The Pre-emption Group has published its revised Statement of Principles for the disapplication of Pre-Emption Rights. To read the new guidance, click here.
Who are the Pre-Emption Group?
The Pre-Emption Group represents listed companies, investors and intermediaries and re-formed in 2015 to consider whether revisions to its guidance published in 2008 may be appropriate, taking into account market changes and best practice developments. Although the Pre-Emption Group will monitor the development of practice, it will not express a view on, or otherwise intervene, in specific cases.
What is the Statement of Principles?
Pre-emption rights are enshrined in UK company law to offer protection to shareholders against the inappropriate dilution of their investments. The market recognises, however, that there are certain circumstances where flexibility is desirable for companies to issue shares on a non-pre-emptive basis. The Statement of Principles clarifies which circumstances might be acceptable and sets out appropriate limits to ensure that shareholders' interests remain protected.
The Statement of Principles largely reconfigures the principles which were published by the Pre-Emption Group in 2008 (see here for the 2008 guidance) but there are a few key amendments to note:
Which issuers should apply the guidance?
The principles apply to companies (wherever incorporated) with shares admitted to the Premium Listing segment of the Official List. Standard listed issuers, High Growth Segment issuers and AIM issuers are also encouraged to adopt the principles.
Cashbox transactions – in scope
The principles apply to all issues of equity securities that are undertaken to raise cash for the issuer or its subsidiaries, irrespective of the legal form of the transaction – in particular, 'cashbox' transactions, which are structured so that an issue of shares for non-cash consideration falls outside the scope of pre-emption, will now be subject to the principles. Vendor placings will remain outside the scope however - but shareholders will expect a right of clawback that represents greater than 10% of ordinary share capital or that is undertaken at a discount of greater than 5%.
Flexibility to issue non-pre-emptively for acquisitions and capital investments
An additional 5% of issued ordinary share capital (which is in addition to the routine 5% of ordinary share capital for wider purposes in any one year) is permitted to be issued non-pre-emptively if the company confirms in its AGM circular that it intends to use it only in connection with an acquisition or a specified capital investment* which is announced at the same time as the issue, or which has taken place in the preceding six month period and is disclosed in the announcement of the issue. However, this will not apply to a non-pre-emptive offering which is raising capital for the purposes of a 'war-chest' for potential future acquisitions.
Issuing at any discount is noted as a concern - however, if a discount is used, companies should seek to restrict it to a maximum of 5% which must now include expenses (such as underwriting commissions, sub-underwriting fees, brokerage fees and professional advisers' fees). Companies must disclose any discount in the pricing announcement of the relevant issue. Guidance on the calculation of discounts is set out in the Appendix to the guidelines.
Discount for 'backstop' underwriting commitments
The Pre-Emption Group recognises that it may be difficult or indeed, 'uneconomic' for a company to procure a backstop underwriting commitment of less than 5% (which may be necessary when carrying out a bookbuilt equity issue in the context of an acquisition financing). Provided that it is not expected at execution of the underwriting agreement that the underwriter will acquire securities pursuant to its commitment, an underwriting at a discount of greater than 5% should not be regarded as problematic.
When do the new principles apply?
The Pre-Emption Group encourages companies and investors to apply the principles from now on but acknowledges that some flexibility may be required given that AGM season is imminent.
Will issuers welcome the new guidance?
Whilst not binding, the Statement of Principles is supported by NAPF and the Investment Association (formerly the ABI which has merged with the Investment Management Association) and consequently, most listed issuers have applied, and will continue to apply, their principles accordingly. The new guidance takes into account recent market practice and in particular, addresses institutional investors' concerns around the use of cashbox structures to circumvent the pre-emption rights regime. Issuers who may have chosen the cashbox route to raise funds for acquisitions however, should not be too disheartened. The additional 5% headroom permitted (together with the routine 5% - amounting to a total of 10% which may be used for acquisitions or specified capital investments) will provide more flexibility for issuers looking to raise funds quickly for their acquisitions. However, issuers who have been using cash-box structures for general corporate purposes or for 'war-chests' will need to consider alternative structures, such as a disapplication of pre-emption rights.