Pre-emption Group issues report on compliance with principles

The Pre-emption Group has published its 2017 monitoring report on compliance with its Statement of Principles (the "Principles").

Background

The Principles are non-binding guidelines for when a company disapplies statutory pre-emption rights on an issue of new shares. They apply to companies with a premium listing, but standardlisted and AIM companies are also encouraged to follow them.

When issuing new shares, a UK company must first offer them to its existing shareholders under statutory pre-emption rights. A company can dis-apply those pre-emption rights with the approval of its shareholders, either for a specific issue, or generally for any number of issues up to a given limit.

The Principles provide some guidance for specific disapplications, but their greater focus takes the form of a number of rules relating to general disapplications:

  • Companies should not seek a general disapplication of pre-emption rights in relation to more than 5% of its issued share capital in any one year.
  • Companies may seek an additional 5% for a general disapplication in relation to an acquisition or a specified investment. When this additional 5% is used, the company should disclose the circumstances that have led to its use and describe the consultation process undertaken.
  • General disapplications together should not exceed 7.5% of the company's issued share capital in any three-year rolling period.
  • When seeking a general disapplication, companies should use the Pre-emption Group's template resolutions, which recommend separate resolutions for the first 5% and the additional 5%. The template resolutions were published on 13 May 2016 and became "effective" on 1 August 2016.

The report sets out the level of compliance with the Principles and template resolutions by FTSE 350, Small Cap and Fledgling companies.

Findings

In relation to the FTSE 350, the report notes the following:

  • Generally, companies complied with the Principles and template resolutions, but in some cases companies did not adequately consult and disclose when seeking to disapply the additional 5%.
  • Requests for general disapplication are likely to be supported where they meet the criteria regarding size, duration and resolution format.
  • Support for resolutions to disapply the additional 5% was not as strong as for resolutions to disapply the first 5%. The report suggests this may reflect concern about the proposed use of the additional disapplication authority and previous company issuance practices.
  • The template resolutions have been well received. 30% of companies adopted them voluntarily before the "effective date" of 1 August 2016. After that date, out of 32 companies that asked to disapply the additional 5%, only two (6%) used a single resolution instead of the two separate template resolutions.
  • Shareholders tended to vote more heavily against a single resolution to disapply 10% than against separate resolutions for the first 5% and the additional 5%.
  • The opinion of most investors remains that companies should not seek to disapply the additional 5% unless it is appropriate for their individual circumstances.

The report also found that a high proportion of FTSE Small Cap and AIM companies sought to disapply pre-emption rights beyond the 10% limit set out in the Principles.

FCA consults on guidance for insurance business transfers

The Financial Conduct Authority (FCA) has published a consultation paper, in which it is proposing to provide guidance on its approach to reviewing insurance business transfers under Part 7 of the Financial Services and Markets Act 2000 ("FSMA").

A Part 7 transfer is a court-sanctioned procedure by which an insurance or banking business transfers all of its assets to another entity. This avoids the need to assign hundreds of individual contracts. The Prudential Regulation Authority (PRA) takes the primary regulatory role on a Part 7 transfer, but the FCA also has an active role and can make representations.

The FCA has drafted the proposed guidance in response to requests by industry practitioners to help them understand the FCA's approach and requirements to Part 7 transfers for insurance businesses. It estimates that the guidance may reduce compliance costs, generating savings of around 50,000 per transaction and 1 million per year.

The proposed guidance covers the following:

  • How and when to contact the PRA and FCA, the level of detail to be provided, and how to structure meetings, on-going communications and changes to the transaction timetable.
  • What the FCA will consider when assessing whether the independent expert (who prepares the "scheme report" for the transfer) is independent and has sufficient skill, experience and resources.
  • The FCA's key considerations when reviewing a Part 7 transfer, including the business rationale for the transfer, competition considerations and any impact on policyholders.
  • What information the FCA will expect to see in the transfer scheme documents and independent expert's report, and how the FCA expects applicants to communicate with policyholders.

The guidance does not apply to banking transfers under Part 7 of FSMA. The FCA is requesting responses by 15 August 2017.

Council of the EU approves new prospectus regulation

The Council of the European Union has adopted the new EU Prospectus Regulation. The new regulation will replace the existing EU Prospectus Directive (2003/71/EC) and EU Prospectus Regulation (809/2004) with a new pan-European prospectus regime applicable in all Member States.

The new regulation will apply automatically two years and 20 days after it is published in the EU's Official Journal. This means it will come into force after the last date on which the United Kingdom is currently scheduled to leave the European Union. At the moment, it is unclear whether and to what extent the regulation will be adopted in UK law (e.g. under the previous Conservative government's proposed Great Repeal Bill). The FCA has issued a consultation on amending the UK Prospectus Rules to accommodate the new regulation, suggesting at least some elements will be adopted.

We will provide a further update in due course when this becomes clearer.

Other items

The independent panel appointed by the Financial Reporting Council (FRC) to review the FRC's enforcement sanctions has published a call for submissions. The panel is seeking stakeholders' views on (among other things) the fairness and effectiveness of the sanctions available to the FRC, and whether the existing financial penalties are adequate or should be strengthened.