Bold recommendations outlined in UK Secondary Capital Raising Review

Introduction

On July 19, 2022 the UK Secondary Capital Raising Review published its report (Report) setting out a series of bold and wide-ranging recommendations for improving the secondary capital raising regime in the UK designed to make it quicker, more flexible, more inclusive of retail investors and more cost-effective, as well as moving towards digitisation and making better use of technology. The recommendations are closely inter-linked with a raft of other recent and ongoing reforms triggered by the Hill Review intended to modernise, enhance and maintain the attractiveness and competitiveness of UK capital markets on the global stage¹.  

Whilst the Report is detailed in its recommendations, responsibility for taking these forward is allocated to other bodies including the FCA, HM Treasury, the FRC and the Pre-emption Group (PEG). However, given the broad market support for the conclusions of the Report we can expect rapid implementation of many of the recommended changes, although others will necessarily take longer to come to full fruition.

The recommendations

The recommendations cover a range of different areas, including²: 

• Reconfirming the importance of, and enhancing, the UK pre-emption regime, including formalising the role of PEG, reinstating the more flexible approach to secondary fundraisings introduced in 2020 as a result of the Covid pandemic allowing issuers to seek approval for non-pre-emptive issues of up to 20% (with a number of enhancements, including post-event public reporting on how fundraisings have been effected), and better accommodating the needs of capital hungry companies. The Report indicates that PEG expects to publish updated principles and revised template resolutions shortly.
• Increased retail involvement in capital raisings, with due consideration being given to how existing shareholders can be involved in offers as fully as possible.
• Reducing regulatory involvement and the associated burden on issuers on larger fundraisings, including recommendations that the threshold at which a prospectus is required in connection with admission of further shares to trading on a regulated market should be raised from the current 20% to 75%, that a sponsor should not be required for a secondary fundraising (absent other reasons – for example a significant acquisition), that the current overlap between working capital exercises and the work issuers undertake in other contexts (such as going concern and viability statements) should be addressed and that the approach currently taken to working capital diligence on undocumented placings should be able to be followed on all secondary fundraises. 
• Making existing fundraising structures quicker and more cost-effective, including shortening the offer period for open offers and rights issues, amending statutory pre-emption provisions to provide greater flexibility, applying the usual market disclosure liability regime to documents and information published in connection with non-prospectus offerings, and introducing an “opt in” enhanced continuous disclosure regime to bolster disclosure in certain areas, with the intention of enabling the necessary comfort to be given to underwriting banks in relation to offerings made outside the UK (in particular, into the United States). 
• Increasing the range of fundraising structures available – including looking at features of models used in other markets that could be adopted in the UK such as “cleansing notices” (whereby issuers confirm at the time of a non-prospectus offering that they are in full compliance with their disclosure obligations), follow-on offerings and the introduction of standard form terms and conditions for use with institutional investors.  
• Promoting better use of technology by making it a priority to move to a system where all shareholders hold their shares in fully digitised form to ultimately create a system to provide near real-time transparency on investment decision makers and share owners. In this context, the Chancellor has already announced the terms of reference for a new Digitisation Taskforce as recommended in the Report.

Our views

The themes underpinning the Report’s recommendations are not surprising and reflect the general market view that the current secondary capital raising regime is in need of material reform and updating. 

A more flexible approach to pre-emption (moving to a 10 + 10% model rather than the current 5 + 5%)³ will be welcomed by issuers and reflects the fact that the approach taken during the pandemic worked well, with the required safeguards such as soft pre-emption generally being observed. While the template public reporting proposed by the Report would introduce an additional procedural requirement to the process, in our view this is justified by the additional clarity and transparency this would provide and rigour it will impose. The recognition that capital hungry companies may seek enhanced authorities is also welcome, and reflects the specific needs of these types of issuer. More generally, we agree with the recommendations that the pre-emption principles should be kept as investor guidance rather than codifying them into law or regulation (as this will be key to ensuring they remain flexible and responsive) and that PEG’s role should be formalised, enhanced and made more transparent. The proposed relaxations to the statutory pre-emption provisions are also positive and reflect the disapplication process that is usually followed in practice even on substantively pre-emptive rights issues and open offers in order to deal with issues such as overseas shareholders, fractional entitlements, convertible securities etc. 

Promoting greater retail involvement is a topic we have seen increasingly on the agenda in recent years, and this is an area where implementation of the recommendations (together with changes being made to the UK prospectus regime) will remove many of the barriers that currently limit companies’ ability to allow retail participation. Likewise the focus on streamlining the process and timetable for secondary fundraisings and looking at aspects of models used in other markets (such as follow-on retail offerings) that could potentially be adopted in the UK is helpful. Whilst due regard should obviously be given to involvement of retail/existing shareholders in fundraisings, that is not to say that full pre-emption will be appropriate in all cases. We also agree that the manner of including retail should not be mandated - companies should be given as much choice and flexibility as to structure as possible, recognising that what is most appropriate will depend on the circumstances of the issuer and the nature of the fundraising in question.

Using offer documentation that is shorter, more specifically tailored to the transaction in question and which avoids unnecessary duplication of information that is already publicly available has also been a welcome theme in recent discussions and the Report makes a number of sensible recommendations in this context. One area of key importance for listed issuers will be the threshold at which the FCA determines a prospectus is required for further admissions – if the recommendation for this to be increased from the current 20% to 75% is adopted, this will significantly increase the types of fundraising that can be conducted using lighter-touch documentation.⁴ The recommendations in relation to working capital diligence exercises, including looking at the overlap with work companies undertake in connection with going concern/viability statements, is also an important area of focus and something that is likely to be welcomed by the market. 

The question of how a lighter-touch documentary regime in the UK would dovetail with the need for so-called Rule 10b-5 comfort in certain circumstances where shares are also being offered into the United States (in particular, the placing of the “rump” on rights issues) remains something of a thorny issue and it will be interesting to see how the “opt in” continuous disclosure regime outlined in the Report develops. However, complexities in this regard should not detract from the overall benefits a revised UK regime will offer issuers more generally. Ultimately, listed issuers will need to decide whether, in their particular circumstances, the additional flexibility that complying with the “opt in” regime would provide (by enabling more substantial access to other international capital markets in addition to the UK) justifies the additional time, expense and US legal involvement required.

As the Report notes, and as we agree, a number of its recommendations will only be fully realised if the securities holding model in the UK is updated to provide issuers with greater transparency on the detailed make-up of their investor base and to enable end investors to exercise their shareholder rights effectively and efficiently. That said, this is an area where, as the Report recognises, change is likely to be piecemeal given the complexity involved, although the swift publication of terms of reference for a Digitisation Taskforce (and the expectation that it will provide a public report on its progress and initial findings by Spring 2023 and publish final recommendations and an implementation plan by Spring 2024) indicates the seriousness of the Government’s intent in driving this forward.

The Report’s recommendations, in conjunction with the recent and ongoing reforms to the UK prospectus and listing regimes, constitute the most significant overhaul of the UK ECM landscape for many years. As the Hill Review noted last Spring, moments when politicians, regulators and the City are aligned do not come around very often and we share the view expressed in the Report that there is a desire to seize this once in a generation opportunity for meaningful reform.