What is a Placing Agreement?
At a high level, a placing agreement is commonly understood as an agreement whereby the issuer of shares of a public company engages a financial institution or broker dealer, as an agent, to place unissued and unsold shares in a secondary offering. More specifically, a placing agreement is a sales agency agreement between a broker dealer or other financial institution and a corporate issuer of securities. The broker dealer, upon engagement and in a given offering cycle, agrees to act as an agent, offering and selling the issuer’s securities for the issuer for a prescribed length of time (referred to as the syndicate period). It is important to note that, unlike in sales by prospectus, the agency in a placing transaction is private and therefore not governed by the transparency and procedural requirements of prospectus distributions. Instead, a placing is a private placement.
Accordingly, a placing is often referred to as a "picking up a greenshoe" in the market, given that there are no prospectus requirements or statutory qualifying conditions to closing a placing. A placing can regularly be implemented without the need of a final agreement – documentation is accomplished by a confirming agreement sent by the issuer’s counsel after the securities have been placed . As and if the market is suitable, a placing agreement can further be used to set forth certain provisions, including reps and warranties, conditions, and indemnifications, by which the parties will govern the placing transaction.
As the parties work together to develop the offering structure, and a pre-agreement understanding develops between the issuer and the dealer manager and/or bookrunner, the draft of the placing will set forth the issuer’s intentions for the offering, including such ancillary terms as the intended offering size, use of proceeds, business purpose of the offering, underwriter expenses and prospectus exemptions. Once the parties negotiate the material contract terms, including pricing, the dealer manager will bind the syndicate to acquire firm commitments to purchase the securities in the intended amount specified in the placing agreement. The syndicate deal manager will then allocate, on a best efforts basis, the shares equitably among the syndicate members, and will set a date for the offer. At the close of the offer period, if the securities have all been successfully placed, settlement by the syndicate will occur.
Finally, a placing agreement is essentially a synergetic agreement to bring a company’s existing shareholders and new investors, such as institutions, on board while maintaining good relations with both parties through an intermediary or third party, the broker-dealer or investment dealer.
Types of Placing Agreements
There are different types of placing agreements to suit different circumstances. A placing agreement is a legally binding contract between the issuer and the placing agents. This article covers some of the key features of the most commonly used types of funding arrangements to place shares.
A firm commitment underwriting agreement normally involves the placing agents committing to underwrite the entire issue of securities and paying a set price for the securities even if they are not sold to investors.
A best efforts underwriting agreement is an arrangement whereby the placing agent seeks to place securities with investors but does not commit to underwrite. With a best efforts arrangement, the placing agent is obliged to use its best efforts to place the securities.
The difference between the firm commitment and the best efforts underwriting agreement is that in a firm commitment underwriting agreement the placing agent has full responsibility for the placing so that investors can look solely to the placing agent for performance. In a best efforts underwriting agreement the placing agent does not have the same level of responsibility and the issuer may have to look for investors in the securities.
A "bought deal" is a variation on the firm commitment underwriting agreement. It involves the placing agent agreeing to purchase a number of securities from the issuer and sell them to its own subscribers. The issuer knows at an early stage how much money it will be receiving from the deal. One popular type of bought deal arrangement is when an issuer sets the price and the envelope (the number of securities) and the placing agent makes the market.
In a sub-underwriting arrangement the issuer appoints a lead manager to act on its behalf. The lead manager then appoints sub-underwriters to buy the securities. No money is paid by the sub-underwriters until a certain date and they have no liability until the securities are placed. From an issuer’s perspective this is a useful arrangement as the issuer has the security of knowing how many securities it will be placing.
A warrant covering arrangement is an arrangement that is made between an issuer and a sub-underwriter. Once the placing is closed the placing becomes unconditional and the sub-underwriter receives the securities. However, under a warrant covering arrangement, no payment is made by the placing agent until the shares have been placed.
An auction is an arrangement whereby investors bid for the shares being placed. An auction is a more marketable form of placing as there is usually better demand for shares in an auction and this may result in a higher price for the shares.
There is also an auction underwriting arrangement under which the placing agent receives bids and allocates shares to prospective investors and underwrites any remaining shares.
Placing Agreement Process
The process of a placing agreement will generally involve the following steps:
- Negotiation – The issuer will instruct its chosen placing agent to fundraise, usually in consultation with its nomad (if AIM-quoted) or financial adviser (if listed). The issuer will provide the placing agent with some preliminary information about itself and its business activities, which will usually be in the form of a short form management presentation, an outline of the placing timetable and information of its advisers. The placing agent will review the information provided and begin to draft the placing document. This will involve liaison between the placing agent, the issuer and its nominated advisers.
- Documentation – The placing agent usually arranges for the placing document to be approved by the issuer’s board before it is distributed and before applications for shares are received from investors. The placing document will be a part of the placing agreement document. The placing agreement will be entered into between the placing agent on the one part and the issuer on the other part. It will contain the following key provisions:
- Acceptance – Once the placing document has been approved, the placing agent will circulate it to prospective investors. Amongst other things, the placing document will contain details of how investors should apply for shares. The document will also contain details of the placing price. The placing price will be determined after discussions between the placing agent and the issuer, with reference to pricing of other recent qualifying transactions for issuers in the issuer’s sector and the assessment of the issuer’s required proceeds.
- Issuing allotment letters – Once completed booking forms have been received from prospective investors, the placement agent will draft and issue allotment letters to those investors setting out details such as the number of placing shares to be issued to each investor, the placing price and settlement instructions.
- Closing – Often the issuer will give the placing agent a period of time to complete marketing and syndicate with other brokers if necessary to complete the placing (a period in which the placing agent has an exclusive right to complete the placing). If the issuer decides to close the placing early, the placing agent may request an extension of this ‘exclusivity period’ (often called a ‘bookbuild extension’). If granted, this extension gives the placing agent an exclusive right to raise funds from investors for this additional period. Once the placing is complete and in the absence of any extensions of the exclusivity period requested by the placing agent, the issuer will usually formally close the book and (subject to market conditions) will issue the placing shares shortly afterwards.
- The Record Date – On closing, the placing agent will usually close its books on record in order to freeze the register of members on a certain date. This will usually be the same date as the closing date but can be later. Details will be announced to the market following closure of the placing to indicate either when the shares will be issued or, if later, when the admission of the placing shares to the market will take place. The record date is considered the date upon which shareholders of the issuer making the placing must be registered on the issuer’s register of members in order to benefit from any rights attaching to the placing shares.
Legal and Regulatory Requirements
The legal and regulatory considerations associated with placing agreements are significant. As a practical matter, most issuers who enter into placing agreements publicly disclose their related party and/or material transactions or seek security holder approval of the transaction in respect of the placement. As a result, issuers may be required to file a disclosure document that complies with the disclosure requirements of the relevant stock exchange. For example, an issuer listed on the TSX Venture Exchange is subject to the applicable requirements in National Instrument 41-101 General Prospectus Requirements and Policy Statement 5.9 Distributions through an Investment Dealer.
Issuers and intermediaries engaged in a distribution of securities through a placing agreement should also remain attentive to the applicable requirements of the securities commissions in each of their jurisdictions. Often, these securities commissions will consider whether the disclosure document to security holders was "full, true, and plain" as to the material facts and risks regarding the securities being offered in the proposed distribution. The applicable securities laws and regulations may require a separate filing or submission in connection with the use of a placement agreement. If an issuer has any doubts, it is always prudent to obtain the advice of experienced Canadian securities counsel.
Advantages of Placing Agreements
The key advantages of a placing agreement are as follows:
Timely and cost efficient capital raising: Once a placing agreement is signed, it provides issuers with the certainty that the placing agent will act with incremental effort and with the utmost degree of professionalism towards the acceleration and efficiency of the capital raising process. In many cases this can provide issuers with the required certainty of timeline and cost in circumstances where a public offering is not commercially viable for the issuer and/or where the issuer’s cash resources are insufficient to meet additional costs associated with an offering such as roadshows, speaking tours, and book building. It is usual for a placing agreement to provide that the placing agent will use its best endeavours to obtain reasonable demand from its clients in respect of the issue and that the final amount will be agreed between the issuer and the placing agent.
Market positioning: The entry into a placing agreement with a placing agent often correlates with a specific issuer strategy for either facilitating a broader offering and/or creating investment ‘buzz’ around an issuer’s securities. A high profile placing agent can provide valuable cachet and glamour that may draw investor attention that may not have otherwise been the case. It is common for issuers to take a view on their likely ability to do an offering in the market and based on such view , may work with sponsors, brokers, book runners, dealers, lead managers or underwriters to effect a listing and/or an introduction of a class of securities (referred to here generically as a "placing agent"). Further, issuers may want to incentivise placing agents to actively promote their securities to their clients rather than wait for clients to ‘go to them’ i.e. ‘hard sell’ their securities, even if that means paying higher fees/remuneration to the placing agent than might otherwise be the case.
Cost saving: The placing agent’s commission in respect of a placing is often significantly less than the underwriting commission that might be charged by an underwriter to effect an offering or have an over-allotment option in relation to a relevant offering.
Risks of Placing Agreements
Placing agreements can also pose certain risks and challenges that issuers should be aware of before agreeing to the terms of a deal.
One such risk is that market volatility could negatively affect the ability of the issuer to actually execute the deal. Since placing agreements are typically subject to a range of conditions, including a favorable resolution of due diligence, market volatility could prevent putting the deal in place or the issuer from satisfying the conditions. A real life example of this occurred in 2008 during financial turmoil when one issuer had a placing agreement in hand, only to see the deals fall apart due to a downgrading of the company’s debt by rating agencies. Similarly, in 2011, another issuer had entered into a placing agreement subject to conditions and was forced to renegotiate the transaction on less favorable terms. While we cannot say for certain, these transactions were likely negatively impacted by the company’s credit rating. Another example is related to investor demand for the placement. If demand is so strong that the issuing company and the placement agent only plan to offer a small portion of the securities to investors, but investors bid for a larger amount, the issuer may be presided with difficult choices as to whether to accept subscriptions in excess of the offering or reject investors who bid aggressively. If subscriptions are accepted, the issuer may frustrate those who made lower bids but ultimately assigned greater value to the available shares that the issuer was willing to sell to them. Alternatively, if subscriptions are rejected, the issuer may break its agreement with those investors. Some issuers may find the terms of a placement agreement unfavorable. For example, although a placement agent is not a fiduciary to the client under a placement agent agreement, an issuer may find it helpful for the institutional investors to be of the same or higher tier than the issuer’s current investors. Otherwise, the issuer may have to engage in extensive selling efforts in the secondary market to find new buyers at a price level they find acceptable. Placements may also become the subject of litigation. An example is a 2015 case where a court found that a senior executive engaged in insider trading and ordered them to disgorge their profits. This would likely affect the issuer’s reputation and ability to successfully issue additional securities in the future with a consequence of higher financing costs or failure to obtain funding at all. To mitigate these risks, an issuer should take steps to ensure that it has a sufficient pipeline of diverse institutional investors on a cost-effective basis, and take into account on the wider effects of its placement on its operating model. This means prior to any deal, an issuer should make certain that it has a broad array of good quality relationships to support the payment, integrity, record keeping and pricing needs related to the operation and settlement of a potential placement.
Examples of Placing Agreements
Placing agreements are used in a variety of circumstances. They can take the form of a contract or a treaty and be entered into by, for example, an insurer and a broker, an insurer and an insurance company in another country, or even by more than one insurer.
For example, the placing agreement between the UK motor insurers’ association and EU bodies setting out guidelines for motorists in the UK and throughout Europe is an example of a placing contract of an unusual type.
Another example is the RTD (retrocession transfer document) 45 proposed by the Lloyd’s Market Association. This is a standard form used to record the transfer of a retrocession, which was previously placed under a different contract. LTMs (Lloyd’s managing agents) are being encouraged to use this document as a means of transferring retrocessions, i.e. reinsurance of reinsurance, so as to make evidence of the transfer of retrocessions more accessible. Use of the RTD 45 should also make it easier to identify the risk and recoveries that are covered by such a transfer of retrocession.
A third is the contract between a UK insurer and a non-EU insurer, in which the EU insurer agrees to accept business from other EU insurers and reinsurers which is subject to incoming reinsurance agreements. The incoming reinsurance is expressly understood by the parties to contemplate all reinsurance ceded by the EU insurers in accordance with direct treaty or facultative reinsurance.
Even more unusual, from a reinsurance perspective, is the rare event (hopefully!) when a placing contract is entered into between competitors. This is an agreement that was entered into in the past between five Lloyd’s underwriters setting up a market in Singapore. They agreed that they would approach clients of their choice – their former clients – in relation to a market they had identified as being available. In so doing they were able themselves to offer a potentially conflicting service to their corporate policyholder clients. They justified this action by saying that it was cheaper to insure their clients’ risks at Lloyd’s in London (and so easier to compete by offering price) and that the transaction costs of doing business in Singapore were lower, so that they could afford to compete by offering improved service. Because of the number of reinsurers affected by the arrangement, known in London as the "Stockholm Syndrome", it caused some concern. The agreement was not totally unproblematic.
Conclusion – Useful Ways to Implement a Placing Agreement
In conclusion, placing agreements can be vital tools for a company looking to balance a number of competing objectives during a financing transaction. They can accomplish the otherwise mutually exclusive aims of securing terms which are robust enough to prevent scope creep and late-stage surprises, while providing flexibility to amend the inserting agreements if required (both from a commercial perspective, as well as a technical angle). In our experience , placing commitments have a number of advantages over a standard locking-up or comfort letters. Chief among them are:
None of this is to say that everyone should be using placing agreements all the time – they have their limits and are not a substitute for the normal and expected diligence steps taken by professional advisers (which are sometimes left out in the rush to get a deal done). Advisers should be attentive to the balance of when and how to use placing agreements – all companies and deals are different, and a placing agreement may suit a particular company on a particular transaction but not on others.
