On 4 November 2022, the Pre-Emption Group (“PEG”) published an updated Statement of Principles: Disapplying pre-emption rights reflecting certain recommendations of the UK Secondary Capital Raising Review (the “SCRR”) which itself was published in July 2022 (the “Updated Statement of Principles”).1
The Updated Statement of Principles remains directed at all premium listed companies (wherever incorporated), but companies with a standard listing and those trading on the London Stock Exchange’s Alternative Investment Market are also encouraged to adopt them. Although not legally binding, the principles are widely followed when companies request shareholder authorities for the disapplication of pre-emption rights at their annual general meetings. Listed companies will typically seek such authorities (in relation to the allotment of new shares and the disapplication of statutory pre-emption rights in respect of the issue of new shares) on an annual basis so that they are ready to proceed with a fundraising without having to call a separate general meeting, thereby making the fundraising process quicker. PEG has historically set limits on the authorities companies can obtain in this regard and provided guidance on the factors to be taken into account by companies and investors when considering the case for disapplying pre-emption rights.
As recommended by the SCRR, the Updated Statement of Principles increases the proportion of a company’s issued ordinary share capital, from 10% to 20%, for which it can seek an annual shareholders’ resolution to disapply pre-emption rights. PEG temporarily increased the limit to 20% during the height of the Covid-19 pandemic to allow companies to be able to raise larger amounts of equity capital within shorter timeframes which was widely acknowledged as being a success.
The Updated Statement of Principles reiterates the position previously put forward by PEG that cash box structures, although not technically considered to be an offer of equity securities for cash (and therefore not subject to statutory pre-emption rights), are nonetheless subject to the limits set out in the principles.
The key differences between the Updated Statement of Principles and the prior version from 2015 (the “2015 Principles”) are:
Disapplication of pre-emption rights up to 20%
- The Updated Statement of Principles will permit companies to obtain disapplication of pre-emption rights resolutions from shareholders for up to 20% of their issued ordinary share capital. Up to 10% (previously 5%) should be available for use for any purpose, with up to a further 10% (also previously 5%) only being used for an acquisition or a specified capital investment, announced contemporaneously with the issue or which has taken place in the preceding 12-month period (previously 6 months). The previous 7.5% rolling three year limit in the 2015 Principles in respect of the first 5% tranche (as it then was) has been removed.
- The use of the routine annual disapplication resolutions is subject to certain conditions, including:
- the company must provide an explanation of the background to and reasons for the fundraising and the proposed use of proceeds in an announcement;
- to the extent that it is reasonably practicable and permitted by law, the company must consult with a representative sample of its major shareholders prior to announcement of the fundraising;
- as far as practicable, the fundraising should be made on a soft pre-emptive basis (i.e. the allocation policy should seek to replicate the company’s existing shareholder base);
- the company should give due consideration to the involvement, in the fundraising and/or in any follow-on offer, of retail investors and existing investors not allocated shares as part of the soft pre-emptive process. The number of shares issued in any follow-on offer should not exceed 20% of those issued in the main fundraising. The Updated Statement of Principles provides for an additional shareholder disapplication authority of up to 2% of the company’s issued ordinary share capital to be obtained on an annual basis in order to cater for this;
- company management should be involved in the allocation process; and
- the company must make a post-transaction report in a prescribed format within one week of completion of the fundraising. The report should be publicly announced through a regulatory information service and submitted to PEG for inclusion in its Pre-Emption Database (a publicly searchable resource). Details of how due consideration was given to the interests of retail investors and existing investors not allocated shares as part of the soft pre-emptive process should be included in the post-transaction report.
The expected features of any follow-on offer which a company carries out in connection with a fundraising for retail or existing investors not allocated shares as part of the soft pre-emptive process are set out in the Updated Statement of Principles and cover the timing and pricing of the follow-on offer (which should be equal to or less than the offer price for the fundraising).
Additional flexibility for capital-hungry companies
Companies that need to raise larger amounts of capital more frequently (referred to in the Updated Statement of Principles as “capital-hungry companies”) may seek additional disapplication authority (i.e. in excess of the 20% limit that otherwise applies), for use whether or not in connection with an acquisition or a specified capital investment, if the reason for exceeding the limits set out in the Updated Statement of Principles is specifically highlighted at the time at which the request for a disapplication is made. They may also obtain such authority for a longer period than usually applies (being no more than 15 months or until the company’s next annual general meeting). The UK Companies Act 2006 allows for disapplication authorities to last for up to five years when obtained alongside an allotment authority for the same period.
Prospective capital hungry companies looking to list and make use of this approach should disclose this intention in their IPO prospectus. Such companies may choose to put in place a disapplication on this basis prior to IPO, with clear disclosure given to investors in the IPO prospectus.
What happens next?
The Updated Statement of Principles has immediate effect although companies will need to wait until their next annual general meeting in order to obtain the shareholder disapplication thresholds. Template resolutions for this have been provided by PEG and it recommends that companies looking to avail themselves of the higher thresholds before then should follow the transitional arrangements in the SCRR.
Companies will also have to wait for the implementation of the proposals in the Outcome of HM Treasury’s UK Prospectus Regime Review published in March 2022 before certain of the changes in the Updated Statement of Principles will be fully effective. Currently the UK Prospectus Regulation requires the publication of a prospectus for offers to retail investors which are greater than €8 million and for issuances of 20% or more of a company’s issued share capital in a 12 month period (subject to certain carve-outs). The changes in the Updated Statement of Principles relating to retail investor participation and capital-hungry companies will remain subject to these Prospectus Regulation requirements until the prospectus regime is amended and therefore they continue to impact the size of any non-pre-emptive fundraising. As explained in our alert Efforts to Elevate London as a Listing Venue of Choice for Growth Companies Continue - Publication of the UK Secondary Capital Raising Review, reform of the prospectus regime will therefore play a key part in creating a more agile and effective regulatory framework for the UK capital markets.
If you would like to discuss any of the topics raised in this alert or have any queries on the UK listing process and the status of its on-going reform, please reach out to the Goodwin team members listed below.