Underwriting arrangements
Types of arrangement
What types of underwriting arrangements are commonly used?
‘Best efforts’ and ‘bought deal’ underwriting arrangements are common in South Africa. In a best efforts deal, the underwriter undertakes to use its best efforts to procure that the securities are taken up. Two types of bought deals are common: in the case of a bought deal where the underwriter is obliged to take up any shares that are not taken up by investors and there is a book build, there are ‘soft’ as well as ‘hard’ underwriting arrangements. In a hard underwriting arrangement, the underwriter agrees, before the offer is made, to take up any shares not taken up by the investors. In a soft under-writing arrangement, the underwriter only undertakes to take up shares that investors applied for in the book build but did not pay for (ie, the underwriter takes on the ‘settlement risk’). Often a soft underwrite is achieved by only signing the relevant agreement or the placing terms after the book build. Of the two, a soft underwrite is more common.Typical provisions
What does the underwriting agreement typically provide with respect to indemnity, force majeure clauses, success fees and overallotment options?
Underwriting is usually regulated by agreement between the underwriter and the issuer or seller in terms of which the underwriter agrees to subscribe for or purchase, for a commission, any or a specified portion of the securities that are not subscribed for or purchased by the persons to whom they are offered. The commission is usually calculated as a percentage of the issue or purchase price of the securities being underwritten.
Where warranties and indemnities are given by the issuer in underwriting agreements for secondary offerings, care should be taken to ensure that there is no contravention of the provisions of the Companies Act prohibiting the granting of financial assistance by an issuer for the purchase of or subscription for its shares, although the Companies Act allows for this to be condoned in certain circumstances.
With regard to success fees, the parties are free to agree whatever they deem appropriate (subject to the restrictions on underwriting commissions). However, the amount of the commission must be disclosed in the prospectus.
All force majeure clauses are subject to agreement between the parties.
Overallotment options are regulated by the Listings Requirements or disclosure requirements in the case of listed securities.Other regulations
What additional regulations apply to underwriting arrangements?
In respect of an underwritten public offering requiring a prospectus, the underwriting agreement relating to the public offering must be filed with the Commission and accompanied by a sworn declaration by two directors of the underwriter that it is, and will be, in a position to carry out its obligations even if no securities are applied for.
Even if an offer of securities is made in respect of which no prospectus is required by the Companies Act, a copy of the underwriting agreement and sworn declarations must be lodged with the Commission no later than the date of the proposed offer of securities.
The Listings Requirements state that if a public offer is underwritten, the underwriter must satisfy the Johannesburg Stock Exchange (JSE) that it can meet its commitments in the manner required by the JSE. Additionally, any underwriting commission paid to a shareholder of the issuer should not be greater than the current market rate payable to independent underwriters as the Listings Requirements limit the amount of commission payable and such limitation generally equates to (but does not exceed) the current market rate payable to independent underwriters. The applicant is required to present evidence to the JSE proving the reasonableness of such underwriting commission. The agreement and affidavits or declarations along the lines of those referred to above are also required to be provided to the JSE.
