Global | Publication | July 2022
On July 19, 2022 HM Treasury published the outcome of the UK Secondary Capital Raising Review, tasked in October 2021 with making recommendations on how further capital raising processes by companies that are already listed could be made more efficient. The Review makes a series of recommendations to the Government, the Financial Conduct Authority (FCA), the Financial Reporting Council (FRC) and the Pre-Emption Group (PEG). See also our separate briefing Bold recommendations outlined in UK Secondary Capital Raising Review.
The Review has been guided by four main principles, namely: (a) the maintenance of the principle of pre-emption rights for existing shareholders; (b) cost and efficiency (the fundraising structures available to issuers should be as efficient as possible in terms of time and cost while ensuring that appropriate standards of investor protection are preserved); (c) choice, in that the choice of structures available to companies on the UK capital markets who want to raise capital should be as broad as possible; and (d) enabling retail investors (as much of a company’s existing shareholder register as possible, including retail investors, should be able to participate in any capital raising in a timely way, whatever its structure).
In terms of timing, the Review notes that some of its recommendations will take longer than others to realise and there is an order in which the various reforms will need to flow through. However, the recommendations are intended to be implemented as a holistic package, so that progress in one area is not undermined by a lack of movement in another. To achieve the Review’s aims, the timely taking of co-ordinated steps by a wide range of stakeholders will be needed. Each recommendation lists the key stakeholders responsible for it and the timetable for action.
Recommendation 1: The principle of pre-emption is an important shareholder protection in the UK capital markets and should be preserved and enhanced. To reflect this, the PEG should be put on a more formal and transparent footing, with its secretariat appropriately resourced. PEG and the Financial Reporting Council (FRC) should take steps to carry out this recommendation immediately.
Recommendation 2: The ability for companies to issue up to 20% of their issued share capital, introduced during the Covid-19 pandemic in 2020, should be made permanent and the PEG’s Statement of Principles updated accordingly.
Conditions similar to those in 2020 should apply, namely: (a) an explanation of the background to and reasons for the fundraising and the proposed use of proceeds; (b) to the extent reasonably practicable and permitted by law, consultation with a representative sample of the company’s key shareholders should be undertaken; (c) as far as possible, the issue should be made on a soft pre-emptive basis; and (d) company management should be involved in the allocation process. However, in addition, (i) due consideration should be given in all placings to the involvement of retail investors and other existing investors; and (ii) up to 10% should be available for use for any purpose with up to a further 10% only being used for an acquisition or a specified capital investment, using the existing PEG definitions, with the acquisition or specified capital investment being announced contemporaneously with the issue or having taken place in the preceding 12-month period.
Prior shareholder approval should be obtained at a company’s annual general meeting (AGM) each year for the up to 10% + 10% authorities. Ahead of a company’s next AGM at which it can seek shareholder approval for this authority, a transitional regime should be put in place by the PEG to allow companies to use the revised regime in the meantime.
Recommendation 3: In light of the increased threshold, companies should be required to report publicly after a placing on how it was carried out. This should be done using a short, template form that is filled out by the company and made available publicly by it via an RIS in the week after the placing and which specifies certain information and confirmations, for example, confirmation that, as far as possible, the principle of soft pre-emption was applied, detailing any specific points in this respect that the issuer considers relevant, and confirmation that appropriate consultation of key shareholders was carried out before launch. This form should also be filed with the PEG and be available going forward in a publicly searchable database maintained by it as well as a summary of the details being included in the company’s next annual report.
Recommendation 4: In connection with undocumented placings, cash box structures should only be used for up to the amount of the pre-emption disapplication authority that has been granted by shareholders at the company’s most recent AGM, as a mechanic to increase the company’s distributable reserves. This should also be reflected in the PEG’s updated Statement of Principles.
These recommendations are for the PEG and the FRC to implement immediately.
Recommendation 5: Shareholders should support companies that need to raise larger amounts of capital more frequently, if appropriate in the circumstances, if they request a disapplication of pre-emption rights of more than 20% in any one year or a disapplication over a longer period. This should be reflected in the updated PEG Statement of Principles. The company will need to make an appropriately compelling argument for the enhanced authority to achieve that shareholder support. For newly listed companies, the putting in place, as well as the size and duration, of an enhanced authority at IPO and any intention to seek further authorities on the same or similar terms in the future should be fully disclosed in their IPO offer documentation.
This recommendation is for the PEG and the FRC to implement immediately.
Recommendation 6: Companies should consider the interests of retail shareholders (and all other shareholders) on all capital raisings, including undocumented placings of up to 20% of issued share capital, and how to involve them in the offer as fully as possible. Companies should consider the most appropriate method for this, taking into account both the company’s and the market circumstances at the time of the placing as well as the constitution of their shareholder register. For example, it could be appropriate to use one of the technology-driven market providers and solutions that exist and are being developed or, the company could include a follow-on offer that would take place after the institutional offer had closed. If this route was chosen, companies should ensure that any follow-on offer is limited to no more than 20% of the size of the placing, with a monetary cap of £30,000 per investor. This amount would fall outside and be in addition to the up to 20% disapplication authority. The follow-on offer should otherwise be made on the same terms and conditions as the institutional placing and be open for five business days. The offer document should be short and contain the offer structure, the timetable, a chair’s letter (which includes the background to and reasons for the fundraise), the terms and conditions and the use of proceeds.
This recommendation is for the PEG and the FRC to implement immediately.
Recommendation 7: The Review also recommends to the FCA that for an IPO that involves a retail offer, a prospectus should not continue to have to be made available to the public at least six working days before the end of the offer. This period should be shortened materially and should be a maximum of three working days.
This recommendation is for the FCA and the FRC to implement in the near term.
The Review notes that HM Treasury’s reforms to the prospectus regime will mean that prospectuses do not, as a default, need to be prepared and published when a company is making a public offer of securities to its existing shareholders. In many cases this will materially shorten the pre-launch preparation time and cost involved for companies. Separately, the threshold at which a prospectus should be required for an admission of shares to trading should be raised materially from the current 20% threshold to at least 75%, so prospectuses that are inherently duplicative of a company’s existing market disclosure should not be needed on most fundraisings.
Recommendation 9: A sponsor firm should not need to be appointed by a company in relation to a secondary fundraising (although sponsor declarations on a circular will continue, under the current regime, to be required for certain secondary offers – for example where these are linked to a material acquisition). The working capital diligence approach followed on placings (which involves a working capital warranty being given to the underwriting banks and an exercise undertaken to stress test and sensitise the company’s financial model) should also be able to be followed on all secondary fundraisings.
Recommendation 10: The FCA’s approach to working capital statements, when and if required in the future, whereby clean statements cannot be accompanied by disclosure of assumptions made by the company in making its confirmation, should be reconsidered and revised to allow greater flexibility of approach and a disclosure-based approach. The FCA’s approach to the formulation of language emphasising how important the shareholder vote is on fundraises that constitute a reconstruction or refinancing should also be revised, if retained as a concept. The key disclosure should be around the rationale for the quantum of funds being raised and the use of proceeds.
Recommendation 11: The current overlap between working capital diligence exercises and the work that issuers are required to undertake to give going concern statements and viability statements (and in due course resilience statements) should be addressed and the working group that has already been set up by the FCA and the FRC to look at this area should progress its work as soon as possible.
These recommendations are for the FCA and the FRC to implement in the near term.
Recommendation 12: The offer period for rights issues and open offers should be shortened so that an offer is open for acceptance for seven business days rather than ten business days. The different methods set out in the Companies Act 2006 (CA 2006) and the FCA Handbook for calculating minimum offer periods should be aligned to clarify the obligations for listed companies. BEIS and the FCA should implement this in the near term.
Recommendation 13: Statute should be amended to give the Secretary of State the flexibility, without further primary legislative change, to reduce the notice period for shareholder meetings other than AGMs to seven clear days at the appropriate time. BEIS should implement this in the medium term.
Recommendation 14: Companies should continue to be able to seek annual shareholder allotment and pre-emption rights disapplication authorities of up to two thirds of their issued share capital, but with the authority extending not just to rights issues as currently, but to all forms of fully pre-emptive offers made on the basis of the updated pre-emption provisions set out in Recommendation 15 below, and any follow-on offer as described in Recommendation 6. The Investment Association should implement this in the near term.
Recommendation 15: The pre-emption provisions in the CA 2006 should be amended to align them to the process usually followed on a rights issue or open offer when a disapplication resolution has been used to modify statutory pre-emption rights. This should include the ability to exclude shareholders in overseas jurisdictions where the cost and burden of extending the offer to them would be disproportionate, flexibility to deal with fractional entitlements through aggregating and selling them, as well as permitting the new shares to be offered to securities holders with a contractual right to them, such as convertible bondholders, warrant holders and preference shareholders, as if they were holders of ordinary shares. BEIS should implement this in the near/medium term.
Recommendation 16: The listing regime should be amended to cater for the ability to have excess application mechanics attached to rights issues (where existing shareholders can apply to take up shares that are not taken up by other shareholders, at the offer price). The FCA should implement this in the near term.
Recommendation 17: The Review notes that the current structure of rights issues in the UK and the proportion of UK share registers held by US shareholders or EEA shareholders mean that often shares or rights to shares that are not taken up by existing shareholders in a rights issue need, in practice, to be capable of being sold by the banks to institutional shareholders in the US and other non-UK jurisdictions. This results in issuers having to publish a full prospectus. To address the issues this creates, two actions are recommended for HM Treasury to implement in the near/medium term:
Recommendation 18: There should be greater choice of structure available to UK issuers to use if the circumstances are relevant. Australia uses a number of different accelerated fundraising structures and there are various features of the Australian models that could be adopted in the UK capital markets in the near to medium term. The Australian concept of a ‘cleansing notice’ is one that should be adopted in the UK where a secondary issue involving a public offer does not require a prospectus. In a cleansing notice a company at the time of a fundraising confirms publicly that it is in full compliance with its market disclosure obligations and that it is not delaying the disclosure of any inside information (i.e. level-setting the market in terms of its existing market disclosure and confirming that it is accurate and up-to-date). Such a statement, alongside publication of the company’s investor presentation and any supplementary offer document and in conjunction with other Recommendations made in the Review, including around potentially clarifying the bank liability regime, will help streamline disclosure where offers are made without the current full prospectus.
The FCA should implement this in the near/medium term.
Recommendation 19: Ahead of a move to full digitisation of shareholdings, section 793 CA 2006 should be amended so that, in addition to the information about its shareholders that is already provided to a company when it does a section 793 ‘sweep’, the identity of the ultimate investment decision maker or beneficial owner in relation to a share is also disclosed. This will assist in identifying institutional and non-institutional shareholders in the context of fundraisings as well as being of benefit more generally in terms of a company having greater visibility over its shareholder register. BEIS should implement this in the near/medium term.
Recommendation 20: Standard form terms and conditions with institutional investors for use on secondary fundraisings should be agreed by the market and made available publicly to remove the need to agree bespoke terms with investors at the time of a transaction, reducing cost and increasing speed. Appropriate industry groups should implement this in the near term.
Recommendation 21: The Review believes that moving to a system where all shareholders (institutional and retail) hold their shares in fully digitised form will hugely benefit the UK capital markets if done effectively, and an appropriate legal and regulatory framework could, among other things, significantly improve the effectiveness of existing listing regime protections and allow the full benefits of many of the recommendations in the Review to be realised and, in some cases, the fundraising structures made even more efficient.
The practice of investors holding certificates should be eradicated, in a way which preserves their rights to vote, receive information and participate in corporate actions. Similarly the current intermediated securities chain from central securities depository to end retail investor could be reformed and improved. However, the Review believes that progress is more likely to be secured through imposing formal obligations on intermediaries to notify and provide underlying beneficial owners with the option to attend meetings, vote, receive information and participate in fundraisings, for example.
It also believes that the implementation of the Shareholder Rights Directive II could be revisited so that the provisions facilitating the identification of shareholders, transmission of information and the exercising of shareholder rights could be applied to the underlying beneficial owner of a share as well as to the legal owner whose name is included on the company’s shareholder register.
Digitisation should ultimately involve creating a system to provide near real-time transparency on investment decision makers and share owners. It may involve substantial changes being made to the current structure, including clarifications and revisions from a legal perspective that have already been identified. The use of innovative technologies, such as distributed ledger technology, should be explored alongside tried and tested technologies which could create more efficient shareholder engagement, such as online presentations, app-based platforms and online and automated telephone-based payments.
However, the move to an ambitious digitised shareholding system should be made more of a priority so that the recommendations in the Review to make fundraising structures quicker and cheaper and to involve all shareholders, including retail, meaningfully in every fundraise, can be realised. It should be coordinated and driven by a newly established Digitisation Task Force, with an independent chair to head it and a technically experienced second-in-command.
HM Treasury and BEIS should implement this in the near term.
(HM Treasury: UK Secondary Capital Raising Review - Outcome of Review, 19.07.2022)
On July 20, 2022 HM Treasury announced the establishment of a digitisation taskforce (Digitisation Taskforce) to modernise the UK’s shareholding framework. Setting up a Digitisation Taskforce of this nature was one of the recommendations of the UK Secondary Capital Raising Review published on July 19, 2022 (see Recommendation 21 of that Review).
The Digitisation Taskforce, to be chaired by Sir Douglas Flint, has been asked to work with stakeholders across the financial services sector to build a broad consensus for change and in particular to:
The Digitisation Taskforce will also consider the use of new processes and technologies in achieving these goals.
It has been asked to provide a public report on its progress and initial findings by Spring 2023 and to publish final recommendations and an implementation plan by Spring 2024.
The Terms of Reference for the Digitisation Taskforce are here.
On July 19, 2022 London Stock Exchange plc announced the launch of a new UK Capital Markets Industry Taskforce (UK CMI Taskforce) to drive forward the development of the UK’s capital markets and maximise the impact of capital market reforms. It follows the publication of the UK Secondary Capital Raising Review on July 19, 2022.
The UK CMI Taskforce comprises CEOs, Chairs and industry leaders representing private and publicly listed companies, asset owners and managers and the advisory services that support their access to capital and investments. Its objectives will be to stimulate industry engagement to ensure that the UK’s capital markets serve those who seek capital and those who have capital to invest, that they support the UK economy and strengthen its role as a global financial centre.
(LSE: UK Capital Markets Industry Taskforce launched, 19.07.2022)
A Companies House blog published on June 30, 2022 in relation to the regime introducing the Register of Overseas Entities under the Economic Crime (Transparency and Enforcement) Act 2022, has been updated. It now states that the new Register is to be launched on August 1, 2022, with Companies House expecting the relevant commencement order to be laid on that date.
Further information on this is anticipated. In the meantime, a link to our earlier briefing on this new Register is here.
On July 21, 2022 the Financial Reporting Council (FRC) published guidance, primarily for listed companies and shareholders, which sets out suggestions for good practice (in the form of “Principles” and relevant actions) that listed companies should consider adopting to enhance effective shareholder participation when planning and conducting annual general meetings (AGMs) and other general meetings (Guidance).
The Guidance points out that in relation to company meetings, companies should seek to maximise the participation and engagement of all types of shareholders on the register and, where appropriate, take advantage of the use of technology to increase participation and engagement. The Guidance suggests potential ways to engage and participate, taking into account any confidential and/or commercially sensitive information. The Guidance also stresses the importance of shareholders and proxy advisers engaging with companies throughout the year, not only at the AGM or in the lead up to it.
The Guidance notes that many companies have moved to hybrid forms of meeting and it refers to the ongoing uncertainty surrounding virtual-only meetings in light of the interpretation of the word “place” for a meeting in the Companies Act 2006. As a result it states that “Careful consideration should be given by companies if they are planning to hold virtual-only meetings and independent legal advice should be sought.”
The Guidance is divided into sections relating to the different stages of a meeting, as well as engagement with shareholders. It sets out seven Principles throughout those stages and explains particular actions that can be taken to achieve those Principles. The Principles are as follows:
Principle 1: Information disseminated prior to the general meeting must offer clear instructions on how to attend the meeting and participate, in order to enable effective shareholder engagement.
Principle 2: Whether meetings are physical, hybrid or virtual (should the legal position be clarified), shareholders should, as far as practicable, be able to engage in the business of the meeting.
Principle 3: The board should provide an update at the AGM on matters raised by stakeholder groups that are considered by the board to materially affect the company’s strategy, performance, and culture.
Principle 4: Companies should seek the broadest access to and participation in GMs by a diverse range of shareholders. Whether attending virtually or in person, shareholders should have the opportunity to raise questions pertinent to the meeting agenda.
Principle 5: Shareholders should be able to cast their vote in real-time, or submit a voting instruction in advance via the appointment of a proxy, depending on the format of a meeting. Appropriate technology should be used by companies to ensure that shareholders have the ability to appoint proxies and send instructions to proxies prior to the meeting. Actions to achieve this are suggested for virtual (to the extent legally permitted) and hybrid meetings, utilising an electronic platform, as well as for other general meetings, including those incorporating a webcast.
Principle 6: Companies should be as transparent as possible with shareholders in relation to matters discussed and raised by shareholders at the GM.
Principle 7: Effective and transparent shareholder engagement should not be limited to an annual event. Opportunities to update shareholders on company matters should be offered throughout the year, with an emphasis on ensuring all shareholders have access to similar information. The Guidance sets out a non-exhaustive list of approaches for companies to consider in relation to this, noting that the company’s directors should determine what will work best for their shareholder base, in order to maintain strong ties with them.
(FRC, Good practice guidance for company meetings, 21.07.2022)
On July 19, 2022 the Department for Business, Energy and Industrial Strategy (BEIS) published a set of Market Guidance Notes to complement the guidance already published on the National Security and Investment Act 2021 (NSI Act) by answering questions and providing advice based on the first six months of the NSI Act’s operation. Since most interest has been focused on the mandatory notification system under the NSI Act, BEIS notes that this first set of Market Guidance Notes has a particular focus on whether commonly raised scenarios require mandatory notification.
The Market Guidance Notes cover the following topics:
BEIS welcomes suggestions for topics to include in future market guidance publications and states that it will publish another tranche of Market Guidance Notes in early 2023.
In addition to the Market Guidance Notes, BEIS has published additional guidance and updated certain existing guidance relating to the NSI Act as follows:
(BEIS: National Security and Investment: Market Guidance Notes - July 2022, 19.07.2022)
On July 20, 2022 the Takeover Panel (Panel) published Panel Bulletin 5 (PB5) in relation to possible offer announcements. PB5 reminds financial advisers of certain aspects of the guidance on Rule 2 of the Takeover Code set out in Practice Statement No. 20, including steps the Panel expects parties and their advisers to take in order to ensure that their responsibilities are complied with.
In particular, PB5 reminds financial advisers that once the requirement to make a possible offer announcement has been triggered under Rule 2.2, the Panel expects the announcement to be made immediately (i.e. within a matter of minutes) and discusses the Panel’s expectations regarding release procedures and the preparation and content of draft leak announcements.
(Takeover Panel: Bulletin 5 – Possible offer announcements, 20.07.2022)
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