In a recent Regulator’s Column, the SGX RegCo reminded issuers that, in the allotment of excess rights shares in connection with a rights issue, preference for the rounding of odd lots and allotment of excess share rights must be given to applicants who are not directors and substantial shareholders of the issuer. Issuers must consult with the SGX RegCo before departing from this requirement. This Update discusses the Regulator’s Column.
Executive summary
Rule 877(10) of the Mainboard Rules and Rule 814(3) of the Catalist Rules (Rule) require listed issuers (Issuers) to confirm that, in the allotment of excess rights shares in connection with a rights issue, preference will be given to the rounding of odd lots, and that directors and substantial shareholders who have control or influence over the Issuer in connection with the day-to-day affairs of the Issuer or the terms of the rights issue, or have representation (direct or through a nominee) on the board of the Issuer (Restricted Individuals) will rank last in priority for the rounding of odd lots and allotment of excess rights shares. The SGX RegCo expects that the Restricted Individuals would only be entitled to receive excess rights after the excess rights applications by the other shareholders who are not Restricted Individuals (Minority Shareholders) have been fully satisfied (and not partially satisfied).
The SGX RegCo expects Issuers to abide by the Rule for rights issues in form and in substance. However, where the Rights Issue is undersubscribed, the SGX RegCo recognises that a strict adherence to the Rule may not fully achieve substantive fairness in the allocation of the excess rights shares. In exceptional situations where Issuers have legitimate concerns, Issuers are expected to consult SGX RegCo if they do not expect to fully comply with the Rule. The onus is on Issuers to justify to SGX RegCo why it should not insist on strict compliance with the Rule.
Source: Regulator’s Column (Column), “What SGX RegCo expects of listed issuers when allotting excess rights shares” published on 15 December 2023.
Rights Issues - Confirmation as to allotment of excess rights shares
Chapter 8 of the Mainboard Listing Rules sets out the rules with respect to Rights Issues. Rule 877 identifies the documents to be submitted for the Rights Issue additional listing application, and these include a confirmation that preference will be given to the rounding of odd lots, and that Restricted Individuals will rank last in priority for the rounding of odd lots and allotment of excess rights shares. As noted above, these Restricted Individuals are:
- directors of the Issuer;
- substantial shareholders who have control or influence over the Issuer in connection with the day-to-day affairs of the Issuer or the terms of the rights issue; and
- substantial shareholders who have representation (direct or through a nominee) on the board of the Issuer.
Where an application for excess share rights is vastly disproportionate to the number of shares held
The SGX RegCo addressed the situation where, in an undersubscription scenario, one or more applications for excess rights shares is vastly disproportionate in relation to the number of shares that the applicant Minority Shareholder holds. It noted that this might occur where certain individuals may have purchased a small quantity of the Issuer’s shares in order to participate in the rights issue for the purpose of acquiring a large quantity of excess rights shares at discounted prices. In this situation, there might exist concerns that a strict adherence to the Rule to give preference to Minority Shareholders by satisfying their applications fully before allocating to the Restricted Individuals may not fully achieve substantive fairness in the allocation of the excess rights shares.
The SGX RegCo stressed in the Column that notwithstanding these concerns, its expectation is that Issuers must consult with it first before the allocation of excess right shares if they do not intend to fully abide by their obligation to give preference to Minority Shareholder applications. The onus is on Issuers to justify to SGX RegCo why it should not insist on strict compliance with the obligation. Issuers should monitor the progress of their rights issue and approach the SGX RegCo as soon as concerns arise.
SGX RegCo raised an issue with an issuer
The publication of the Column follows from a recent resolution of a matter raised by the SGX RegCo with an issuer where, in a renounceable non-underwritten rights issue exercise conducted in December 2021, preference was afforded to Minority Shareholders over directors and controlling shareholders in allocating the excess rights shares, but not all the applications by the Minority Shareholders of the issuer were fully satisfied before allocating excess rights shares to its directors and controlling shareholders.
In their joint press statement issued by the SGX RegCo and the issuer on 15 December 2023, the SGX RegCo disagreed with the issuer’s excess allocation method. The SGX RegCo’s position is that to prevent conflicts of interests, controlling shareholders and directors are entitled to receive excess rights shares only after the excess rights applications by Minority Shareholders have been fully satisfied.
Key takeaway
The views of the SGX RegCo set out in the Column provide assurance that the obligation may not be applied strictly and invariably. However, the issuer’s board must engage with the SGX RegCo beforehand and be prepared to justify their proposed departure from the strict obligation. SGX RegCo will take any non-compliance seriously and the consequences of not consulting with the SGX RegCo beforehand can be potentially quite severe.
