Rights Issues: How to Structure and Communicate Effectively

A rights issue, also called an entitlement offer, is one of the most equitable ways to raise capital. By offering all existing shareholders the right to participate in proportion to their holdings, the company avoids unfair dilution and gives its loyal shareholders a chance to maintain their position. But a rights issue is also one of the most regulated forms of capital raising. The structuring and communication choices made by the board can make or break the outcome.

What is a rights issue?

In a rights issue, the company offers new shares to existing shareholders on a pro-rata basis at a specified ratio. For example, a "1 for 4" rights issue allows each shareholder to subscribe for one new share for every four existing shares held, at a specified price (usually below the market price).

Rights issues come in two forms:

Renounceable. Shareholders who do not wish to take up their entitlement can sell or transfer their rights to others. The rights typically trade on the ASX for a defined period. This protects non-participating shareholders from dilution by allowing them to monetise their entitlements.

Non-renounceable. Shareholders who do not take up their entitlement simply lose it. The rights cannot be sold or transferred. This is simpler and faster to execute but offers less protection for non-participating shareholders.

Accelerated structures

In recent years, accelerated entitlement offers (often called AREOs, ANREOs or PAITREOs) have become common for ASX-listed companies. These compress the timetable by inviting institutional shareholders to commit during a short trading halt, then opening the retail offer afterwards.

The advantages are clear: the company gets certainty of funding quickly, and price risk is reduced. The complexity is in the regulation and the documentation, particularly around the order of institutional and retail components, and the treatment of shortfall.

Disclosure requirements

Rights issues require a disclosure document under Chapter 6D of the *Corporations Act* unless an exemption applies. The most commonly used exemptions are:

• Section 708AA, which allows a "low-doc" rights issue without a full prospectus, provided the issuer has been listed for at least three months and certain conditions are met (including a cleansing notice).
• Section 708A(11), which permits a "cleansing" approach for placements but is generally less applicable to true rights issues.

The cleansing notice requires the company to confirm that it has complied with continuous disclosure obligations and to disclose any information that has been withheld under the carve-outs in Listing Rule 3.1A.

Pricing and timing

Pricing a rights issue requires balancing two competing pressures:

• The discount must be deep enough to attract participation, particularly from price-sensitive retail shareholders.
• The discount should not be so deep that it dilutes shareholder value unnecessarily or signals weakness.

Typical discounts range from 10% to 25% of the prevailing market price. The right level depends on the company's circumstances, the size of the raise relative to market cap, and broader market conditions.

Timing is also critical. Rights issues conducted into negative news flow or weak markets can underperform badly. Where possible, the announcement should be coordinated with positive operational news or strong financial results.

Communicating with shareholders

This is where many rights issues stumble. Shareholders need to understand:

• Why the company is raising capital
• How the funds will be used
• Why a rights issue is the right structure
• What happens if they do or do not participate

The offer document should be clear, plain-English and free of unnecessary legalese. The company should also ensure communication is consistent across all channels: announcement, presentation, offer document and shareholder letters.

Common pitfalls

• Choosing a non-renounceable structure where shareholder fairness considerations would have warranted a renounceable approach.
• Setting the offer price too high, leading to undersubscription.
• Inadequate disclosure of how the funds will be used.
• Selective communication with institutional shareholders ahead of retail shareholders.
• Failing to manage the shortfall in a way that aligns with shareholder fairness principles.

How Luma Legal can help

We advise listed companies on the design and execution of rights issues, from structuring decisions through to disclosure documents, ASX engagement and shareholder communication. We work alongside your corporate adviser and broker to deliver a clean, compliant outcome.