TP05/040
The Panel announced today that it has declined to make a declaration of unacceptable circumstances in relation to SteriCorp Limited's (SteriCorp) 1 for 1, non-renounceable rights issue (Rights Issue), the terms of which were set out in a prospectus dated 11 March 2005. The Rights Issue was underwritten by a major shareholder of SteriCorp, Catilina Nominees Pty Ltd (Catilina). The decision was in response to an application on 19 April 2005 (TP05/37) by SteriCycle, Inc (Stericycle), a major convertible note holder in SteriCorp.
No finding of unacceptable circumstances
The Panel did not consider that the structure of the Rights Issue and underwriting arrangements made the Rights Issue inaccessible to SteriCorp's shareholders or that SteriCorp shareholders were likely to have been materially misled by the Rights Issue prospectus.
In coming to this decision, the Panel considered a number of issues including:
- SteriCorp's need for funds to repay a vendor finance loan (negotiated to be repaid early at a significant discount) and to fund previously announced capital projects;
- various fundraising alternatives had been investigated by SteriCorp with potential investors (including Stericycle);
- SteriCorp had taken legal and commercial advice with a view to structuring the Rights Issue and the underwriting arrangement with Catilina in accordance with Chapter 6; and
- the Panel considered that the Rights Issue prospectus and the supplementary prospectus had provided SteriCorp shareholders with the material information in relation to the potential increase in voting power of Catilina.
In considering whether any action was warranted in relation to any of the issues raised by Stericycle, the Panel also took into account the delay of the applicant in bringing the application to the Panel. Stericycle had not raised its concern with SteriCorp or ASIC until 14 April 2005, one day before the Rights Issue was due to close, despite the Rights Issue having been announced to ASX on 21 February 2005 and the prospectus having been issued on 11 March 2005.
Stericycle and SteriCorp are currently involved in disputes in relation to (among other things) the performance of medical waste treatment equipment supplied by Stericycle to SteriCorp (Warranty Dispute). SteriCorp instituted proceedings in the Supreme Court of Victoria against Stericycle in relation to the Warranty Dispute on 14 April 2005.
Rights issue withdrawal facility
SteriCorp lodged a supplementary prospectus updating information in relation to the Warranty Dispute litigation on 15 April 2005. In accordance with section 724 of the Corporations Act, SteriCorp offered shareholders who participated in the Rights Issue a right to withdraw their subscription and receive a refund of their application monies (Withdrawal Facility).
SteriCorp and Catilina amended the terms of the underwriting agreement so that Catilina, as underwriter, will either subscribe for, or accept a transfer of, the withdrawn subscriptions/shares at the price per share under the Rights Issue.
Stericycle alleged that any shares acquired by the underwriter under the Withdrawal Facility would not fall within the rights issue and underwriting exceptions in item 10 or 13 of section 611 of the Corporations Act. However, the Panel found that an increase in Catilina's voting power under the Withdrawal Facility would not constitute unacceptable circumstances.
Underwriting commission payable in shares
Under the terms of the underwriting agreement, the underwriting fee to Catilina was payable in shares (Commission Shares). SteriCorp advised that this was intended to retain cash for the purposes set out in the prospectus.
The Panel notes that the issue of Commission Shares does not appear to fall within an exception to section 606. Although the Panel was not minded to find that the mere payment of the commission in shares renders the rights issue unacceptable in this case, the Panel welcomed SteriCorp's offer to pay the underwriting fee in cash or, alternatively, structure the issue of the Commission Shares so that their issue does not cause Catilina to breach section 606 (if this is possible under the underwriting agreement).
Related party underwriter
One of the complaints put by Stericycle related to the fact that Catilina, as underwriter of the Rights Issue, is also the major shareholder in SteriCorp holding 13% of the voting power in SteriCorp and that Catilina's normal business did not include underwriting. The Panel noted that the fact that a major shareholder is the underwriter for a rights issue and that the normal business of the underwriter does not include underwriting are two of the criteria which the Panel normally considers when assessing whether or not a Rights Issue constitutes unacceptable circumstances. However, the Panel also noted that frequently, in relation to small companies, the major shareholder will be the only feasible source of financial support (i.e. underwriting of a Rights Issue) for such companies.
The Panel considered the circumstances surrounding the SteriCorp Rights Issue and Catilina's involvement as underwriter. The Panel considered that the involvement of Catilina did not contribute towards the Rights Issue constituting unacceptable circumstances.
Factors that weighed towards unacceptability
The Panel notes that there are certain aspects of the Rights Issue that weighed towards a finding of unacceptable circumstances.
First, the Rights Issue was non-renounceable. Renounceability tends to create a market for rights and, subject to the rights having a value and demand existing for those rights, may facilitate the rights being acquired and exercised by a wider range of persons rather than all of the shares not taken up by existing shareholders flowing through to the underwriter. The Panel accepted SteriCorp's submission that there was unlikely to be a significant market for the rights, but notes that the Panel considers that it is better practice for rights issues to be renounceable in the absence of material reasons for non-renounceability.
Second, the Rights Issue was offered at a price which was very close to the market price of SteriCorp shares. The Panel received submissions from both parties as to the price of SteriCorp shares over various periods before the Rights Issue was announced. The Panel considered that the Rights Issue was not priced at a discount to the 1 month volume weighted average price of SteriCorp shares before the announcement, unless a significant value was attributed to the attached option. The Panel took into account that a significant discount was not possible given the low price of SteriCorp shares. The Panel found that the price was not so high as to deter shareholders from taking up their rights.
Overall, the Panel considered that the factors weighing against unacceptability clearly outweighed the factors suggesting unacceptability. Accordingly, the Panel declined to make a declaration of unacceptable circumstances.
The sitting Panel in these proceedings was Jennifer Seabrook (Sitting President), Carol Buys (Deputy President) and John O'Sullivan.
Nigel Morris
Director, Takeovers Panel
Level 47, 80 Collins Street
Melbourne, VIC 3000
Ph: +61 3 9655 3501
