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New PEG pre-emption guidance: Consequences for listed issuers
United Kingdom | Publication | 11月 2022
Update: In February 2023 the Investment Association also published updated guidance in the form of revised Share Capital Management Guidelines. These have been changed to (among other things) support the Updated PEG Principles. For a summary of the key changes made to the Investment Association guidelines see here.
Content
Introduction
On November 4, 2022 the Pre-emption Group (PEG) published an updated Statement of Principles (Updated PEG Principles) and template resolutions.1
These replace the previous version of the PEG Principles (2015 PEG Principles) and associated template resolutions and reflect recommendations made in the report (Report) published by the UK Secondary Capital Raising Review in July 2022 (for a discussion of the wider recommendations made in the Report, see our separate briefing Bold recommendations outlined in UK Secondary Capital Raising Review).
In its press release PEG notes that it is committed to implementing the Report’s recommendations in full, is working to establish the governance and membership proposed and will make a further announcement when this is complete.
Annual disapplication authorities
New 10% + 10% approach
The most significant change compared to the 2015 PEG Principles is the increase in the level of general disapplication of pre-emption rights.
In line with the recommendations in the Report, this has been increased from 10% of issued ordinary share capital to 20%. Companies are able to use the first 10% for any purpose and the further 10% in connection with an acquisition or specified capital investment2 (as opposed to the previous 5% + 5% model). This provides companies with significantly more flexibility to raise funds quickly through non-pre-emptive structures such as placings, subject to the conditions described below (see “Conditions to use of annual disapplication authorities”).
As previously, disapplication authorities should last no more than 15 months or until the next AGM (whichever is the shorter).
Additional 2% + 2% disapplication for follow-on offers meeting certain criteria
Under the Updated PEG Principles and template resolutions, companies are also able to seek additional annual disapplications to be used for the purposes of making a follow-on offer that complies with certain requirements (see further “Follow-on offers to retail and other existing shareholders” below).
In terms of size, these authorities are limited to follow-on offers of up to 20% of the size of any allotments made under the 10% + 10% general disapplication authorities described above – so effectively to a maximum of an additional 4% of issued share capital.
This reflects the requirement, discussed further below, that any follow-on offer should not exceed 20% of the size of the non-pre-emptive placing it relates to.
Capital-hungry companies3
As expected, the Updated PEG Principles also include new guidance in relation to “capital hungry” companies such as growth companies. This essentially supports case-by-case consideration of higher disapplication authorities for such companies (whether or not in connection with an acquisition or specified capital investment) provided that the reasons for seeking a higher level of authority are specifically highlighted at the time the request for the disapplication is made.
Capital hungry companies are also able to seek disapplications that extend for longer than the usual period of 15 months/until the next AGM, again provided the reasons for this are specifically highlighted at the time the request is made.
Cashboxes
As with previous iterations, and unsurprisingly, the Updated PEG Principles provide that (other than in connection with true vendor placings) cashbox structures should only be used in line with a company’s approved disapplication authorities.
Transitional provisions
Most issuers have already held their 2022 AGM and, as a result, will not be seeking authorities in line with the anticipated new PEG Principles until their 2023 AGM.
In this context, PEG notes that there may be urgent, exceptional circumstances before a company’s next AGM where it wishes to carry out a non-pre-emptive offer under the new regime. In these circumstances, PEG recommends that issuers follow the transitional arrangements set out in the Report. For ease of reference, PEG has published an extract of the relevant pages of the Report which includes a helpful tabular comparison setting out different permutations of the transitional regime depending on the shareholder authorities that the company has in place and whether or not particular provisions of the UK prospectus regime have been amended.4
PEG notes that, as with other capital raises, shareholders are likely to hold board members to account at their next AGM or limit their future pre-emptive authorities if they consider the transitional arrangements have been used inappropriately.
Conditions to use of annual disapplication authorities
The Updated PEG Principles expect companies to comply with certain conditions in respect of any share issues made pursuant to their general disapplication of pre-emption rights.
The conditions (which reflect the recommendations made in the Report) are summarised below. They represent an enhanced version of the conditions imposed by PEG in 2020 in connection with the temporary relaxation of its recommendations in light of the Covid-19 pandemic.
| Consultation | Prior to announcement, consultation with the company’s major shareholders should be undertaken to the extent reasonably practicable and permitted by law |
| Retail investors5 |
Due consideration should be given to the involvement of retail investors and other existing investors not allocated shares as part of the soft pre-emptive process Where proportionate in the context of the issue, it may be appropriate to include such investors through a retail investor platform; alternatively (or in addition) the issuer may choose to make a follow-on offer (see “Follow-on offers to retail and other existing shareholders” below) |
| Explanation | An explanation of the background to and reasons for the offer and the proposed use of proceeds should be given, including details of any acquisition or specified capital investment |
| Soft pre-emption | As far as practicable, the issue should be made on a soft pre-emptive basis |
| Management involvement | Management should be involved in the allocation process |
| Post-transaction reporting | After completion of the issue, standardised disclosure should be made in relation to the conduct of the placing and compliance with the PEG conditions (see “Post-transaction reporting” below) |
Post-transaction reporting
As discussed above, one of the conditions under the Updated PEG Principles relates to post-transaction reporting in respect of non-pre-emptive offers. This will involve companies:
- Announcing certain transaction details via RIS (within a week of the closing of the offer) using a template form included in the Updated PEG Principles.
- Submitting the completed form to PEG to be included in its Pre-emption Database.
- Including the same information in the company’s next annual report and accounts.
The template report requires companies to include information on the areas summarised below.6
| Transaction details | Offer size (including as a percentage of issued share capital) and settlement date |
| Use of proceeds |
Use of proceeds of the offer, including details of any acquisition or specified capital investment |
| Quantum of proceeds |
Gross and net proceeds of the offer |
| Discount |
The discount the issue price represented to the market price of the issuer’s shares |
| Allocations |
Whether the shares were allocated on a soft pre-emptive basis (and details of any allocations made other than on that basis), and confirmation of the role played by management in the allocation process |
| Consultation |
Confirmation that appropriate consultation with major shareholders was undertaken before launch to the extent reasonably practicable and permitted by law |
| Retail investors | How due consideration was given to the interests and involvement of retail investors and existing investors not allocated shares as part of the soft pre-emptive process and an explanation of the approach taken |
Follow-on offers to retail and other existing shareholders
As noted above, the Updated PEG Principles provide that where an issuer is including retail and existing shareholders not allocated shares as part of the soft pre-emptive process, one way to do this would be through a follow-on offer meeting certain criteria (as summarised below and which reflect the recommendations made in the Report).
Follow-on offers that follow this guidance will also fall within the additional 2% + 2% annual disapplication that companies are now able to seek (see “Annual disapplication authorities” above).
| Qualifying shareholders |
The offer should be made to shareholders as at a record date prior to announcement of the placing, and exclude any shareholder allocated shares in that placing The company may exclude shareholders resident in jurisdictions where onerous requirements would otherwise apply, and may include holders of other equity securities where the directors consider it necessary or appropriate to do so |
| Individual monetary cap |
Qualifying shareholders should be entitled to subscribe for shares up to a monetary cap to be determined by the issuer of not more than £30,000 per ultimate beneficial owner7 The company should be able to make any arrangements which its directors consider necessary or appropriate to deal with fractional entitlements |
| Size |
The number of shares issued in the follow-on offer should not exceed 20% of those issued in the placing8 The offer may be made for ”up to” a specified number of shares, with fewer shares issued if sufficient applications are not received |
| Price |
The issue price of shares in the follow-on offer should be equal to, or less than, the offer price in the placing |
| Timing |
The company should announce the follow-on offer when, or as soon as reasonably practicable after, it announces the placing In determining when to launch any follow-on offer, the company should ensure that both the price requirement above, and the discount limit in LR9.5.10R (discounts not to exceed 10%), can be met |
| Offer period |
The company should ensure the follow-on offer is open for a period sufficient to allow qualifying shareholders to become aware of the offer and to reach an investment decision9 |
Future changes to the pre-emption regime and guidance
In addition to its recommendations regarding PEG and the PEG Principles, the Report also made certain other recommendations in relation to pre-emption rights, namely that:
- In the near term, the separate Investment Association guidance in respect of allotment authorities should be amended to permit authorities in excess of one-third of existing issued share capital to be applied not only to rights issues, but also to other forms of fully pre-emptive offering and to follow-on offers that comply with the Updated PEG Principles.
- In the near to medium term, the statutory pre-emption provisions contained in the Companies Act 2006 should be amended to align them with the process usually followed to modify pre-emption rights on a rights issue or open offer (i.e. to allow the exclusion of shareholders in jurisdictions where the cost and burden of extending the offer to them would be disproportionate, to provide flexibility to deal with fractional entitlements and to permit the new shares to be offered to securities holders with a contractual right to them – such as convertible bondholders – as if they were holders of ordinary shares).
We await further developments in these areas.
Conclusion
The Updated PEG Principles provide companies with welcome flexibility to carry out smaller fundraisings more quickly. In our view, the conditions imposed strike the right balance between the interests of companies and their shareholders and reflect the fact that the similar approach taken during the pandemic worked well as a matter of practice, with the requisite safeguards generally being observed.10 While the formalisation of requirements for template post-transaction public reporting introduces an additional procedural element to the placing process, in our view this is justified by the additional clarity and transparency this will provide to shareholders and the market and the rigour it will impose.
Given where we are in the annual AGM cycle for many companies, the proposed transitional provisions are welcome. It is also helpful that the Updated PEG Principles and template resolutions have been published sufficiently in advance of the year end to enable companies that have their 2023 AGM early next year to reflect them in the resolutions to be put to shareholders.
In the longer term, the implementation of other recommendations made in the Report and the expected changes to the UK prospectus regime will also be key to removing many of the barriers that currently limit listed companies’ ability to allow retail participation, whilst providing flexibility and optionality as to the structure through which this is achieved.
For an overview of the status and progress of changes to the UK listing, prospectus and secondary capital raising regimes more generally (and to register to receive updates in these areas), please see our client portal UK listing and capital raising portal: A revised regime for UK equity capital markets.
Footnotes
1
As with previous iterations, the Updated PEG Principles apply to all companies (wherever incorporated) with shares admitted to premium listing and their adoption by companies with shares admitted to standard listing, to the high growth segment of the Main Market or to AIM is also encouraged.
2
In each case as defined in the Updated PEG Principles and announced contemporaneously with the share issue or which has taken place in the previous 12 months (this represents an increase compared to the six month period provided for in the 2015 PEG Principles).
3
The Updated PEG Principles note that companies seeking admission to the Official List that wish to be considered “capital hungry” and to make use of this approach should disclose the fact in their IPO prospectus. It is also noted that such companies may choose to put in place a disapplication prior to IPO on the basis of the Updated PEG Principles, with clear disclosure given to investors in the IPO prospectus.
4
For an overview of the proposed changes to the UK Prospectus Regime and the current status of these, see the Prospectus Regime page of our UK listing and capital raising portal.
5
In terms of transitional provisions, the Report noted that (until the current public offer prospectus rules are amended) it is not expected that a listed company will make an offer to retail investors requiring publication of a prospectus and that, similarly, the aggregate of any non-pre-emptive placing and associated retail offer is unlikely ever to exceed the current 20% admission to trading threshold requiring publication of a prospectus as this would be unduly burdensome. However, it noted that companies should continue to give due consideration to the interests of retail shareholders and calibrate their offer accordingly, including use of the current €8m exemption where appropriate, and explain their approach and reasoning in their post-transaction report (see “Post-transaction reporting”) and next annual report.
6
In the Report it was noted that the market was expected to develop standard formulations to cover usual market practice.
7
This is primarily intended to deal with a concern discussed in the Report that a follow-on offering could, in certain circumstances, reduce support from existing institutional shareholders for the initial placing. As the ability of institutional shareholders to limit their dilution through the follow-on will be constrained by imposing an individual monetary cap, this should ensure that there is no disincentive for them to participate in the initial placing.
8
The Report noted that, within this maximum, the size of a follow-on offer should be left to the discretion of the company, with the aim of limiting the dilution suffered by retail investors without impacting the institutional placing process.
9
The Report noted that this was likely to mean an offer period of at least five business days in practice.
10
In this context, the Report noted that levels of capital raised during the pandemic remained bespoke to each company (i.e. there was no general move to automatically upsize offers to the temporary 20% ceiling) and that discounts were tight.
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