In light of the severe impact of COVID-19 on the market, the Pre-Emption Group (PEG) now recommends that investors consider supporting issuances by companies of up to 20% of their issued share capital without seeking shareholder approval to disapply preemption rights.
The PEG recommendation for investors to apply this additional flexibility is in place on a temporary basis and is subject to certain conditions.
The announcement is significant because PEG has generally opposed non pre-emptive placings above 5% of issued share capital for general corporate purposes or 10% for specified acquisitions or investments. Market participants including industry groups such as the Investment Association (IA) and the Association for Financial Markets in Europe (AFME) have welcomed the relaxation, which brings the guidance in line with other European countries.
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The Prospectus Regulation permits companies to issue new shares representing up to 20% of existing shares, over a 12 month period, without a prospectus. However, until now, the PEG guidance impeded UK issuers making full use of this flexibility to access the equity markets on an accelerated basis because shareholder approval is required to disapply pre-emption rights on issuances for cash above 5% for general corporate purposes or 10% for specified acquisitions or investments. The authorities to disapply pre-emption rights up to these thresholds are typically obtained by issuers at their annual general meetings.
In a cashbox placing shares are considered to have been issued for non-cash consideration and therefore fall outside the scope of statutory pre-emption. Accordingly, a cashbox structure can be used by a company to issue up to 20% of its issued share capital without requiring either a prospectus or shareholder approval. Such structures have to date been inconsistent with the PEG guidance, which provide that cashboxes should be regarded as being an issuance of shares for cash and therefore subject to the 5% and 10% limits referenced above.
However, it is inevitable that in light of the current circumstances there will be listed companies who will need to raise capital quickly and it is likely that the market windows in which to raise capital will be short. It is in the interests of companies and all their stakeholders, including existing shareholders, employees and the broader economy, that these capital raises can happen quickly.
On 25 March 2020, SSP announced a 216 million capital raise, executed by way of a 19.9% cashbox placing.
Relaxation of PEG guidance
In order to help companies raise equity capital in these difficult circumstances, PEG now recommends that investors, on a case-by-case basis, consider supporting issuances by companies of up to 20% of their issued share capital on a temporary basis, rather than the 5% for general corporate purposes with an additional 5% for specified acquisitions or investments. PEG's Statement of Principles already permits companies to request a specific disapplication of pre-emptive rights outside of the normal thresholds, and this process should continue to be respected for issuances larger than 20%.
PEG has said that, if this additional flexibility is being sought:
- the particular circumstances of the company should be fully explained, including how they are supporting their stakeholders;
- proper consultation with a representative sample of the company's major shareholders should be undertaken;
- as far as possible, the issue should be made on a soft pre-emptive basis; and
- company management should be involved in the allocation process.
These conditions are broadly consistent with market practice for placings undertaken within existing disapplication authorities. The one condition that may cause some practical difficulty is the requirement "as far as possible" to make the issuance on a soft pre-emptive basis. Issuers will need to make genuine efforts to allow existing institutional investors to invest pro-rata to their holdings. There will be a debate about the appropriate shareholding threshold at which issuers cut-off the register and whether shareholders in jurisdictions with more challenging securities laws may be excluded. In circumstances where a new cornerstone investor comes in to anchor the capital raise, issuers will need to consider carefully the extent to which soft pre-emption is offered, recognising that such cornerstone investors will generally be unwilling to be a stalking horse. The solution in most cases will be high quality engagement and consultation with existing investors to ensure broad support.
It is important for issuers to discuss allocations with the banks and to test what they plan to do to honour soft pre-emption having regard to this guidance. There remains a risk that a particular issuance is criticised in hindsight (e.g. for inadequate consultation, insufficient respect for soft pre-emption or failure to explain the particular circumstances of the capital raise). That risk has diminished significantly in light of the new PEG guidance but still exists. We would expect companies with an urgent liquidity need to be willing to accept that risk where it would be in the best interests of the company, its shareholders and other stakeholders to undertake a larger placing on an accelerated timetable. We expect more companies to follow SSP's lead in coming weeks.