On 19th May 2011, the Institutional Investor Committee (IIC) published their "Best Practice Guidance for Issuers when Raising Equity Capital" (the Guidance).[1] The Guidance sets out institutional investors' views on best practice and sets out the conclusions drawn from the IIC's Rights Issue Fees Inquiry (carried out in association with the Association of British Insurers (ABI), the National Association of Pension Funds (NAPF) and the Investment Management Association (IMA)) in December 2010. The inquiry was prompted by institutional shareholders' concerns that unfamiliarity with the fundraising process meant that boards were less likely to challenge their advisers and banks, especially in relation to underwriting fees.

The Guidance sets out potential issues and suggests questions for companies to ask their advisers at each stage of the equity raising process.

Background preparation

Board members are advised to familiarise themselves with the equity capital raising process generally - it is suggested that companies should incorporate this into the directors' induction and regular evaluations - and engage with shareholders regularly. The appointment of advisers should always be made pursuant to an appropriate corporate governance structure and different structures and fee levels should be discussed with all advisers.

When the need for equity raising is identified, the possible structures for fundraising should be considered in detail at board level with key decision subject to an appropriate corporate governance structure. As part of this process the board should assess whether existing advisers should be used or if an alternative source of advice is called for and whether an independent financial adviser who would not underwrite any rights issue should be instructed. Using the company's corporate broker's parent bank for such transactions should not be a foregone conclusion and the existing relationship should not prejudice the decision-making process. The Guidance also highlights the relationship between the level of discount on a rights issue and the size of the underwriting fee.

The process

Board members should request a full breakdown of advisers' proposed fees. The Guidance also recommends that board members ensure that they understand what is being paid for and the purpose. Shareholders that have expressed a willingness to be made insiders should be consulted as part of the assessment of whether underwriting is required. The Guidance also gives advice in relation to sub-underwriting and other considerations for the board once the decision to undertake the issue has been made.

Post issue

The Guidance also considers the level of detail to be included in the public disclosure of the fees paid for capital-raising in press announcements and in the annual report and accounts. It recommends a breakdown of the differences between gross and net proceeds and, in the case of fee agreements containing a performance element, advance disclosure of the potential range of the performance fee.