What ASX Directors Need to Know Before Approving a Capital Raise

Written for chairs, directors and CFOs of ASX-listed entities. If you want to understand your board's exposure on this issue, contact JR3 Legal.

Four ASX-listed companies breached their placement capacity in the last eighteen months. One was banned from issuing securities without shareholder approval until it completed an external legal review. Another exceeded capacity across two separate placements because debt-to-equity shares were misclassified in the calculation.

These are not edge cases. They are the predictable result of a rule that looks simple on its face but has real complexity underneath - and a compliance function that is often treated as administrative until something goes wrong.

Listing Rule 7.1 limits a listed entity to issuing no more than 15% of its issued capital over a rolling twelve-month period without shareholder approval. The formula is well-known. The errors that produce breaches are also well-known, and they keep appearing for the same structural reasons.

These aren't edge cases. They're the predictable result of a rule that looks simple on its face but has real complexity underneath.

What Listing Rule 7.1 requires

Listing Rule 7.1 provides that a listed entity may not issue equity securities (or agree to issue equity securities) exceeding 15% of its issued capital over a rolling twelve-month period without shareholder approval.

Entities that have passed a Listing Rule 7.1A resolution at their most recent AGM get an additional 10% capacity, but that additional capacity is subject to its own formula and conditions under LR 7.1A.2.

Simple enough on the surface. The problems sit in the detail.

The four calculation errors ASX keeps seeing

Timing of the capacity test. Capacity must be assessed at the date the agreement is entered into, not the date the securities are actually issued. This catches companies that sign a placement agreement when they have capacity, but by the time settlement occurs, the denominator has shifted because of other share movements. The obligation crystallises at agreement, not issue.

Deferred and contingent consideration. If a company agrees to issue shares as part of a transaction where some consideration is deferred or contingent, those shares count toward Variable C in the capacity formula even where the consideration could ultimately be satisfied in cash. I've seen companies assume that a "cash or scrip at the company's election" clause means scrip doesn't count until the election is made. That's wrong. If scrip is a possibility at the time of agreement, it counts.

The LR 7.1A interaction. A Listing Rule 7.1A mandate does not retrospectively ratify prior issues that used base LR 7.1 capacity. Those must be factored separately into the 7.1A.2 formula. Companies that treat the two pools as interchangeable will find themselves in breach.

Variable A adjustments. The denominator for the capacity calculation (Variable A) adjusts for bonus issues, pro rata issues, and other movements during the rolling twelve months. Getting this wrong is the most common calculation error I see. It typically happens when companies issue shares under an employee incentive plan and fail to adjust Variable A accordingly.

What ASX now requires after Compliance Update 05/25

ASX has tightened its enforcement posture on placement capacity. Compliance Update 05/25 restated three specific requirements:

1. Entities must submit standard form worksheets with every new issue, showing the full capacity calculation.

2. Notices of meeting for ratification resolutions must include three-scenario dilution tables showing the impact on existing shareholders.

3. Allocation policy disclosure must be meaningful, not boilerplate.

Here's the critical point. If the issue exceeded capacity at the time it was made or agreed to be made, Listing Rule 7.4 ratification is not available. The securities sit in breach. There's no fix. Ratification under LR 7.4 only works prospectively: it refreshes capacity for future issues but does not cure a past breach.

Worked example: how a capacity breach happens

Take a company with 100 million shares on issue at the start of its rolling twelve-month period. Base LR 7.1 capacity is 15 million shares.

The company does a placement of 10 million shares in Month 3. Capacity used: 10 million. Remaining: 5 million.

In Month 6, the company agrees to acquire a project, with consideration of 8 million shares. The shares won't be issued for another three months pending regulatory approval. But the capacity is consumed at the date of the agreement, not the date of issue. The company is now 3 million shares over its 15% capacity.

If the company had a LR 7.1A mandate, the additional 10% would have provided a buffer. But even then, the calculation under LR 7.1A.2 uses a different formula (Variable D), and any shares issued under the base 15% cannot be double-counted.

Every reported breach I've looked at traces back to the same setup: manual tracking on a spreadsheet, maintained by one person, without cross-checking.

A central register of all share issues and agreements to issue, dual sign-off on capacity calculations before any placement is agreed, and a pre-transaction checklist that captures Variable A adjustments would have caught all of them.

This is a company secretarial function. If your company secretary isn't running a live capacity model, you're relying on someone remembering to check a spreadsheet before a time-pressured deal closes. That's not a system. That's a hope.

What to do before your next placement

If you're not certain your capacity calculations are right, now is the time to check. Not after the placement goes out. A 30-minute review of your share issue history against the LR 7.1 formula will tell you whether you have a problem.

If you want someone to pressure-test your placement capacity framework, that's a conversation worth having before the next capital raising.

Julian Rockett is the principal of JR3 Legal, providing external general counsel and company secretary services to ASX-listed companies. For more information, visit jr3legal.com or connect on LinkedIn. Contact Julian directly at julian@jr3legal.com.