The Pre-Emption Group (PEG), which represents listed companies, investors and intermediaries, has published a monitoring reportlooking at the use of its revised Statement of Principles for the disapplication of pre-emption rights (Statement of Principles) and the template resolutions in meetings held between 13 March 2016 and 1 February 2017 (the Relevant Period). The Statement of Principles aims to clarify the factors to be taken into account by companies when considering whether to request the disapplication of their shareholders' pre-emption rights.
Click here to read our article which looked at the PEG's monitoring report published in May 2016, together with the PEG's announcement of its published template resolutions to assist companies with their request to disapply pre-emption rights. For further background on the revised Statement of Principles, click here.
Key findings – early consultation and effective disclosure
The monitoring report found that the template resolutions and the Statement of Principles were generally adhered to in the Relevant Period but some examples of poor consultation and disclosure were identified. Consequently, the monitoring report draws the following conclusions:
- Early consultation with investors is critical - the Statement of Principles should be used as a framework for companies to engage in early dialogue with investors regarding their proposed resolutions.
- The template resolutions should be used for the disapplication of pre-emption rights.
- A request for general disapplication is likely to be supported where it meets the criteria regarding the size, duration and resolution format – but note that early dialogue with investors still remains important.
- Consultation about proposed issues must be 'specific and unequivocal' and must explicitly address whether or not the relevant authority is to be used. Companies should disclose the reasons for the issue. When using the additional five per cent authority, companies should also disclose the circumstances that have led to its use and should describe the consultation process in detail.
- The grant of flexibility to companies in the Statement of Principles to apply for an authority to issue non pre-emptively in respect of two allocations of five per cent was based on an expectation that, regardless of the legal form of a transaction, companies would consider the thresholds, with the 'second' five per cent allocation being specifically tied to acquisitions or specified capital investments. Note that the investor view is that the additional five per cent should not be sought automatically – but only when it is appropriate for the company's circumstances.
- Companies which do not comply with the Statement of Principles are less likely to receive ongoing shareholder support and should expect close scrutiny from investors. Companies should note that, if they do not use the template resolutions, this may form part of an advisor's rating analysis.
- The use of the Statement of Principles will be monitored by the PEG on an ongoing basis – particularly in the light of the implementation of the Prospectus Regulation.
- The appendix to the monitoring report outlines 'Best practice in engagement and disclosure' in respect of applying for the disapplication authority, the relevant issue and the content of the next annual report and accounts after the issue. The guidance reinforces the importance of early consultation with, and proper disclosure to, investors.
What do we think?
The monitoring report provides an interesting insight into market practice and the PEG has used this opportunity to emphasise that early dialogue with investors and effective disclosure should lead to more affirmative resolutions at general meetings. This should come as no real surprise to the market.
Perhaps more interesting is the PEG's position on one of the amended exemptions in the Prospectus Regulation. Click here to read our article for more information on the exemption. The new provision provides that issuers are exempt from the requirement to publish a prospectus for the admission of trading of securities to a regulated market where securities represent less than 20% (currently 10%) of the number of securities of the same class already admitted to trading over a 12 month period. This is a significant benefit for issuers who will be able to raise more capital without the delay and cost involved in producing a prospectus.
However, issuers will remain restricted by the 'collective' 10% authority for a non pre-emptive issue (subject to the relevant restrictions) in the Statement of Principles and consequently, they will need to seek specific shareholder approval to disapply pre-emption rights at the relevant time of the capital raising. This means that, although issuers may not need to produce a prospectus, they will still incur time and expense in convening shareholder meetings to approve the capital raising and in preparing the necessary circular.
The UK Government's position on the new exemption and the provisions in the Prospectus Regulation post Brexit may be a factor which influences the PEG's stance. We would expect that the PEG will consider this issue and publish its position in due course.