On 4 November 2022, the UK Pre-Emption Group (PEG) issued a new Statement of Principles on disapplying pre-emption rights and associated template resolutions. The Statement of Principles has been revised with immediate effect in line with the recommendations of the UK Secondary Capital Raising Review (SCRR) published in July 2022.
The SCRR was launched by HM Treasury in October 2021 in response to Lord Hill’s UK Listing Review and was asked to consider how to improve the efficiency of capital raisings by listed companies in the UK. The SCRR made several recommendations to support the principle of pre-emption while increasing the ability to raise smaller amounts of capital quickly and give flexibility to companies that need to raise larger sums of capital more frequently. The SCRR’s recommendations were accepted in full by the UK government and endorsed by the PEG, which is currently working to establish the formal governance and membership structure proposed by the SCRR. The PEG will make a further announcement when this work is complete.
Application of pre-emption rights and the Statement of Principles
Pre-emption rights are a cornerstone of UK company law and are enshrined by the UK Companies Act 2006, which provides that they may be disapplied by a special resolution of shareholders at a general meeting of the company. In addition, a company with a premium listing on the Financial Conduct Authority’s Official List that is incorporated outside the UK is required by the UK Listing Rules to ensure that its constitution provides for rights of pre-emption for shareholders that are at least equivalent to those statutory rights that apply to UK incorporated companies.
The Statement of Principles, which was last revised in 2015, provides guidance on the factors to be taken into account by companies and investors when considering the case for disapplying pre-emption rights.
The Statement of Principles applies to issues of equity securities for cash other than on a pre-emptive basis (i.e., other than pro rata to existing shareholders) by all companies (wherever incorporated) with shares admitted to the premium segment of the Financial Conduct Authority’s Official List. Companies with shares admitted to the standard segment of the Official List, to the High Growth Segment of the London Stock Exchange’s main market, or to trading on AIM, are also encouraged to adopt the principles. The principles expressly apply to all issues of equity securities that are undertaken to raise cash, irrespective of the legal form of the transaction – this includes so-called cash-box transactions which may be structured as an issue of equity securities for non-cash consideration falling outside the statutory pre-emption under UK law.
In addition, several proxy advisory firms (in particular, ISS) have historically incorporated the thresholds set out in the Statement of Principles into their voting policies for UK incorporated companies that are listed in the United States.
Key changes in the new Statement of Principles
The key changes in the new Statement of Principles are summarised below.
Increase in the pre-emption disapplication threshold
The new Statement of Principles recommends that shareholders support resolutions at a company’s annual general meeting for an annual disapplication of pre-emption rights in respect of up to 20% of a company’s issued share capital. This comprises:
- Up to 10% of issued share capital, to be issued on an unrestricted basis.
- An additional up to 10% of issued share capital to be used only in connection with 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 of the issue.
In each case, companies may seek further authority to disapply pre-emption rights for up to an additional 2% of issued share capital, which may be used only for the purposes of a follow-on offer to retail investors and existing shareholders after a placing of equity securities. The expected features of such follow-on offers are set out in the Statement of Principles and include, among other things, that qualifying shareholders should be entitled to subscribe for shares up to a monetary cap of no more than £30,000, that the number of shares issued should not exceed 20% of those issued in the placing, and that the price of the shares should be equal to, or less than, the offer price in the placing.
Conditions for use of the 20% disapplication authority
Companies issuing equity securities non-pre-emptively pursuant to a general disapplication of pre-emption rights should:
- Prior to announcing the issue, consult in advance with key shareholders to the extent reasonably practicable and permitted by law.
- Give due consideration to the involvement of retail investors and existing shareholders not allocated shares in the placing. It may be appropriate for companies to make shares available through a retail investor platform or a follow-on offer.
- Explain the background to and reasons for the offer and the proposed use of proceedings, including details of an acquisition or specified capital investment.
- As far as possible, make the issue on a soft pre-emptive basis.
- Involve company management in the allocation process.
- Report publicly on the issue via a Regulatory Information Service within one week of the placing, using the short template included in the Statement of Principles.
Enhanced authority for ‘capital hungry’ companies
Companies that need to raise larger amounts of capital more frequently may seek additional disapplication authority or a disapplication over a longer period than the recommended 15 months. Companies should specifically highlight the reasons for any additional disapplication at the time the request is made for a general disapplication. Companies that wish to be considered ‘capital hungry’ for these purposes should make clear disclosure in their initial public offering prospectus.
Next steps for companies
The PEG recommends that companies should obtain shareholder approval for capital raisings in line with the new guidance at their next annual general meeting, including the use of the template resolutions when seeking such shareholder approval.
Companies that wish to make a non-pre-emptive offer before that time under the new regime due to urgent or exceptional circumstances should follow the transitional measures agreed between the PEG and the SCRR.