One of the most common issues companies face is ensuring that any issuance of shares complies with both the Companies Act 2006 (the 2006 Act), any provisions in the company’s Articles of Association (the Articles) and institutional guidelines. The two initial key questions are:
- do directors have authority under s551 of the 2006 Act to allot shares?
- how can directors dis-apply any pre-emption rights under s570 of the 2006 Act?
1. Authority to allot
Under s551 of the 2006 Act, the directors of a company may allot shares in the company if they are authorised to do so by the company’s Articles or by resolution of the shareholders of the company. Such authority may be unconditional or conditional, but the authorisation must:
a) state the maximum amount of shares that may be allotted under it; and
b) specify the date on which it will expire (which cannot be more than five years from the date on which the resolution is passed).
The Investment Association (IA) has published some share capital management guidelines, setting out, among other things, the expectations of its members where companies seek shareholder authorisation for the general power to allot. The guidelines state that:
- IA members will regard as routine an authority to allot up to two-thirds of the existing issued share capital, but any amount over one-third of the existing issued shares should be applied to fully pre-emptive rights issues only (further discussed below). The IA's reason for this recommendation is that shareholders have appropriate protections against dilution in pre-emption rights and in the requirement for premium listed companies to obtain shareholder approval for Class 1 transactions (i.e. major transactions for a listed company, the size of which results in a 25% threshold being reached under any one of the class tests set out in the Listing Rules);
- the authority must be approved by ordinary resolution and should last until the next AGM; and
- when calculating the size of the existing issued share capital, any shares held in treasury should be excluded.
2. Pre-emption rights
Under section 561 of the 2006 Act the existing shareholders of a company have a right to pre-emption on allotment of new shares. This is subject to several exceptions and one of the main exceptions is if the issue of shares is for non-cash consideration (under section 565 of the 2006 Act). This means if the allotment is made on a share for share exchange basis, any pre-emption rights will automatically not apply. Even if none of the exceptions applies, pre-emption rights can generally be dis-applied for allotments pursuant to an authority to allot under section 570 of the 2006 Act. The Pre-emption Group Guidelines (the Guidelines), which are voluntary guidelines produced by representatives of listed companies, investment institutions and corporate finance practitioners, allow for 5% of a company’s issued share capital to be issued on a non- pre-emptive basis. The Guidelines further state that it is acceptable for an additional 5% of issued share capital to be made available without pre-emption rights if the Annual General Meeting (the AGM) circular makes it clear that funds raised from the issue of those shares:
- will be issued only in connection with an acquisition or specified capital investment which is announced contemporaneously with the issue; or
- relate to an issue which has taken place in the preceding six- month period and is disclosed in the announcement of the issue.
The Pre-emption Group has also provided a template for special resolutions to dis-apply pre-emption rights and this template provides for companies to propose separate resolutions to authorise companies to:
a) dis-apply pre-emption rights on up to 5% of the issued share capital; and
b) dis-apply pre-emption rights for an additional 5% for transactions which the board determines to be an acquisition or other specified capital investment (as defined by the statement of principles).
Resolution b should only be proposed when appropriate for the individual company’s circumstances.
In addition to the above, the Guidelines provide that in any rolling three-year period, a company should not issue non-pre-emptively for cash shares that represent more than 7.5% of its issued ordinary share capital. Of course this limit comes with exclusions which are as follows:
- any shares issued pursuant to a specific disapplication of pre-emption rights; or
- any shares issued pursuant to a general disapplication of pre-emption rights in connection with an acquisition or specified capital investments.
The Pensions and Lifetime Saving Association (PLSA), which is the main UK body representing the interests of the occupational pensions industry and provides representation and other services for those involved in designing, operating advising and investing funds of pensions schemes in the UK, adopts this same approach.
Additionally, the IA guidelines (mentioned above) seem to agree that the template special resolution to dis-apply pre-emption rights provided in the Pre-emption Group’s current statement of principles should be used, where possible.
Finally, the IA guidelines recommend that:
- companies should, where possible, signal an intervention to undertake a non-pre-emptive issue at the earliest opportunity in order to establish a dialogue with the company’s shareholders; and
- shareholders should, where possible, engage with the company to help it understand the specific factors that might inform their view on a proposed disapplication of pre-emption rights by the company. They should review the case made by a company on its merits and decide on each case individually using their usual investment criteria.
It is important to note that the above mentioned Guidelines relate to issues of shares for cash by all companies with shares admitted to the Premium Listing segment of the Official List of the UK Listing Authority and to trading on the Main Market for listed securities of the London Stock Exchange. However, companies with shares admitted to the Standard Listing segment of the Official List of the UK Listing Authority, to the High Growth segment of the Main Market of the London Stock Exchange, or trading on AIM, are still encouraged to adopt these Guidelines.
New Prospectus Rules
The new Prospectus Regulation which was published in the EU Official Journal on 30 June 2017 and which came into force on 20 July 2017 amended the existing exemption from the requirement to publish a prospectus where shares are admitted to trading on a regulated market (such as the LSE’s Main Market) representing less than 10% to a higher threshold of 20%. The New Prospectus Rules are therefore more permissive than the existing investor guidelines in respect of non-pre-emptive issues, which only provide for an up to 10% disapplication of pre-emption rights. We will need to wait and see how the guidance may change, in light of this, but it is currently debatable whether the relevant investor bodies would support a relaxation of the guidelines to bring them in line with the change to the 20% prospectus threshold.
It is extremely important that the directors of a company are aware of the above mentioned rules / guidelines to ensure compliance with the same and this is a useful reminder of what the directors need to bear in mind before proceeding with issuances of shares.