A new monitoring report by the UK Pre-Emption Group, which acts as the voice of investors in this area, highlights the continuing importance to UK shareholders of their "pre-emption rights" – rights of first refusal on an equity fundraising. While investors remain willing to allow company boards to raise small amounts of equity finance without the time and costs involved in a rights issue, this flexibility is limited and closely scrutinised.
The report follows on from the Pre-Emption Group's revised Statement of Principles published in March 2015. Among other things, the revised Principles say that shareholders will generally be supportive of annual requests by boards for authority to issue up to a further 5% of share capital on a non-pre-emptive basis, on top of the 5% previously allowed for general purposes. However, although this overall 10% limit represents a significant increase on what was previously permitted, the Principles restrict the use of the additional 5% to financing acquisitions or specified capital investments announced at the time of the issue (or a subsequent refinancing within the next six months) – and expect boards to confirm these restrictions in the AGM circular.
The Group's latest report reviews how companies have been applying the revised Principles during the past year. More practically, alongside the report, the Group has also published template shareholder resolutions to clarify what is likely to be acceptable to investors. A key point to note here is that where boards are seeking authority to issue an additional 5% non-pre-emptively for acquisitions or capital investment (on top of the usual 5% for general purposes), the Group has now confirmed it expects this to be separated out into another resolution, which specifies these limited purposes (instead of just including an explanation of the restrictions in the notes to the resolution(s)). The Group says that boards should only ask for the additional 5% authority when this is appropriate for the individual company's circumstances.
As it turns out, the monitoring report shows that, in general, companies are complying with the 2015 Statement of Principles. But there is no doubt that the additional 5% represents something of a sea change, especially for larger listed companies, and institutional investor bodies are still taking a cautious line. Of these, PIRC has expressed the most conservative view. Its most recent shareholder voting guidelines say that it will not support a request to dis-apply shareholder pre-emption rights for up to 10% of issued share capital unless the board makes a "clear, cogent and compelling case" as to why this is appropriate for the company. The latest PLSA guidelines take a more moderate stance, but still expect companies to signal their plans to issue shares non-pre-emptively as early as possible and for there to be meaningful dialogue with shareholders – an approach which the Pre-Emption Group generally endorses.
So the message for boards is that requests for the extra 5% can still be made, but need to be justifiable and in line with the expectations of the shareholder base. This may be more straightforward for smaller companies in expansion mode, where the costs of a rights issue would be disproportionate.
The Pre-Emption Group expects companies to use the template resolutions for meetings held after 1 August 2016, but is encouraging earlier adoption for meetings before then. The Group also says that while the template resolutions are drafted for UK companies, the Principles also apply to non-UK companies with premium listings, and these companies should adopt the resolutions in an appropriate form.