Pre-Emption Group extends additional flexibility for equity placings to 30th November 2020
04 September 2020
Issued on behalf of the Pre-Emption Group
The Pre-Emption Group (PEG) is extending, to 30th
November 2020, its recommendation that investors, on a case-by-case basis, continue to consider supporting placings by companies of up to 20% of their issued share capital over a 12-month period.
The PEG’s original recommendation on additional flexibility, introduced as a temporary measure on 1st
April 2020 as a direct result of the severe business implications of COVID-19, has been very well received by the market. Of the £23.7 billion raised in the UK market since the start of the year, over 125 of the issuances have been accessing emergency funds, generally at a small discount to the prevailing market price. Investors have responded pragmatically to the extenuating circumstances by extending the usual thresholds for pre-emptive issuances. Companies and market participants have also responded responsibly to the additional flexibility and have generally recognised the desired conditions of the PEG guidelines. Investors recognise that companies have in most cases taken into consideration the interests of all stakeholders and, in particular, their employees.
Given the continued uncertainties of COVID-19 and the developing pipeline of equity offerings over the 3rd
Quarter, the PEG has decided to extend the relaxation of its guidelines by a further two months. We have chosen 30th
November to allow companies more time to assess any unforeseen consequences of COVID-19-related financial and cashflow developments. Investors remain committed to the thresholds outlined in the PEG’s Statement of Principles, which are designed to protect all investors and are a hallmark of the UK equity markets. By 30th
November all companies will have had a reasonable opportunity to review their liquidity requirements and as these measures were always expected to be temporary, it is important that we return to the expectations within the Statement of Principles after that date.
The PEG wishes to reiterate that if a company looks to use the additional flexibility between now and 30th
- it should only do so if it is experiencing extreme circumstances, and issuance is required to fund an immediate concern;
- the particular circumstances of the company should be fully explained, including how the company is supporting its stakeholders;
- effective consultation with a representative sample of the company’s major shareholders should be undertaken, and as outlined in the PEG’s Appendix of Best Practice in Engagement and Disclosure, companies would be expected to disclose information about the consultation undertaken prior to the issuance;
- consideration should be given to the effect of the issuance on retail shareholders, and how they may be able to take part in some aspect of the issuance;
- the date at which the status of shareholding is assessed for the purposes of pre-emption should be clearly disclosed and, as far as possible, the issue should be made on a soft pre-emptive basis;
- company management should be involved in the allocation process; and
- existing share awards should not be normalised to negate the dilutive effect of the issuance.
The PEG also wishes to underline that the Statement of Principles applies to all issues of equity securities that are undertaken to raise cash, irrespective of the legal form of the transaction. For example, a “cashbox” transaction may be structured as an issuance of equity securities for non-cash consideration falling outside the scope of statutory pre-emption. Nonetheless, such a transaction should be regarded, for the purposes of the Statement of Principles, as being an issue of equity securities for cash.
This recommendation is in place until 30th
November 2020 and at that stage it is the PEG’s expectation that companies will revert to seeking approvals for a maximum of 10% as set out in the Statement of Principles (5% for general corporate purposes with an additional 5% for specified acquisitions or investments). The Statement of Principles already permits companies, on a case-by-case basis, to request a specific disapplication of pre-emptive rights outside of those thresholds where proper engagement and consultation has taken place. Those companies not adhering to these expectations are likely to see stronger opposition to disapplication and other resolutions at future annual general meetings.
Given how successful the additional flexibility has been in helping companies raise much needed cash quickly and efficiently, the PEG will encourage relevant parties to initiate a broader review of the market mechanisms for capital raisings. The PEG will therefore engage with the FCA, HMT and other market participants to gather views on the process of issuing shares and possible changes to make the market more effective and competitive in the future.
Notes to editors:
The Financial Reporting Council (FRC) acts as Secretariat to the Pre-Emption Group. The Pre-Emption Group issues best practice documents regarding authorities to disapply pre-emption rights. The Group represents listed companies, investors and intermediaries.