In November 2008, the Treasury published 'A Report to the Chancellor of the Exchequer: by the Rights Issue Review Group' which proposed a series of far-reaching reforms to the rights issue process. Rights issues in the UK currently take at least 39 days, but if the proposals in the report are implemented this would fall almost immediately to 32 days, and for many issues to 16 days. This would reduce the period when a company's share price is open to potential abuse, for example, through short selling. The length of time currently taken to complete rights issues only serves to compound the potential risk.
The report suggested a number of short-term measures to improve the efficiency of the rights issue process as follows:
- the Association of British Insurers (ABI) should review their guidance on the ceiling on allotments. The Review Group recommended that this should be increased from one-third to two-thirds of an issuer's issued share capital
- the Financial Services Authority (FSA) should consult on reducing the rights issue subscription period from 21 to 14 days;
- working with BERR on the practical transposition of the Shareholder Rights Directive to maintain the notice period for companies' general meetings at 14 days (please click here for a commentary on the recent BERR guidance on notice periods under the Shareholder Rights Directive);
- the FSA should continue to maintain oversight of the conflict of interest regimes with a view to reinforcing transparency between issuers and underwriters; the FSA is to produce non-prescriptive guidance on what issues should be usefully considered when embarking on a rights issue; and the FSA shall consider the development of a new form of compensatory open offer which may be run over a 14 day period in conjunction with a general meeting notice period.
Longer term proposals were also put forward with the aim of reducing the rights issue period to below 16 days. These recommendations include the following:
- the FSA and the Treasury should work at the EU level for the adoption of a short form prospectus for rights issues;
- issuers to consider the possible increased use of shelf registration for equity issuance; and
- the FSA to consider the development of more accelerated rights issue models, including consideration of the Australian RAPIDS model. The Australian market has gradually adopted a structure that has two tiers - a faster wholesale offering and then a slower retail offering.
It is also recommended that the FSA will issue a market consultation on a more permanent position on the matter of short selling in rights issues.
Responses to the report
In response to the recommendations of the report, the ABI has reviewed its guidance in order to facilitate quicker rights-issues. Companies following the ABI guidelines will now be able issue new shares worth up to two-thirds of their existing capital without the need for further shareholder approval. The change will help speed up the rights issue process and make it easier for companies to launch issues at a discount. The new guidance also requires all board members of a company that takes advantage of the new rule to stand for re-election at the next AGM, unless, of course, the additional "headroom" involves the issuance being lower in amount than one-third of the company's issued share capital.
The ABI guidelines are not legally binding but are considered best practice and form the basis of shareholder voting decisions. The ABI has confirmed that this guidance will be reviewed after three years and until then they will continue to monitor the use by companies of the additional "headroom". A copy of the ABI's statement can be accessed by clicking here.
The FSA recently published Consultation Paper 09/4: Rights issue subscription periods (CP09/4) relating to the reduction of the rights issue subscription period from 21 to either 14 calendar days or ten business days. The FSA is in favour of the reduction but has sought opinions on whether it should follow the Review Group's proposal to reduce this to 14 calendar days or if it should be reduced to 10 business days.
In its report, the Review Group recommended that the current open offer subscription period of 15 business days be reduced along similar lines to the rights issue subscription period. While reducing the open offer period to ten business days would roughly match the reduction to a 14 calendar day rights issue period, a harmonised approach would arguably be less confusing for issuers but would also make a significant difference where transactions are run over extended bank holiday periods.
The consultation period ended on 26 January 2009 and the FSA has now announced that it has decided to reduce the Listing Rules' minimum rights issue subscription period to ten business days with the rule change becoming effective on 10 February 2009 (Policy Statement 09/2: Rights issue subscription periods).
The FSA has also confirmed that it will consult at a later date on 'open offers with compensation' and on document vetting fees in relation to equity shelf registration.