New PEG Statement of Principles on the Disapplication of Pre-Emption Rights

New PEG Statement of Principles on the Disapplication of Pre-Emption Rights

November 15, 2022, Covington Alert

On November 4, 2022, the Pre-Emption Group (“PEG”) issued a new Statement of Principles on disapplying pre-emption rights (“Statement of Principles”) implementing the recommendations of the UK Secondary Capital Raising Review (“SCRR”) with immediate effect. The key changes made to the 2015 Statement of Principles are:

• subject to certain conditions, support for non-pre-emptive issuances increased from 10 percent to 20 percent of a company’s issued share capital;
• additional authorities for follow-on offers to retail investors and existing shareholders; and
• higher authorities for ‘capital hungry companies’.

PEG has also issued new template resolutions for the disapplication of pre-emption rights complying with the Statement of Principles. Companies are advised to seek shareholder authorities in line with the new principles at their next AGM. Companies who wish to take full advantage of the recommendations and undertake a non-pre-emptive offer before their next AGM, should follow the transitional measures described in the PEG Review.

Background

The Statement of Principles sets out guidance on the disapplication of pre-emption rights and use of an agreed authority for a non-pre-emptive share issue. The guidance applies to companies with shares admitted to the premium listing segment of the Official List, but companies with a standard listing and those admitted to trading on AIM are encouraged to adopt the principles.

As a temporary measure during the Covid-19 pandemic, PEG issued a statement recommending that shareholders support additional flexibility for non-pre-emptive issuances and raised the threshold for non-pre-emptive issuances from 10 percent to 20 percent of a company’s issued share capital. This temporary measure expired on November 30, 2020, but has now been given permanent effect in the new Statement of Principles.

The SCRR was published in July 2022 in response to Lord Hill’s UK Listing Review on the efficiency of capital raisings by listed companies. The SCRR set out a number of recommendations to the government, the FCA and PEG, which included recommendations to enhance PEG’s governance and implement changes to PEG’s guidance on non-pre-emptive issues, which have now been accepted in full and implemented by PEG in the new Statement of Principles.

Increase in the Disapplication Threshold to 20 Percent

The new Statement of Principles recommends that companies may seek annual shareholder authorities to issue equity securities for cash on a non-pre-emptive basis representing:

• 10 percent of the company’s issued share capital (increased from the previous 5 percent), which may be used for working capital or any other purpose; and
• an additional 10 percent of the company’s issued share capital (increased from the previous additional 5 percent), which may be used in connection with a specified capital investment or an acquisition that is announced contemporaneously with the issuance or that has occurred in the previous 12 months (increased from the previous six months).

  Companies issuing equity securities pursuant to a general disapplication of pre-emption rights obtained in accordance with the new Statement of Principles need to comply with certain associated governance conditions:

• prior to announcement of the issuance, consult with its major shareholders to the extent reasonably practicable and permitted by law;
• give due consideration to the involvement of retail investors and existing investors not allocated shares as part of a soft pre-emptive process;
• provide an explanation of the background to and reasons for the offer and the proposed use of proceeds, including details of any acquisition or specified capital investment;
• as far as practicable, make the issue on a soft pre-emptive basis;
• involve company management in the process of allocating the shares issued; and
• after completion of the issuance, make a post-transaction report via RIS and submit to PEG for inclusion in its database within a week of the issuance.

A template post-transaction report has been included in the new Statement of Principles, which PEG expects companies and advisers to use as a matter of market practice. The template report requires companies to disclose details of the transaction, the quantum of the offering and proposed use of proceeds, the discount, allocations, consultation with major shareholders and an explanation of the consideration given to retail investors.

Follow-On Offers

A company issuing equity securities for cash on a non-pre-emptive basis pursuant to a general disapplication of pre-emption rights should give due consideration to whether retail investors and existing shareholders should be enabled to take part in the offering. Where appropriate in the context of the offering, PEG recommends that companies may wish to include a retail offer component to their fundraising, either through a web-based retail investor platform or by means of a follow-on offer.

The new Statement of Principles supports companies seeking a further disapplication authority of 2 percent of a company’s issued share capital (on top of the 10 percent disapplication authority) and a further disapplication authority of 2 percent of a company’ issued share capital (on top of the additional 10 percent disapplication authority for an acquisition or specified capital investment), which may be used only for the purposes of a 'follow-on offer' to retail investors and existing shareholders after a placing , such that companies may in aggregate seek a further disapplication authority of up to 4 percent for the purposes of a follow-on offer.

It has become common in recent years for companies to give retail investors the chance to participate in a fundraising through the use of web-based technology platforms. The SCRR reported on a number of issues with the regulatory regime which has had an adverse effect on the way that retail offers are currently conducted. For example, the financial promotion regime which requires materials published in connection with the retail offer to be approved as a financial promotion by an authorised person (typically the platform itself or an intermediary), which can be a challenging process on the condensed placing timetable and one that may limit the information that is provided to retail investors. The accelerated timetable also means that the time afforded to retail investors to make an investment decision is extremely short. A follow-on offer would give the company and the retail investors more time to address some of these issues.

The new Statement of Principles expects a follow-on offer to include the following features:

• qualifying shareholders: the offer should be made to shareholders as at a record date prior to announcement of the placing;
• individual monetary cap: qualifying shareholders should be entitled to subscribe for shares up to a monetary cap to be determined by the issuer of not more than £30,000 per ultimate beneficial owner;
• size: the number of shares issued in any follow-on offer should not exceed 20 percent of those issued in the placing and may be made for ‘up to’ a specified number of shares, with fewer shares issued if sufficient applications are not received;
• price: the issue price of shares in any follow-on offer should be equal to, or less than, the offer price in the placing;
• timing: the company should announce any follow-on offer when, or as soon as reasonably practicable after, it announces the placing (and, in determining when to launch any follow-on offer, the company should ensure that it complies with both the price requirement above and the requirement in LR 9.5.10R not to issue equity securities at a discount of more than 10 percent); and
• offer period: the company should ensure that any follow-on offer is open for a period sufficient to allow qualifying shareholders to become aware of the offer and to reach an investment decision.

The new Statement of Principles includes enhanced authorities for companies that need to raise larger amounts of capital more frequently. Such ‘capital hungry companies’ may seek additional authorities, whether or not in connection with an acquisition or specified capital investment, provided that the reason for exceeding the limits set out in the new Statement of Principles was specifically highlighted at the time at which the request for a general disapplication was made. Companies seeking admission to the Official List that wish to be considered a ‘capital hungry company’ should disclose that fact in their IPO prospectus.

Capital hungry companies may also ask for such additional authority to last for a longer period than ordinarily prescribed by the Statement of Principles (the shorter of 15 months and the next AGM), subject to the long stop date of five years in the Companies Act 2006.

The new Statement of Principles aims to give companies greater flexibility to raise larger amounts of capital on a non-pre-emptive basis, which will be welcomed by market participants, so one can expect companies to seek shareholder support for the new limits at their next AGMs.

It is also clear from the new Statement of Principles, that there is a continued sharp focus on retail investors and existing shareholders. Companies are encouraged to include a retail offer or open offer component to their fundraisings, or explain to their shareholders and the market the justifications for why they chose not to. 

Until the proposals in the UK Prospectus Regime Review outcome paper are implemented, the current public offer prospectus requirements continue to apply such that for main market listed companies the aggregate size of a non-pre-emptive offering not requiring a prospectus will continue to be subject to the current 20 percent threshold. Similarly, a retail follow-on offer will continue to be subject to the current small offers exemption where offers greater than €8 million would require a public offer prospectus (applicable to both main market and AIM listed companies).

If you have any questions concerning the material discussed in this client alert, please contact the members of our London Corporate practice.