On 4 November 2022 the Financial Reporting Council issued, on behalf of the Pre-Emption Group, a new Statement of Principles - Disapplying pre-emption rights (the Principles). The Principles have been revised in line with the recommendations of the UK Secondary Capital Raising Review and its proposed adjustments to the guidance on non-pre-emptive issues, and are welcomed by market participants. The Principles relate to issues of equity securities (the Securities) for cash other than on a pre-emptive basis (i.e. other than pro rata to existing shareholders) by all companies with shares admitted to the premium listing segment of the Official List of the Financial Conduct Authority and to trading on the Main Market for listed securities of the London Stock Exchange. Companies with shares admitted to the standard listing segment of the Official List of the FCA or to trading on the Alternative Investment Market are also encouraged to adopt them. The Principles apply to all issues of Securities that are undertaken to raise cash, including a “cashbox” transaction (structure of raising funds from an issue of Securities for non-cash consideration through the acquisition of a special purpose vehicle).
The Principles aim to clarify the circumstances in which issuance of Securities on a non-pre-emptive basis would be appropriate and the factors to be taken into account in relation to:
- requesting a general disapplication of pre-emption rights at an Annual General Meeting;
- issuing equity securities pursuant to a general disapplication; and
- requesting a specific disapplication of pre-emption rights for an identified issuance of Securities.
General disapplication of pre-emption rights
A company may seek authority, by special resolution at an AGM, to issue Securities non-pre-emptively for cash representing:
- no more than 10% of its issued ordinary share capital in any one year, on an unrestricted basis; and
- no more than an additional 10% of its issued ordinary share capital, to be used for either an acquisition or a specified capital investment which is announced contemporaneously with the issue, or which has taken place in the preceding 12-month period and is disclosed in the announcement.
The disapplication should be for no more than 15 months or until the company’s next AGM, whichever is the shorter period. In each case, a company may seek a further authority to disapply pre-emption rights for no more than 2% to be used only for the purposes of making a follow-on offer (after a placing) to retail investors and existing shareholders not allocated shares as part of the soft pre-emptive process. Further detail regarding the follow-on offer is set out below.
Capital hungry companies
Companies that need to raise larger amounts of capital more frequently (“capital hungry” companies) may seek additional disapplication authority and/or a disapplication over a longer period, provided that they highlight reasons for exceeding the standard level and/or the disapplication period at the time at which they make the request. Such companies may choose to put in place a disapplication prior to IPO and provide clear disclosure to investors in the IPO prospectus.
Issuing securities pursuant to a general disapplication
Companies issuing Securities non-pre-emptively pursuant to a general disapplication should:
- prior to announcing the issue, consult with key shareholders, to the extent reasonably practicable and permitted by law;
- give due consideration to the involvement in the placing (and/or any follow-on offer) of retail investors and existing shareholders not allocated shares as part of the soft pre-emptive process;
- explain the background to and reasons for the issue 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 their management in the allocation process; and
- within one week of completion of the issue, make a post-transaction report in the format set out in paragraph 10 of Part 2B of the Principles (the Post-Transaction Report) via a Regulatory Information Service and submit the report to PEG.
In general, companies issuing Securities non-pre-emptively should aim to ensure that they are raising capital on the best possible terms in order to avoid unnecessary dilution of existing shareholders, especially where the share price may reasonably be expected to rise as a result of the proposed equity issue, any related transaction or any other simultaneous transaction or matter of which the directors are aware. Companies should, other than in exceptional circumstances, seek to restrict any discount to a maximum of 5% (including expenses), and will be expected to disclose any discount in the Post-Transaction Report.
Retail investors and follow-on offer
The company should give due consideration as to whether retail investors and existing investors not allocated shares as part of the soft pre-emptive process are enabled to take part in the issue, and details of such consideration should be included in the Post-Transaction Report. Participation of retail investors may be, where proportionate in the context of the issue, via a retail investor platform. The company may also decide to make a follow-on offer, its main features are expected to be as follows:
- Qualifying shareholders - should be made to qualifying shareholders (shareholders as at a record date prior to announcement of the placing, excluding any shareholder allocated shares in that placing);
- Inpidual monetary cap - subscription for shares up to a monetary cap of no more than £30,000;
- Size - the number of shares issued should not exceed 20% of those issued in the placing;
- Price - the issue price of shares should be equal to, or less than, the offer price in the placing;
- Timing - should be announced by the company when, or as soon as reasonably practicable after, it announces the placing; and
- Offer period - should be open for an adequate period to allow qualifying shareholders to become aware of the offer and to reach an investment decision.
Specific disapplication of pre-emption rights
Requests for specific disapplication of pre-emption rights should be considered by shareholders on a case-by-case basis. Companies should flag the possibility of such request at the earliest opportunity, communicate to shareholders information they need to reach an informed decision and in certain cases, consult a small number of major shareholders before making any announcement.
The Principles set out a non-exhaustive list of general considerations that are likely to influence shareholders’ decisions when voting on a request for a specific disapplication of pre-emption rights – these include (i) the strength of the business case; (ii) the size and stage of development of the company and its sector; (iii) stewardship and governance of the company; (iv) financing options; (v) level of dilution of value and control for existing shareholders; (vi) proposed process following approval; and (vii) contingency plans.