The problems with routinely carrying out directed cash issues instead of preferential rights issues have been highlighted several times in recent years. It has even resulted in sanctions from the Nasdaq Stockholm Disciplinary Committee.
In August 2021, the Swedish Securities Council issued a statement (AMN 2021:41) in which the Council (in addition to the Swedish Corporate Governance Board’s recommendation regarding good practice in directed issues from 2014) underlined that directed issues are a deviation from the general rule that cash issues should be carried out with preferential rights for the shareholders. According to the Recommendation, when deciding on a directed issue, an issuer must inform the shareholders and the stock market in a clear, detailed manner of the reasons for the deviation from the shareholders’ preferential rights, how the issue price has been determined and the steps taken to ensure that it conforms to market conditions.
In its statement, the Swedish Securities Council draws attention to a certain routine-like approach in the market when deciding on directed issues and underlines that deciding on a directed issue without necessary analysis of the conditions for carrying out a rights issue does not conform to good practice.
TWO COMPANIES EXAMINED BY THE SWEDISH SECURITIES COUNCIL
In October 2022, two specific cases were examined by the Swedish Securities Council (AMN 2022:36) because Nasdaq Stockholm had identified two companies whose information on the reasons for a deviation from the shareholders’ preferential rights and on how the issue price had been determined and the steps taken to ensure that it conformed to market terms were not considered to be compatible with the Recommendation and good stock market practice.
In its statement, the Council establishes that neither of the companies met the requirement to report in a clear way on the Board of Directors’ reasoning when it decided to deviate from the main rule, that new cash issues should be carried out with preferential rights for the shareholders. In order to meet the requirement, the report must provide shareholders with an opportunity to assess the Board of Directors’ considerations in the light of the circumstances at the specific company. An almost standardised statement that the deviation from the preferential right is a time- and cost-effective way of raising capital is not enough.
Nor did the Council consider that the companies had met the requirement to provide information on how the issue price had been determined and the steps taken to ensure that it conformed to market terms. The fact that the price “is based on an assessment by the Board of Directors as to whether it conforms to market terms” or that the Board of Directors considered the subscription price in question as “conforming to market terms for a transaction of this type” was here considered to be completely insufficient since there is no information concerning what the Board based its opinion on.
HOW TO AVOID BEING IN BREACH OF THE REGULATIONS
The Recommendation and the Swedish Securities Council’s statements mean that the Board of Directors of a listed company that is considering carrying out a directed share issue needs:
- to analyse the conditions for a preferential rights issue and whether there are objective reasons of sufficient weight for deviating from the preferential right through a directed issue; and
- to clearly justify why a directed issue is carried out and inform the shareholders of how the issue price has been determined and the basis on which it is considered to conform to market terms.
Trading on the stock market in breach of good practice is also a breach of Nasdaq Stockholm’s regulations and may thus be subject to sanctions by the stock exchange. In the Nasdaq Disciplinary Board’s decision (2022:07), a fine amounting to five annual fees was imposed on one of the companies that was found to have been in breach of good stock market practice as described above.