On 4 November 2022, the Pre-Emption Group (PEG) issued an updated Statement of Principles, and also template shareholder resolutions, for UK listed companies to deal with their shareholder authorities to disapply pre-emption rights. This is the first update of the Statement of Principles since 2015.
The Statement of Principles provides guidance for companies with shares admitted to the Premium Listing segment of the Official List of the Financial Conduct Authority (FCA), although companies whose shares are admitted to the Standard Listing segment of the Official List, the High Growth segment and companies whose shares are admitted to trading on AIM are also encouraged to adopt these Principles.
The key revisions to the Statement of Principles are outlined below.
Disapplication threshold increased to 20 per cent
During the COVID-19 pandemic, the PEG issued a statement recommending flexibility for non-pre-emptive issuances, raising the threshold temporarily from 10 per cent to 20 per cent of a company's issued share capital. The updated Statement of Principles has given this recommendation permanent effect. A company may now seek annual shareholder authority to issue equity securities for cash on a non-pre-emptive basis representing:
- 10 per cent (increased from 5 per cent) of the company's issued ordinary share capital, which may be issued on an unrestricted basis; and
- an additional 10 per cent (increased from 5 per cent) of the company's issued ordinary share capital, which may be used in connection with an acquisition, or a specified capital investment, in either case announced contemporaneously with the issue or which has taken place in the preceding 12 month period (increased from six months) and which is disclosed in the announcement of the issue.
These authorisations should last no more than 15 months after the date on which the resolution is passed or, if earlier, the date of the company's next annual general meeting.
Companies seeking these general disapplication authorities should comply with the following conditions:
- Consultation: prior to announcing the issue, the company should consult with its major shareholders (to the extent reasonably practicable and permitted by law);
- Soft pre-emptive basis: the company should, as far as practicable, make the issue on a soft pre-emptive basis (i.e. an allocation to investors that seeks, within limits, to replicate the existing shareholder base);
- Retail investors: due consideration should be given to the involvement of retail investors, as well as existing shareholders, who are not allocated shares as part of the soft pre-emptive process;
- Explanation: an explanation should be provided by the company of the background to, and reasons for, the offer and the proposed use of proceeds, including details of any acquisition or specified capital investment. Sufficient information relating to the acquisition or the details of the investment requiring the capital expenditure (rather than operating expenditure) need to be disclosed, including the assets, the subject of the transaction and (where appropriate) the profits attributable to them, so shareholders are able to reach an assessment of the potential return;
- Management involvement: the company's management should be involved in the process of allocating the shares issued;
- Post-transaction report: after completion of the issue, a post-transaction report should be made (a template for which is set out in Part 2B of the Statement of Principles), which should be announced through a regulatory information service (and submitted to the PEG for inclusion in its Pre-Emption Database) within one week of completion of the issue. The company's next annual report published following a non-pre-emptive issue of equity securities pursuant to a general disapplication of pre-emption rights should also include the information included in the post-transaction report.
Commentary
Pre-emption rights, which have long been a cornerstone principle of UK capital markets and enshrined in statute (unlike some other common law jurisdictions), give shareholders protection from having their shareholdings diluted and also prevent the issue of new shares to investors with whom the existing shareholders may not wish to be in business. A company with a larger institutional shareholder base will generally be obliged to adopt the principles above and retain a lower pre-emption threshold to ensure that the institutions, whose interests the principles seek to protect, vote in favour of the relevant resolutions, and whose votes in any case normally follow advance guidance from proxy advisory firms, depending on whether or not the principles have been adhered to. However, for smaller companies without a large institutional shareholder base, such as some of the early stage companies whose shares are admitted to trading on AIM that regularly need to raise large amounts of new capital, then a pre-emption threshold above the principles would not be unusual, especially if this threshold is supported by shareholders (or there is general shareholder apathy).
'Follow-on' offers
The updated Statement of Principles provides companies with the ability to seek up to a further 4 per cent additional authority (2 + 2) to disapply pre-emption rights to make 'follow-on' offers to retail investors and existing shareholders who are not allocated shares as part of the placing. The further disapplication authority is for an additional 2 per cent of a company's issued share capital and a further 2 per cent disapplication authority for an acquisition or specified capital investment, and can be through a retail investor platform and/or to other existing shareholders.
The updated Statement of Principles sets out the criteria for 'follow-on' offers:
- Qualifying shareholders: the offer should be made to shareholders at a record date prior to announcement of the placing and should exclude any shareholder who is allocated shares in the placing.
- Individual monetary cap: qualifying shareholders should be entitled to subscribe for shares up to a monetary cap to be determined by the issuer of not more than £30,000 per ultimate beneficial owner.
- Size: the number of shares issued in any 'follow-on' offer should not exceed 20 per cent of the number of shares issued in the placing. The 'follow-on' offer may be made for 'up to' a specified number of shares, with fewer shares issued if sufficient applications are not received.
- Price: the issue price of shares in any 'follow-on' offer should be equal to, or less than, the offer price in the placing.
- Timing: the company should announce the 'follow-on' offer when, or as soon as reasonably practicable after it announces the placing.
- Offer period: the company should ensure that any 'follow-on' offer is open for a period sufficient to allow qualifying shareholders to become aware of the offer and to reach an investment decision.
Commentary
This further pre-emption authority for 'follow-on' offers allows additional headroom for existing shareholders to increase their holdings, and creates an opportunity for companies to introduce retail investors on substantially the same terms as the institutional investment, giving the company the ability to create more liquidity in its shares.
'Follow-on' offers bear some resemblance to the existing practice of AIM companies using an open offer process at the same time as announcing a placing (up to an €8 million limit to avoid the publication of a prospectus), whereby an offer is made to existing shareholders who do not have the ability to participate in the placing. They might also include a simultaneous offer to retail investors through one of the growing number of retail platforms.
"Capital hungry" companies
The updated Statement of Principles also includes new provisions for companies that need to raise capital more frequently, such as growth companies, tech, life sciences and mining and oil & gas exploration companies. "Capital hungry" companies may seek additional disapplication authorities, whether or not in connection with an acquisition or specified capital investment, if the reason is specifically highlighted at the time at which the request for the general disapplication is made. These additional authorities may also apply to companies who may not be deemed 'high growth' but whose strategies require further growth, or companies who are considering pre-revenue investments which will have a consequent impact on the company's liquidity. Companies that are seeking admission to the Official List of the FCA and wish to be considered "capital hungry" should disclose that fact in their Initial Public Offering (IPO) prospectus.
"Capital hungry" companies can request that such authorities be for a duration of longer than the usual 15 months from the date on which the resolution is passed, or the company's next annual general meeting (if earlier) if the reason for the longer period is specifically highlighted at the time the request for a general disapplication is made (or if applicable, disclosed in the prospectus).
Commentary
Companies admitted, or proposing to be admitted, to the Standard Listing segment of the Official List may want to make use of this guidance as they tend to be smaller "capital hungry" companies that might struggle to follow the Statement of Principles on an annual basis. However, given the recent increase to the market capitalisation threshold requirement for standard listings to £30 million, and the possible changes to consolidate the Premium and Standard segments of the Official List, then there may be fewer companies looking to take advantage of this guidance.
'Cashbox' transactions
'Cashbox' transactions are a method of issuing equity securities for non-cash consideration, thereby avoiding the need to disapply pre-emption rights which only apply to issues for cash. A company can therefore issue new shares without seeking any shareholder consent or convening a general meeting even if there is insufficient authority in place to disapply pre-emption rights, allowing that company to raise funds quickly.
The PEG's updated Statement of Principles reiterates that 'cashbox' transactions should be treated as an issue of equity securities for cash, which should therefore be subject to the company's approved disapplication authorities/limits. A company carrying out a 'cashbox' placing would therefore not avoid the pre-emption rules and will need to produce and distribute a circular (if applicable) and notice of meeting to seek the relevant shareholder consents.
A vendor placing is however not regarded as an issue for cash, but the updated Statement of Principles repeats the established expectation as to clawback (where it exceeds 10 per cent in size and/or 5 per cent in discount).
Commentary
As 'cashbox' transactions are often used, especially by smaller companies, in situations where there is insufficient pre-emption disapplication authority, the guidelines have not been particularly useful as they have sought to keep new issues within existing authorities, which potentially defeats the purpose of a 'cashbox' transaction.
Given the updated Statement of Principles now allow a company potentially to issue up to 20 per cent of their issued share capital on a non-pre-emptive basis, 'cashbox' structures may become less widely used, as a company admitted to listing on the Official List (but not AIM quoted companies) that wants to issue more than 20 per cent of its issued share capital (over a rolling period of 12 months) will in any case need to publish a prospectus under the Prospectus Rules. That may change again however if the FCA introduce a higher threshold for prospectuses, as recently proposed in the UK Secondary Capital Raising Review dated July 2022, which could again raise the possibility of using a 'cashbox' for equity issues above 20 per cent.
The updated Statement of Principles issued by the PEG gives companies more scope to raise capital on a non-pre-emptive basis. If you would like further information on the material discussed in this article, please get in touch.