 12 months.

It appears most COVID-raisings to date have been in the form of placements to select institutional investors together with a share purchase plan for existing shareholders. It is understandable that companies have used this structure for emergency raisings as placements can be done quickly to maximise liquidity with a minimum of documentation.

Placements can however be very dilutive for employee and other retail shareholders and institutions that miss out on allocations. Going forward we would expect to see raisings that are structured to better consider the interests of all shareholders and employees with unvested equity.

Proxy adviser Ownership Matters have also indicated that they will be adding equity raising conduct as new criteria to its assessment of board performance and voting recommendation.

The preferred structure to raise equity capital expeditiously while preserving value for existing shareholders is for issuers to make use of the accelerated timetable for pro-rata entitlement offers that the ASX introduced in 2014.

The opportunity for existing shareholders to participate in a capital raising is a valuable right which is recognised in pro-rata offers, which also have the advantage that employees with unvested equity on foot can be compensated through standard adjustments to the exercise price and number of shares their options or rights entitle them to at exercise. These adjustments do not apply to placements. See the formula in ASX listing rule 6.22 HERE.

Although many employees will see their LTI grants on foot as unlikely to vest, boards should consider how unvested equity is treated in future raisings.

There will be a need for boards to balance the interests of capital raise expediency, transaction costs, the rights of existing shareholders and the treatment of unvested employee equity on foot. We would expect that accelerated pro-rata offers is the superior alternative in most cases.

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