The Association of British Insurers (“ABI”) has published guidance on the expectations and views of ABI members on various aspects of equity capital market transactions. The guidance is split into three sections, ‘Initial Public Offerings’, ‘Secondary Offerings’ and ‘Corporate Governance during corporate transactions’ and supplements the recommendations in the ABI’s ‘Encouraging Equity Investment' Report and ‘Improving Corporate Governance and Shareholder Engagement’, both published in July 2013. A summary of the new guidelines is set out below:
1. Initial Public Offerings (IPOs)
The guidance on IPOs is structured under five headings:
The ABI is of the view that maintaining a balance between achieving depth of distribution to a wide range of investors and avoiding duplication of investor opinion from across and within the various categories is essential to an efficient IPO process. The guidelines provide that:
- No more than three book runners should be appointed for large transactions, being transactions above £250,000,000 excluding any over allotment option. Below this issue size, there should be no more than two book runners.
- Issuers should ensure that any additional members of the syndicate are included based on their sector expertise or distributional reach.
- The inclusion of syndicate members who are present solely on the basis of past or future services to the issuer or selling shareholders is discouraged. The ABI acknowledges occasionally selling shareholders and/or companies will occasionally need to appoint more banks due to ongoing relationships. In such cases, companies should clearly specify the roles of each syndicate member, including those with entirely passive roles.
- Issuers, with assistance of independent advisers if appropriate, should scrutinise allocations to ensure shares are being distributed to those most likely to be long-term shareholders.
- When listing on the premium segment of the Official List, the ABI encourages issuers and selling shareholders to consider including a retail tranche.
The ABI accepts that IPO fees vary widely as a result of various factors including the size of issue, complexity of the transaction and the identity of the selling shareholder(s). Despite these factors, there remains a significant concern amongst new investors regarding the overall level of fees. The guidelines provide that:
- There should be greater disclosure in the prospectus of all fees paid for an IPO, including the maximum incentive fee (if any). There should be a breakdown of fees as a percentage of the size of the offering, and those fees that are independent of size (such as lawyers and accountants). Syndicate members’ individual fees should also be disclosed.
- Final determination and payment of incentive fees in an IPO should be made either at (i) the release of the first quarterly results of the issuer as a listed company; or (ii) three months after listing. The amount paid should be disclosed to the market at the time of award.
- The following criteria should be taken into consideration when awarding the incentive fee: the stability of the share price in the newly listed environment; the allocation of shares to a predominantly long-term shareholder base; the extent and quality of the syndicate research both during and after the IPO, in the eyes of the investor; and the continuity of research coverage following the IPO.
- A mechanism should be established for investors to give input into the allocation of the incentive fee on an anonymous basis.
The ABI notes that market views on prospectuses include that they are often too detailed to be understood by retail investors and contain too many generic or boiler plate risk factors that obscure the most important risks and opportunities. The ABI supports the UKLA’s aim to reduce the amount of generic information in prospectuses and encourages issuers, their sponsors and lawyers to work with the UKLA to provide a document that is more succinct in providing the important information relevant to an investment decision.
The ABI is of the view that the sponsor regime is fundamental to ensuring the effectiveness of the premium equity market. The guidelines provide that ABI members expect:
- Clarity on the role of the sponsor so that the appointment is clear to market participants and distinguishable from the role of the lead book runner(s).
- Sponsors to consider including an institutional ‘stamp of approval’ in relation to the suitability of the company for listing.
- Any potential conflicts of interest that may arise if the sponsor is also one of the lead distributors of an IPO to be managed and mitigated.
- The Key Adviser for issuers who seek a flotation on the High Growth Segment of the AIM should already be an approved sponsor under the UK Listing Rules.
Role of Independent Advisers
The ABI notes the recent increase in the use of independent advisers (IAs) by management teams or selling shareholders who have less frequent experience of equity capital markets. Investors typically have less contact with IAs as part of the IPO process but value the importance of a well-run syndicate and proper flow of information. IAs should ensure that a syndicate is well managed; that the right information and advice is provided both to and by the issuer; and that the syndicate and issuer’s interests are protected.
2. Secondary Offerings
Underwriting Capacity and Fees and Discounts
The ABI guidelines note that although there is sufficient primary and sub-underwriting capacity in the UK market, capacity from traditional sub-underwriters in the UK has fallen. The split of risk and the reward for taking such risk between primary and sub-underwriters could be improved. The ABI is of the view that greater transparency and unbundling of fees will lead to greater reconciliation of risk with reward. The guidelines provide that:
- Companies should use deep discounts in rights issues to reduce the level of underwriting fees paid to primary and sub-underwriters. Companies are also encouraged to reduce primary underwriting fees by getting firm undertakings from sub-underwriters before announcing the transaction.
- The gross spread for rights issues and open offers should be unbundled, so that amounts for advice, including document preparation, primary underwriting and sub-underwriting are shown separately. These fees should be fully disclosed in the offer documents along with other rights issue-related fees (such as lawyers and accountants).
- Investors would like to see disaggregated disclosure as a matter of best practice.
- Tendering for both primary and sub-underwriting should be pursued only if the unbundling of fees does not lead to a lowering of the overall fee levels.
- The ABI encourages the buy-side and sell-side to develop standard sub-underwriting agreements to make the process more efficient. This should result in a reduction in overall fees.
- The aggregate fees charged, and the discounts to the mid-market price at the time of agreeing the placing, should be disclosed in the pricing announcement for non-pre-emptive placings.
The guidelines provide that:
- Efforts should be made to shorten a pre-emptive timetable by examining ways to eliminate the physical distribution of documents and reducing the time needed by custodians to enact their clients’ instructions to exercise.
- The ABI encourages the UKLA to investigate the feasibility of introducing a fast track process for time critical offerings.
3. Corporate Governance during corporate transactions
The ABI guidance sets out a number of structural measures to ensure that non-executive directors, whom the ABI believes are crucial to good governance, can maintain and assert independence during corporate transactions.
Corporate Transactions and Independence
The guidelines provide that:
- Non-executive directors should be given sufficient time and information to give proper consideration to the merits of the transaction as well as the opportunity to provide their views to shareholders when they are first made insiders.
- Executive directors should inform the appropriate non-executive director of the transaction when an approach is received from a possible bidder or management first actively considers a transaction in respect of which a shareholder approval is to be sought.
- Non-executive directors should be provided with a narrative description of the discussions between the company and the transaction counterparty and this narrative should be disclosed in summary form in the circular to shareholders.
- Non-executive directors should be given direct access to financial and legal advisers to the company on a transaction.
- The ABI encourages non-executive directors, both regularly and in specific circumstances, to have discussions without the executives present. When considering a transaction, the non-executives’ group should confirm to the chairman, prior to the publication of a circular or recommendation to shareholders, that they are satisfied that they have received sufficient time and information.
- Non-executive directors should consider whether it is appropriate to seek separate, independent advice on the merits of the transaction. In such circumstances, the adviser should be paid on a fixed fee (as opposed to a ‘success’ or ‘incentive’) basis.
Where a company is subject to a management buy-out or similar transaction, or engaging in a transaction with a controller or a group of controllers, or where a conflict may otherwise arise, a special independent committee comprising only unconflicted directors should always be formed to consider the transaction. The guidelines provide that:
- The committee should always take independent legal and financial advice (it is not acceptable for a ‘Chinese wall’ to be established within the existing advisers to the company).
- Independent committees should ensure their mandate is clear and is disclosed in any circular to shareholders or annual report. The mandate should normally extend to considering the terms of the transaction and whether the transaction itself (as opposed to the other courses of action) is in the best interests of the company and shareholders as a whole.
The ABI was formed in 1985 and has almost 300 member companies, accounting for 90% of the UK insurance market. The new guidelines, which build upon the recommendations published by the ABI in 2013, provide a useful consolidation of ABI members’ views on equity transactions and how the UK equity market may be improved.