Editor’s note: This is general educational information about the South African rules governing rights offers, not investment advice, and it does not assess any particular capital raise. It is based on the official documents listed at the end.

A rights offer looks like the simplest way for a listed company to raise equity. It sells new shares to the people who already own the company, in proportion to what they hold, usually at a discount. The legal reality is less simple. Under the Companies Act 71 of 2008 an offer of securities to existing holders is an offer to the public unless it fits inside a defined exemption, and everything a company does in a rights offer is shaped by the work of staying inside that exemption.

What the Act is actually regulating

Section 95(1)(l) defines a rights offer as an offer, with or without a right to renounce in favour of other persons, made to holders of a company’s securities for subscription of securities of that company or of another company in the same group. The instrument that carries the entitlement has its own definition: a letter of allocation is any document conferring a right to subscribe for shares in terms of a rights offer.

The reason those definitions matter is the reach of the phrase offer to the public. Section 95(1)(h) includes in it an offer of securities to be issued by a company to any section of the public, and it says explicitly that the section can be selected as holders of that company’s securities. The Act then adds that a person is regarded as a member of the public despite being a shareholder of the company. Existing ownership buys no exemption on its own.

An offer to the public triggers the prospectus regime. A prospectus must be a registered prospectus, may not be registered unless it has been filed within 10 business days after its date, and may not be issued more than three months after registration, failing which it is treated as unregistered.

The exemption that makes a listed rights offer possible

Section 96 lists the circumstances in which an offer is not an offer to the public, and paragraph (d) is the one a listed company uses. It applies if the offer is a rights offer that satisfies the prescribed requirements, and if an exchange has granted or agreed to grant a listing for the securities being offered, and if the rights offer complies with the relevant requirements of that exchange at the time the offer is made. All three limbs have to hold.

The prescribed requirements are set by regulation 50 of the Companies Regulations, 2011, gazetted on 26 April 2011. It provides that a rights offer in respect of listed securities, and all documents issued in connection with it, must satisfy the requirements that would apply to a prospectus in terms of sections 100 and 102 and regulation 51, each read with the changes required by the context. The exemption from the prospectus regime is therefore not an exemption from prospectus-grade disclosure. It removes the filing and registration machinery and leaves the content standard behind, including regulation 51’s requirements that general matter be presented in narrative form, statistical matter in tabular form, and the information be organised in the order and under the headings of the regulations that govern prospectus content.

Unlisted rights offers work differently. A company issuing a letter of allocation for unlisted securities must file a copy of the letter for registration together with any document required by section 99(4), file any agreement referred to in those documents with a translation into an official language where needed, and pay the prescribed fee set out in Table CR 2B. The Commission then issues a certificate of registration, and each letter of allocation must state on its face that the copies have been filed and explain how they can be obtained.

Who has to approve it

Board authority is not always enough. Section 41(1) requires a special resolution of shareholders where shares, convertible securities, options or other rights exercisable for securities are issued to a director, future director, prescribed officer or future prescribed officer, to a person related or inter-related to the company or to a director or prescribed officer, or to a nominee of any of them. Section 41(2)© then carves out issues made in proportion to existing holdings and on the same terms and conditions offered to all shareholders, or all shareholders of the class being issued, which is the structural reason a rights offer is drafted to be strictly pro rata. Underwriting agreements are separately exempted by section 41(2)(a).

Size brings its own vote. Section 41(3) requires shareholder approval by special resolution where the voting power of the class of shares issued or issuable in a transaction, or a series of integrated transactions, will equal or exceed 30% of the voting power of all shares of that class held immediately before it. Voting power is measured as the greater of the shares to be issued and the shares that would exist after conversion of convertible securities and exercise of rights, and transactions are integrated where one is contingent on another, or where they fall within a 12-month period between the same or related parties and concern one company or asset. A director present when the board approved an issue who failed to vote against it despite knowing it was inconsistent with section 41 is exposed to liability under section 77(3)(e)(ii).

Excluding shareholders abroad also requires permission rather than a board decision. Section 99(7) lets a company exclude a category of holders not resident in the Republic from a rights offer despite anything in its Memorandum of Incorporation, but only where the Commission has approved the exclusion in advance, on application in the prescribed form, on the grounds that the number of those holders is insignificant relative to the number of resident holders and to the administrative cost and inconvenience of extending the offer to them.

Analysis: the underwriter is where the pressure sits

Read together, these provisions explain why a rights offer is structured the way it is rather than what it will raise. Pro rata terms are not a courtesy; they are the condition on which the section 41(2)© exemption from a related-party vote depends. Strict proportionality also keeps relative voting power unchanged for anyone who follows their rights, which is the premise the whole exemption rests on.

The premise breaks where holders do not follow. Someone has to take up the shortfall, and that is the underwriter. The Takeover Regulations treat the consequence directly: regulation 86(4) exempts a transaction from the mandatory offer obligation where a company has published a transaction requiring an issue of securities as consideration, a cash subscription or a rights offer, and independent holders of more than 50% of the general voting rights have waived the benefit of the mandatory offer. Regulation 86(5) voids that waiver if the acquirer, subscriber or underwriter, or any of their concert parties, bought securities between the transaction announcement and the waiver date, and regulation 86(6) requires a written declaration to the Panel that they did not.

The exception inside regulation 86(7) is the sharpest signal. A waiver requires a fair and reasonable opinion in the circular in all instances other than a rights offer at a discount to the prevailing market price at the date of announcement. The effect is that a discounted pro rata offer needs no fairness opinion, because every holder can take up rights at the same price the underwriter would pay.

What the statutory framework establishes is a disclosure standard, an approval map and a control safeguard. What it does not establish is whether the price is right or whether the money is needed. Those judgements sit with holders, and the documents that inform them are the ones regulation 50 pulls in: the sections 100 and 102 content, the terms of the underwriting agreement, whether a section 41(3) resolution was required, and whether the Commission approved excluding any non-resident holders.