The landmark UK Secondary Capital Raising Review Report takes a holistic approach in making bold and comprehensive recommendations to improve the UK secondary capital raising processes and ecosystem.
By James Inness, Anna Ngo, Ryan Benedict, and Johannes Poon
On 19 July 2022, HM Treasury published the UK Secondary Capital Raising Review Report (the Report) that sets out a series of recommendations to improve further capital raising processes for publicly listed companies in the UK.
The Report has already been welcomed by the UK government, the FCA and the Pre-Emption Group (PEG), all of which will have key roles in implementing the Report’s recommendations. The Report should also be widely welcomed by listed companies and investors, given a number of the recommendations, likely to be implemented in the short term, will make an immediate positive impact on their capital raising experience. The detailed, 266-page Report is comprehensive and sets out a series of recommendations that are intended for implementation as a holistic package.
Key recommendations of the Report
1. Maintain and enhance the pre-emption regime
- The principle of pre-emption rights for existing shareholders is to be preserved and enhanced. PEG is to be put on a more formal footing with a transparent governance structure, a dedicated website with a searchable database of pre-emption regime information, and its membership to be reviewed.
2. Reforms impacting non-pre-emptive fundraisings
- Companies able to undertake larger placings: Companies are to be permitted under updated PEG Statement of Principles to issue up to 20% of their issued share capital on a non pre-emptive basis (as was the case when the standard “5%+5%” limitation was relaxed during the COVID-19 pandemic). Of this 20%, up to 10% would be available for use for any purpose and up to a further 10% would be for use in connection with an acquisition or a specified capital investment. The use of this headroom would be subject to conditions similar to those in place during the pandemic and companies would be required to report to the market on how the fundraising was conducted (using a short template form that PEG would publish).
- More flexibility for capital hungry companies: The PEG Statement of Principles are to be updated to allow capital hungry companies to seek the disapplication of pre-emption rights of more than 20% in any one year or over a longer period. Such disapplication would be subject to shareholder approval and it would be up to the company to make the compelling case for the enhanced authority.
- Involving retail investors: Companies to be encouraged to involve retail investors in all capital raisings (including undocumented placings) and consider the most appropriate method by which to do this. Separately, the inclusion of retail investors in IPOs would be encouraged through the FCA shortening the period for which a prospectus must currently be made available to retail investors from six working days to three.
3. Reforms impacting larger pre-emptive fundraisings
- Prospectuses no longer a feature for most secondary fundraisings: The threshold at which a prospectus is required for an admission of shares to trading should be raised to 75% of the existing share capital (from the current 20% threshold). Together with HM Treasury’s impending reforms which mean that already-listed companies are exempt from the requirement to publish a prospectus for a public offer, listed companies would not likely need to publish a FCA-approved prospectus on secondary fundraisings (even on rights issues).
Due to the scope for incurring US securities law liability in the United States and the related desire to document the “due diligence” defence, we would expect that underwriting banks will continue to require the market standard comfort package (including 10b-5 negative assurance letters from law firms and SAS 72 look-a-like letters from auditors) for larger fundraisings involving offerings to QIBs in the United States. As is the case now, counsel will only be in a position to give a 10b-5 letter after completing three years of documentary due diligence and if the offering document incorporates disclosures meeting standards for a US-marketed transaction (e.g. OFR/MD&A, and “prospectus-style” business overview, risk factors and the other related disclosure) and the auditors will only be in a position to issue a SAS 72 look-a-like letter if the offering document includes (or incorporates by reference) audited annual financial statements and the most recent interim period (subject to limited review). Rather than requiring a lengthy offering document (even where exempt from the prospectus requirements under the new regime), the Report proposes that companies should be able to “opt in” to an enhanced periodic reporting regime such that their enhanced disclosures could be incorporated by reference into a shorter offering document. But, in practice, it is important that the full “disclosure package” available to investors – whether in the form of a single document or a document that incorporates financial and other disclosures by reference – would need to satisfy the standards for a US-marketed transaction. Note further that, if a separate US “offering circular” or “private placement memorandum” were prepared for US QIBs only, it would be necessary for the issuer to cleanse the market, either by publishing this document or, as is more customary to avoid “general solicitation” concerns in the US, by publishing an extended press release at the time of the offer.
- Sponsors not required for secondary fundraisings: Companies should not be required to appoint a sponsor in relation to a secondary fundraising (save in the context of a fundraising linked to a material acquisition in which the Class 1 requirements are triggered, for example).
- Minimum offer periods: The offer period for rights issues and open offers should be shortened to seven rather than 10 business days.
- Secondary fundraisings less likely to require general meetings:
- Companies are to be permitted to seek at their AGMs pre-emption disapplication authorities of up to two thirds of their issued share capital with respect to all forms of fully pre-emptive offers (not just rights issues).
- In addition, the statutory pre-emption process is to be amended to align with the usual process currently followed on a rights issue or open offer where the statutory pre-emption rights have been disapplied (e.g. with ability to exclude shareholders in problematic overseas jurisdictions and flexibility to deal with fractional entitlements).
- The notice period for shareholder general meetings (not AGMs) should be reduced to seven clear days.
- Increasing the range of fundraising structures: Various features of Australian accelerated fundraising models could be adopted in the UK (including the concept of a “cleansing notice” that is released at the time of a fundraising to confirm that a company’s existing market disclosures are accurate and up-to-date).
- Working capital statements: Companies should be granted flexibility to formulate their working capital statements within offering documents (rather than the FCA’s current prescriptive approach).
4. Digitisation of the UK’s shareholding framework
- HM Treasury/Department for Business, Energy and Industrial Strategy (BEIS) to implement a modern digitised shareholding system providing near real-time transparency on share ownership. In his Mansion House Speech, the UK Chancellor announced his support for establishing a new taskforce to undertake this implementation, with Sir Douglas Flint appointed as the chair.
The Report’s recommendations around reforming the pre-emption regime are likely to be implemented by the Pre-Emption Group imminently, meaning that listed companies are likely soon to have the flexibility to undertake placings of up to 20% of their issued share capital. Listed companies should consider taking advantage of this by reviewing their headroom levels for resolutions to be voted on at the next AGM, and potentially utilizing cashboxes for any immediate fundraising needs as appropriate. Note that cashboxes will remain subject to the limits set by the PEG Statement of Principles. The Report has also resulted in an increasing market expectation that companies should take steps to facilitate retail participation in fundraisings (including undocumented placings).
The other reforms to reduce regulatory involvement in larger fundraisings, increasing the range of choice of fundraising structures, and digitisation of shareholding systems are expected to be implemented in the longer term as these will require rule changes and/or further action from HM Treasury, the FCA and other industry bodies.
On 3 March 2021, Lord Hill’s UK Listing Review made a series of recommendations to the UK government to help boost the UK as a destination for IPOs and optimise the capital raising process for large and small companies on UK markets. One of those recommendations, which was to bring together an expert group to explore how further capital raisings by listed companies can be made more efficient, led to the launch of the UK Secondary Capital Raising Review on 12 October 2021. A number of recommendations set out in the Report dovetail with the ongoing prospectus and listing regime reforms that are led by HM Treasury and the FCA respectively. (For a reminder of the other key developments on reforming the UK capital markets, please see this Latham blog post).
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