Placements - a capital idea or just another case of shares for the big boys?
Placings or block trades are a popular way for listed companies to raise equity from the markets. Commonly done overnight, these large share sales can quickly raise a lot of money for a firm.
During the 2008-09 credit crisis, global financial institutions such as Citigroup, UBS and Bank of America placed new equity to recapitalise their damaged balance sheets.
The deals do not get as much attention as initial public offerings because they are typically marketed to a tight universe of large funds. However, they can be huge - a sale of shares in Telstra, an Australian telecommunications firm, in 2006 netted A$15.4 billion (HK$123.9 billion) - and the flood of shares can crush an issuer's share price.
It's good work for investment banks, with placing fees ranging from 1 to 5 per cent. Fund managers also like them. Large buyers enjoy preferential access to placings, and because deals are often pre-marketed, there is the chance of profiting from selling shares before, and buying them back at a discount during, the placement.
Such benefits come at a cost to shareholders - in particular, minority shareholders, who have limited influence over the timing, size and pricing of the sale.
A large sale of new shares can also seriously dilute (lower) stock dividends paid to shareholders.
Shares usually have to be placed at a discount to market prices to attract buyers (also known as placees). As such, existing shareholders give away value to the placees in the transaction. In addition, as share prices often adjust to near the placement price after a placing, shareholders suffer a loss on their existing investments, as well.
While the listing rules in Hong Kong aim to find a balance between the benefits and costs of placings, there are still issues with them.
Shareholders usually approve an ordinary resolution (that is with support from at least 50 per cent of shareholders present and voting) during the annual general meeting that gives the directors a general mandate to place new shares of up to 20 per cent of issued share capital.
The shares typically are not allowed to be sold more than a 20 per cent discount to current market prices before the announcement of the placing. The first concern is whether the 20-20 thresholds are too high a price for shareholders to pay.
In Britain, general mandates have to be approved by a special resolution supported by at least 75 per cent of shareholders.
In addition, no more than 5 per cent of issued share capital per year and 7.5 per cent over a three-year rolling period may be issued under such mandates, and the shares may not be sold at more than a 5 per cent discount to current market prices before the announcement of the placing.
Hong Kong's stock exchange in 2008 launched a consultation on whether the 20-20 thresholds of general mandates should be amended.
Based on the responses, it concluded there is no need to do so. This is hardly surprising since only eight of the 105 respondents represented retail investors; the rest included listed companies (which want to retain as much flexibility as possible in raising capital) and investments banks, lawyers and accountants (who make lucrative fees from deals).
General mandates may be refreshed for an unlimited number of times during the year with prior independent shareholder approval. As such, repeated refreshments could result in shareholding dilution far in excess of the 20 per cent standard.
The Hong Kong exchange could permit price discounts exceeding 20 per cent if a company is in financial difficulty or other exceptional circumstances. Shareholders have almost no say over the minimum placement price and no chance to participate in an offer of new shares.
The protection provided by the 20 per cent price-discount limit is in relation to current market prices before the placing is announced.
As the listing rules do not prescribe when a placing has to be completed, the 20 per cent discount limit could be circumvented by companies entering into long dated best efforts placement agreements with brokers. As a result, the placement could potentially be completed at more than a 20 per cent discount.
Controlling shareholders are not allowed to increase their shareholdings from a placing. Despite that, because it is the company that decides on the allocation of the placing shares, a placing could be used to benefit connected parties by selling the discounted shares to intermediaries who only appear to be unconnected.
As such, given the many issues surrounding general mandates, shareholders may well want to think twice before voting for them at the next annual general meeting.