ASX and Cochlear Chairman Rick Holliday-Smith (Image: AAP/Glenn Hunt)

ASX and Cochlear chairman Rick Holliday-Smith is an old-school businessman who doesn’t enjoy the media limelight but has a stellar reputation for making the right calls and delivering for shareholders.

Come Monday, when the Cochlear board meets by way of video conference, Rick and his fellow Cochlear directors have a tough but obvious decision to make with regards to the treatment of their 34,000 retail shareholders.

Cochlear sold $880 million worth of discounted stock to institutional investors in an institutional placement on March 25, including an extraordinary $304.5 million to a London-based fund manager called Veritas Asset Management which didn’t own a single share in the company in January, but was previously a substantial holder back in 2014.

The board must now decide whether to stick by their plan to limit retail shareholders to just $50 million in the follow-on Share Purchase Plan (SPP) where all shareholders can apply for $30,000 worth of new shares at the $140 placement price.

There is a long line of precedents for expanding SPP caps in the face of strong demand — the biggest example being ANZ Bank during the global financial crisis, which announced a $350 million cap but then accepted all $2.2 billion worth of applications from 178,000 shareholders.

If every Cochlear shareholder applies for the $30,000 maximum, the board will have received $1 billion worth of applications by last night’s 5pm cut-off. Retail shareholders don’t always act rationally so the majority won’t apply and the actual figure will be closer to $400 million, particularly given expectations of a scale back and the financial pain across the community at the moment.

Australian retail shareholders have been diluted out of billions of dollars by institutional placements over the years but the push back against Cochlear has been strong. The Australian Securities and Investments Commission is now insisting that it be told precisely who has been selectively awarded shares and that companies should pursue a pro-rata allocation policy rather than diluting the property rights of existing holders.

There has been plenty of media coverage too, including multiple columns by News Corp’s Terry McCrann, who has been a powerful champion for small investors against the investment bankers, institutional investors and directors at the big end of town.

Nine’s Sarah Danckert also made a good fist of explaining the rorts in Australia’s anything goes capital raising system, which has included the government and ASX temporarily agreeing that boards can sell off 25% of their shares to non-shareholders at any price without seeking shareholder approval. The old ASX limit was 15% and the UK limit is 5%.

Cochlear is Australia’s most iconic high tech manufacturing outfit, its bionic ear extending the hearing life of tens of thousands of customers the world over. Its shares were foolishly floated off by the old Pacific Dunlop at $2.90 a share in 1995 and soared to a record high of $234 in January this year, when it was valued at $13.53 billion.

In line with the broader market, Cochlear shares retreated rapidly to close at $168 on March 24 as the COVID-19 shutdown cancelled elective surgery around the world.

The next morning, it announced a totally unexpected $800 million selective placement at the fixed price of $140 a share, a 16.7% discount to the last traded price. Retail shareholders were promised a miserable $50 million SPP on the same terms.

JP Morgan, a Wall Street investment bank valued at $US273 billion, kindly agreed to underwrite the Cochlear offer for a $20 million fee, meaning that if fund managers refused to bite, it would write a cheque for $800 million to take a 9% stake in Australia’s most famous medical company.

After JP Morgan was swamped with demand, primarily by its London client Veritas, Cochlear announced that it had agreed to sell off even more of the shop, lifting the placement to $880 million.

And did this mean an extra $80 million in cheap shares would be offered to the 34,000 loyal Cochlear shareholders? Not on your nelly, the SPP is still being capped at just $50 million, a miserable 5.4% of the total $930 million raising, even though retail shareholders own more than 15% of the company.

Politicians have begun to weigh in with the AFR reporting today that Queensland LNP Senator Gerard Rennick, who chairs the Coalition’s backbench committee on financial regulation, has been emailing Holliday-Smith demanding fairer treatment of retail shareholders and respect for their property rights.

So how does that look? It’s a simple case of using board discretion to accept all SPP applications without any scale back.

The optics of giving six times as many shares to one foreign fund than its entire Australian shareholder base will be hard to sustain. And whatever the ASX chairman decides to do will set the tone with a whole range of other capped SPPs which are on offer at the moment from companies such as Metcash, QBE and Ramsay Healthcare.

With Cochlear shares closing at $179.34 last night, the $140 SPP is comfortably in the money. Holliday-Smith owns 10,000 shares and is guaranteed to receive the maximum $30,000 allocation based on the board’s announcement in the SPP offer document that any scale back would favour larger retail shareholders.

He now just has to decide whether to use his board discretion to potentially deliver greater gains to the rest of his mum and dad shareholders.

As things stand today, the London fund manager Veritas is enjoying an $85.5 million gain on its $304.5 million worth placement stock. It would be a brave board which decided to scale back its retail shareholders to anything less than $304.5 million. 

Stephen Mayne is a small Cochlear shareholder who has applied for the SPP.