Summary

  • The new FTSE Nationality Practice Note states that: "for inclusion in the FTSE UK index series, a company not incorporated in the UK will be required to acknowledge publicly adherence to the principles of the UK Combined Code, pre-emption rights and the UK Takeover Code as far as practical."
  • FTSE have informed us that in order for an overseas investment company not already a constituent of the FTSE UK Index Series to satisfy the FTSE's eligibility requirement referred to above, it will need to amend its articles to include pre-emption rights. This clearly applies to all new overseas investment companies proposed to be listed under Chapter 15 of the Listing Rules.
  • This is a significant decision by FTSE. Previously investment companies incorporated offshore (in particular, in Guernsey and Jersey) did not extend pre-emption rights to shareholders either through their articles or as a matter of local law. Now, such companies will be required to do so if they want to be included in the FTSE UK Index Series.
  • For those investment companies already included in the indices which, according to the Practice Note, are not eligible for inclusion, FTSE have provided assurance to the AIC that such companies will not be removed in the near future. However, this does not mean that if an 'ineligible' company wishes to remain in the Index it should not take steps to make the necessary changes.
  • As regards the other two criteria, first, overseas investment companies listed under Chapter 15 of the UK Listing Rules are already required to comply with the principles of the UK Combined Code. Second, the Takeover Code applies to all companies with registered offices in the Channel Islands or the Isle of Man, and many companies whose registered offices are in another EEA state, whose shares are traded on the London Stock Exchange.

Background

FTSE recently carried out a market consultation on its nationality rules. The feedback from the consultation was that investors want overseas companies seeking inclusion in the UK Index to be placed in the same position as comparable companies in the UK. UK law provides shareholders of investment companies with pre-emption rights unless those rights are disapplied by a special resolution passed at a general meeting. Most overseas companies on the other hand are not subject to statutory pre-emption rights and do not have them included in their articles of association. As such companies are typically established with a very large amount of authorised but unissued share capital, this gives their directors the flexibility to conduct large secondary share issues for cash without the need for shareholder approval.

Notwithstanding this disparity, pre-emption rights are imposed on all investment companies by Listing Rule 15.4.11. It provides that, save with the prior approval of shareholders or where shares are offered on a pre-emptive basis to existing shareholders, further issues of shares of the same class for cash can only be made on a non-pre-emptive basis if the issue price is not less than the investment company's net asset value per share. The rationale for this is that provided the shares are issued at net asset value, or above, existing shareholders are protected from any economic dilution and so do not require the protection of pre-emption rights.

However, despite the provisions of Listing Rule 15.4.11, FTSE have confirmed that this alone will not satisfy their eligibility requirements for inclusion of non-UK incorporated investment companies in the FTSE UK Index Series.

The position would therefore seem to be that all non-UK incorporated investment companies which are not already constituents of the FTSE UK Index Series will be expected to amend their articles to include pre-emption rights in order to be considered for inclusion in the UK Index. In order to be consistent with UK law the shareholders' right of pre-emption set out in the articles will not need to apply to issues of shares for non-cash consideration. This clearly applies to all new overseas investment companies proposed to be listed under Chapter 15 of the Listing Rules.

For those investment companies already included in the indices which, according to the Practice Note, are not eligible for inclusion, FTSE have provided assurance to the AIC that such companies will not be removed in the near future. However, this does not mean that if an 'ineligible' company wishes to remain in the Index it should not take steps to make the necessary changes.

In our view, the best approach would be for investment companies to include pre-emption rights in their articles but also to provide that those rights may be disapplied by shareholder resolution at the company's annual general meeting in circumstances where the proposed issue price is at NAV or above.