The Pre-Emption Group was initially set up in 2005 to produce a Statement of Principles to be taken into account when considering disapplying pre-emption rights. The Pre-Emption Group was re-formed in 2015 to consider whether revisions to the Statement of Principles published in 2008 may be appropriate.
The Pre-Emption Group’s members represent listed companies, investors and intermediaries and its role includes:
- monitoring the development of practice in relation to the disapplication of pre-emption rights and reporting on the application of the Statement of Principles;
- if necessary, agreeing to any revisions of the Statement of Principles after consultation with interested parties; and
- providing the market with a clear view of what is regarded as acceptable practice when raising equity and equity-related capital non-pre-emptively in the UK equity capital markets.
The Pre-Emption Group published a revised Statement of Principles (Principles), which provides guidance on the factors to take into account when considering whether to disapply pre-emption rights, on 12 March 2015. The Principles are supported by the National Association of Pension Funds and the Investment Association, which has assumed responsibility for guidance previously issued by the ABI.
The legislative framework for pre-emption rights
Pre-emption rights give existing shareholders in a company the right to subscribe for their pro rata share of any new shares in that company issued for cash, providing them with protection against inappropriate dilution of their investments. Under the Companies Act 2006, pre-emption rights may be disapplied by a special resolution or by the articles. The UK Listing Authority extends the pre-emption rights to overseas companies with a premium listing, regardless of where they are incorporated.
Revised Statement of Principles
The revised Principles leave unchanged the key thresholds for the general disapplication of pre-emption rights, being up to 5% of issued ordinary share capital in any one year (whether or not in connection with an acquisition) and 7.5% in any rolling three year period. However, an additional 5% is now permitted for acquisitions; see below.
General disapplications: an additional 5% permitted for acquisitions
The 2015 Statement of Principles introduces the right to seek authority by special resolution to issue shares non pre-emptively for cash representing an additional 5% of the issued ordinary share capital, on top of the existing threshold of 5% per year, amounting to a total disapplication of 10%.
This provision will only apply, however, where the company confirms in the AGM circular at which shareholder authority is sought that the additional authority is to be used only in connection with an acquisition or capital investment announced contemporaneously with the issue, or which has taken place in the six months preceding the issue and is disclosed in the announcement of the issue.
Other changes to the 2008 Statement of Principles include:
Companies within the Scope of the Principles
It is made clear that the Principles apply to both UK companies and to companies incorporated outside the UK which have shares admitted to the premium listing segment of the Official List of the UK Listing Authority and to trading on the Main Market of the London Stock Exchange.
The Listing Rules require that a company incorporated outside the UK with a premium listing must ensure that its constitution provides for rights of pre-emption for shareholders that are at least equivalent to those that apply to UK incorporated companies, if the law of the relevant jurisdiction doesn’t impose such rights.
Companies that have standard listings on the Official List, AIM listed companies, and companies on the High Growth Segment of the Main Market are encouraged to adopt the Principles.
Issues of equity securities covered by the Principles
The 2015 Statement also clarifies that the Principles apply to issues of equity securities other than on a pre-emptive basis which are undertaken to raise cash for the issuer or its subsidiaries, irrespective of the legal form of the transaction.
This expressly includes “cashbox” transactions, which are a method of fundraising where instead of receiving cash as consideration for the issue of its securities, a listed company will receive the shares of a “cashbox” company (a special purpose vehicle the principal or only asset of which is cash) thereby avoiding statutory pre-emption rights by virtue of the exemption in section 565 of the Companies Act 2006 (issue for non-cash consideration). For the purposes of the Principles, such a transaction should be regarded as being an issue of shares for cash and therefore subject to the Principles.
In practice, a cashbox transaction is generally limited to an issue of less than 10% of the issuer’s issued share capital due to the requirement in Prospectus Rule 1.2.3 to publish a prospectus if this limit is exceeded (in a twelve month period) where the shares are being admitted to trading on a regulated market. Cashbox structures will no longer need to be used where authority for a disapplication of up to 10% is given and the issue is to raise funds for an acquisition (see above).
Vendor Placings, on the other hand, are outside the scope of the Principles (as cash is not raised for the issuer), although shareholders will nonetheless expect a right of clawback in respect of any Vendor Placing that represents greater than 10% of ordinary share capital or that is undertaken at a discount of greater than 5%.
Transparency as to discount
The Principles provide for greater transparency in relation to discounts to market price and the time at which it was calculated where shares are issued non pre-emptively. Any discount should, other than in exceptional circumstances, be restricted to a maximum of 5% and companies will be expected to disclose any discount at which equity is issued, the reference market price and the time at which it was calculated, in the announcement of the pricing of the issue.
The 5% discount calculation is to include any expenses directly attributable to the making of the issue, for example, underwriting commissions, brokerage fees, corporate finance fees and professional advisers’ fees.
For the purposes of the Principles, the sale of treasury shares for cash by a company should be regarded as equivalent to an issue of new shares and shares held by a company in treasury should not be regarded as forming part of the issued share capital of that company.
Annual Report requirements
The next annual report published following a non-pre-emptive issue of equity securities under the authority of a general disapplication, should include the actual level of discount achieved; the net proceeds raised; how those net proceeds were used; and the percentage increase in issued share capital due to non-pre-emptive issues for cash over the three-year period preceding the issue.
Pre-Emption Group to issue a report
The Pre-Emption Group will monitor and issue a report on the use of the revised Statement of Principles. Companies are encouraged to use the revised statement immediately, however as the 2015 AGM season is imminent, the Pre-Emption Group acknowledges that some flexibility may be necessary.