The updated Statement of Principles will have an immediate impact on UK listed companies, providing increased flexibility to undertake larger non-pre-emptive capital raisings.
On 4 November 2022, the Pre-Emption Group (PEG), a UK body which represents listed companies, investors and intermediaries, issued its updated Statement of Principles which implements certain recommendations of the UK Secondary Capital Raising Review. (For further details on the UK Secondary Capital Raising Review, please see this Latham blog post).
Routine annual disapplication limits increased to 10% + 10%
The updated Statement of Principles permits the annual disapplication of pre-emption rights covering:
- 10% of issued ordinary share capital which may be used on an unrestricted basis;
- an additional 10% of issued ordinary share capital to be used for an acquisition or 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; and
- an additional 20% of any issuance made pursuant to the authorities under the two bullets above, to be used only for follow-on offers to existing shareholders not allocated shares under those non pre-emptive issues (see “Involving retail and existing investors through follow-on offers” below)
The previous 7.5% rolling three-year limit, which applied to non-pre-emptive issues for general purposes, has been removed.
Conditions to use 10% + 10% disapplication authorities
Companies using these general disapplication authorities (regardless of transaction size) should comply with the following conditions, which build on similar conditions introduced by PEG during the COVID-19 pandemic:
- Consultation: prior to announcement of the issue, the company should consult with its major shareholders to the extent reasonably practicable and permitted by law;
- Retail investors: due consideration should be given to the involvement of retail investors, as well as other existing investors, who are not allocated shares as part of the soft pre-emptive process (see separate bullet point below);
- Explanation: the company should 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 (in practice, this is disclosed in the transaction announcement);
- Soft-pre-emption: as far as practicable, the issue should be made on a soft pre-emptive basis (i.e. where a bookrunner allocates shares to investors in accordance with an allocation policy that seeks, insofar as is practicable, to replicate the existing shareholder base);
- Management involvement: company management should be involved in the decision as to the allocation of the shares; and
- Post-transaction reporting: companies are required to publish a post-transaction report (template available on Part 2B of the Statement of Principles) through a regulatory information service and submit to PEG for inclusion in its Pre-Emption Database within a week following the completion of the issue.
Additional flexibility for capital-hungry companies
Companies that need to raise larger amounts of capital more frequently are permitted to seek additional disapplication authority for general use, and may seek such disapplication authority for a period longer than the default duration of 15 months or until the next AGM (whichever is shorter). IPO candidates that wish to be considered a “capital-hungry company” for these purposes should disclose that fact in their IPO prospectus and may put in place the requisite disapplication authorities prior to IPO.
Involving retail and existing investors through follow-on offers
Companies undertaking a non-pre-emptive capital raise pursuant to a general disapplication of pre-emption rights should give due consideration to the participation of retail and existing investors (who are not allocated shares as part of the soft pre-emptive process). In addition to retail investor platforms, the Statement of Principles suggests that companies should consider facilitating the participation of such retail and existing investors through follow-on offers which would take place shortly after the institutional-only placing.
The expected features of such follow-on offers are set out in Part 2B of the Statement of Principles, which require that the participation of each ultimate beneficial owner of those retail/existing investors to the follow-on offer be subject to an individual monetary cap of £30,000.
- As with previous iterations of PEG guidance, the updated Statement of Principles applies to all companies (wherever incorporated) with shares admitted to the premium listing segment of the Financial Conduct Authority’s Official List. Companies with shares admitted to the standard segment, High Growth listing segment or to trading on AIM should also consider the guidance.
- PEG’s press release indicates that companies should take advantage of the increased capital raising flexibility by seeking shareholder approval for the updated routine 10% + 10% disapplication authorities at their next AGM.
- Companies that wish to raise capital under the new Statement of Principles before their next AGM should consider the transition arrangements described in the UK Secondary Capital Raising Review, which contemplate the use of cashbox structures limited to the 10% + 10% authorities, as set out in the updated Statement of Principles.
- Despite the increase to the disapplication headroom, companies still need to consider the fundraising size constraints arising from the UK prospectus regime. The prospectus reforms announced on 1 March 2022 have not yet been implemented. In the interim, any retail involvement should be limited to <€8 million and the “admission to trading” prospectus threshold means that an aggregate fundraising limit of 20% of issued share capital per 12 months still applies.