On 18 May 2011, the Institutional Investor Committee ("IIC"), which consists of the Association of British Insurers, the Investment Management Association and the National Association of Pension Funds, published its 'Best Practice Guidance for Issuers when Raising Equity Capital' (the "Guidance"). The Guidance provides some helpful practical tips which should assist boards in ensuring that they are well prepared for any future equity issues and get the best out of their financial advisers and shareholders when they make issues.
In the February issue of this newsletter, we reported that the Office of Fair Trading ("OFT") had published its provisional decision following an investigation into equity underwriting services. In its report, the OFT made a range of recommendations for ways in which boards and institutional shareholders might seek a better deal from banks.
Independently, institutional investors have expressed concern that there is too much leakage of value to intermediaries on secondary issues. That concern led to the IIC Rights Issue Fees Inquiry, which found that issuers were unfamiliar with the equity capital raising process and insufficiently challenging to their advisers, especially on costs issues.
The Guidance is intended to inform issuers and their boards about institutional shareholders' views on best practice when raising equity share capital. It includes four sections:
- background preparation
- when the need for a capital raising exercise is foreseen
- actual equity raising process
- post issue.
This is perhaps the most interesting section of the Guidance as all issuers need to reflect on it.
The Guidance suggests that all directors have training on equity issuance, as part of their induction or as part of the regular board evaluation. Lawyers will typically provide induction and update training, but there will probably now be an increased focus on secondary equity issues.
The Guidance suggests that the appointment of corporate brokers, and other advisers, should include discussions about fee levels on equity issues. It suggests that independent financial advisers might be involved in appointment discussions.
Most significantly, issuers should place secondary issues on the agenda at their regular meetings with major institutional shareholders. Companies should know:
- institutions' views on the company's capital structure
- whether the institution is prepared to receive price sensitive information
- whether the institution would be prepared, in principle, to act as a sub-underwriter.
Anticipated and actual equity raising
Where an equity issue is contemplated, the Guidance flags a number of issues. In particular:
- selection of advisers
- issue structures (with a rights issue preference)
- pricing/fee structures
- the extent and nature of sub-underwriting and sub-underwriters
- off-set for shareholder sub-underwriters
- anti-hedging clauses
Whilst the Guidance may not change the course which advisers propose that an issuer should follow, it will be important that the board has raised all the issues which the Guidance suggests are generally important to institutional shareholders, understands any "conflicts" between their position and that of the lead underwriter and corporate adviser and can report in a transparent fashion to shareholders.
The Guidance suggests extensive public disclosure of fees through market announcements and in the issuer's annual report and accounts.
The Guidance also suggests that the company should be provided with the final sub-underwriting participations.
The Guidance includes several points which should be acted on by all issuers whether or not a secondary issue is in the offing:
- training on secondary equity issues should be offered to directors
- the process for appointing corporate brokers should be re-appraised
- investor relations teams should ensure that discussions with shareholders cover the points suggested by the Guidance.