ABI Investment Affairs merger with the IMA
On 30 June 2014, the ABI Investment Affairs merged with the Investment Management Association (IMA). The enlarged IMA, which will be re-branded as 'The Investment Association' in January 2015, has assumed responsibility for guidance previously issued by the ABI. A few days prior to the merger, the ABI issued its Transaction Guidelines for equity capital markets transactions. Additionally, since the merger the IMA has published its share capital management guidelines.
In this article, we take a look at the two sets of new guidelines.
- ABI Transaction Guidelines
On 27 June 2014, the ABI published its Transaction Guidelines which set out the expectations of ABI members as institutional investors on various aspects of equity capital market (ECM) transactions. Click here to read the Transaction Guidelines.
Formalising key recommendations
Overall, the Transaction Guidelines reproduce the ABI's key recommendations in its two reports published last July 2013 entitled 'Encouraging Equity Investment' (the Encouraging Equity Investment Report) and 'Improving Corporate Governance during Corporate Transactions' (the Corporate Governance Report). The guidance is structured under three headings: initial public offerings, secondary offerings and corporate governance during corporate transactions.
IPOs and secondary offerings
The Transaction Guidelines reproduce the key recommendations in the Encouraging Equity Investment Report concerning IPOs. For our detailed commentary on the key recommendations in the Encouraging Equity Investment Report, click here.
Otherwise, we summarise the key highlights of the final guidance below.
- The ABI provides that only two book-runners per syndicate are acceptable, but there may be no more than three book-runners for large transactions (that is, transactions with value above £250m excluding an over-allotment option).
- Syndicate members should be selected for their sector expertise or distributional reach, rather than for their relationship history with the issuer. Additionally, there should be greater transparency around the roles of syndicate members, including on those members with passive roles.
- Issuers and vendors are encouraged to consider including a retail tranche when listing in the premium segment.
- The ABI considers that there should be greater transparency in the disclosure of fees paid on an IPO, which should include providing a breakdown of adviser fees, the fees of each syndicate member and any maximum incentive fee.
- Specific criteria should be considered when awarding the incentive fee, including the stability of the share price in the newly listed environment, the allocation of shares to a long-term shareholder base and the continuity of research coverage post-IPO.
- Issuers, sponsors and lawyers should work towards producing a succinct document which provides key information relevant to an investment decision.
The Transaction Guidelines provide that the ABI's members expect:
- clarity around the sponsor's role in the IPO process, so that it can be distinguished from the role of the lead book-runner
- sponsors to consider including an institutional 'stamp of approval' in relation to the suitability of the company for listing
- the effective management and mitigation of potential conflicts of interest that may arise if a sponsor is also one of the lead distributors, and
- the Key Adviser for issuers who seek a flotation on the High Growth Segment (HGS) should already be an approved sponsor under the Listing Rules (although this is already required pursuant to the HGS rulebook).
Underwriting capacity and fees and discounts
The ABI recommends greater transparency and 'unbundling' of fees of underwriters on secondary offerings. The recommendations include that:
- companies should use deep discounts in rights issues to reduce level of underwriting fees paid to primary underwriters and sub-underwriters
- the gross spread for rights issues and open offers should be unbundled and disclosed and disaggregated disclosure should be a matter of best practice
- the buy-side and sell-side should develop standard sub-underwriting agreements, and
- aggregate fees charged and discounts to mid-market price at the time of agreeing the placing should be disclosed in the pricing announcement for non-pre-emptive placings.
- Efforts should be made to shorten the pre-emptive timetable by exploring ways to eliminate physical distribution of documents and reducing time spent by custodians to enact client's instructions to act.
- The UKLA is encouraged to explore whether a fast-track review process should be introduced for time critical offerings.
Corporate governance on corporate transactions
Similarly, the Transaction Guidelines (subject to minor modifications) replicate the key recommendations in the Corporate Governance Report (which can be found in Chapter 4, section H and which we reported on here in our August 2013 newsletter). The recommendations emphasise the ABI's focus on the role of the non-executive directors to enforce good governance in companies. Consequently, the ABI recommends various structural measures to ensure that non-executive directors can maintain and assert independence during corporate transactions which include recommending that:
- non-executive directors are given sufficient time and information to properly consider the merits of a transaction, together with having the opportunity to provide their views to any shareholders (when they are first made insiders), and
- non-executive directors have direct access to financial and legal advisers to the company on a transaction and should consider whether they should seek their own separate and independent advice on the merits of a transaction.
A useful reminder of the ABI's position but some notable omissions
The ABI has formalised its key recommendations in the two reports published last summer and so the guidance provides a helpful reminder of the expectations of the UK's largest institutional investors. We note, however, that the ABI's recommendation in its Encouraging Equity Investment Report regarding the earlier publication of the prospectus in the IPO timetable and the consequential shortening of the research black-out period has not been reflected in the Transaction Guidelines, although perhaps the ABI is waiting for comment from the FCA as to whether this would pose any problems before it finalises its guidance on this issue. Additionally, there is no new guidance regarding the ABI's position on the use of cash-box structures not directly linked to acquisition funding - despite hints in its Equity Investment Report that it may adopt a more flexible position. We will continue to watch this space and update you with any further developments in this regard.
- IMA Share Capital Management guidelines
On 29 July 2014, the Investment Management Association (IMA) published its 'Share Capital Management' guidelines (Guidelines) following its merger with the ABI Investment Affairs on 30 June 2014. The guidance sets out expectations of the IMA members as institutional investors on certain aspects regarding share capital management. In general, the guidance reinforces the ABI's previous guidance on these points. Click here to read the Guidelines.
Directors' power to allot shares
The ABI guidelines on directors' powers to allot were previously revised in January 2009 so that the ceiling on allotments of shares should be increased from one third of existing share capital to two thirds. The IMA notes that the guidelines have generally worked well and consequently, it will continue to regard as routine an authority to allot up to two thirds of the existing issued share capital but any amount in excess of one third of existing issued shares should be applied to fully pre-emptive rights issues only. Furthermore, the IMA guidance retains the requirement that the authority should be for the period until the next annual general meeting. Any shares held in treasury should be excluded from the calculation.
Own share purchase
The IMA notes that dividend payments remain the preferred method of returning surplus funds to shareholders but provides guidance for companies which have decided that share buybacks are in the best interests of their shareholders.
The new guidance generally retains many aspects of the ABI's guidance which was previously updated in November 2009. In particular, the guidance continues to require companies to seek authority to purchase their own shares by special resolution (notwithstanding that an ordinary resolution is permitted under the Companies Act 2006). Additionally, the general authority to repurchase shares should be renewed annually. The IMA provides that a general authority to purchase up to 10% of the existing issued ordinary share capital is unlikely to cause concern but it will note a general authority to purchasemore than 10 per cent but less than 15 per cent of the existing issued ordinary share capital (bearing in mind that the repurchase of more than 15 per cent is not permitted under the Listing Rules, unless carried out by a tender offer). Shares held in treasury will also be excluded from the calculation. IMA notes that its preference is for companies to hold no more than 10% of their shares in treasury.
Whereas the IMA prefers that shares offered in lieu of dividends are sourced from shares purchased in the market, rather than from newly issued shares, it acknowledges that shareholders may be offered an option of taking newly issued shares in lieu of a dividend. In such cases, any authority to offer a scrip dividend using new shares should be renewed at least every three years. Furthermore, the IMA provides that any arrangements where a scrip dividend is cancelled are only acceptable if a clear rationale and explanation to shareholders is provided.