COVID-19: Temporary guidance from the UK Pre-Emption Group in relation to its expectations for issuances in the current circumstances

The UK’s Pre-Emption Group has issued temporary guidance in relation to its expectations for issuances at this time. Although the revised guidance is helpful in providing issuers with additional flexibility in these uncertain times, we anticipate that this guidance will have its most significant impact on the approach to cash box placings over the next few months.

Background

• Companies with securities admitted to trading on the Main Market of the London Stock Exchange (“LSE”) are advised to observe the Statement of Principles published by the Pre-Emption Group (“PEG”) when seeking shareholder approval for the disapplication of pre-emption rights at their AGMs, given that the Statement of Principles influences voting decisions made by investors. Although not required to do so, companies listed on the Alternative Investment Market (“AIM”) are encouraged to comply with the Statement of Principles.
• The Statement of Principles allow a company to seek authority to issue equity securities non-pre-emptively for cash representing: (i) no more than 5% of the issued share capital to be allotted non-pre-emptively for cash for general corporate purposes; and (ii) an additional 5% of the issued share capital for specified acquisitions or investments.  In practice therefore, issuers will typically seek authority at their AGMs to allot shares in respect of 33.3% of their issued share capital, with an additional 33.3% in respect of a rights issue, with the issuer then seeking authority to issue those shares on a non-pre-emptive basis in respect of 5% of their issued share capital, with an additional 5% in respect of specified acquisitions or investments.   
• The Statement of Principles also discourages issuers from raising funds by way of a cash box placing when the number of shares issued on a non-pre-emptive basis is proposed to be more than the issuer’s existing authority to issue shares for cash on a non-pre-emptive basis (usually 5% plus 5% - see the paragraph above).    
• Companies are undoubtedly dealing with unprecedented challenges presented by the COVID-19 pandemic. To help provide companies with access to capital which may be required to maintain solvency and address liquidity and cash-flow issues, on 1 April 2020, the PEG published a statement announcing temporary changes to its guidance regarding the disapplication of pre-emption rights, as outlined below. The full statement can be found here.

Temporary guidance  

• The PEG has recommended that institutional investors should consider supporting (by voting in favour of) non-pre-emptive issuances which represent up to 20% of the relevant company’s issued share capital.
• If a company seeks shareholder approval for this increased threshold, the following requirements must be complied with:
    -  the particular circumstances of the company should be fully explained, including how they are supporting their       stakeholders;
    -  proper consultation with a representative sample of the company’s major shareholders should be undertaken;
    -  as far as possible, the issue should be made on a soft pre-emptive basis; and
    -  company management should be involved in the allocation process
• In addition, companies will also need to disclose alongside the announcement of the issuance which relies on the new PEG guidance, details of the consultation undertaken before the issuance and the efforts taken to respect pre-emption rights. 
• Further, the PEG states that existing share awards should not be normalised to negate the dilutive effect of the extended issuance.

Going forward

• The changes outlined by the PEG are expressed to be temporary and will provisionally remain in place until 30 September 2020. The PEG will reconvene before this date to look at how issuers have acted in response to their updated guidance. 
• The PEG has indicated that they have no general intention to consider an extension beyond the usual threshold in normal circumstances.

What this means in practice

• Although the PEG’s revised guidance is helpful in providing issuers with additional flexibility in these uncertain times, allowing Main Market listed issuers to obtain authority at their AGMs in excess of the usual 5% plus 5% (as described in the “Background” above), the flexibility in knowing that the PEG recommends that shareholders should vote in favour of disapplications of pre-emption rights up to 20% may end up being used little directly in practice, given the number of issuers who have already held their AGMs in 2020, or who have already circulated their AGM notices.  
• We anticipate, however, that this guidance will have a significant impact on the approach to cash box placings over the next few months.  This is because the Prospectus Regulation (which came into effect in July 2017) introduced an exemption from the obligation to publish a prospectus for an issue of new shares of up to 20% of the relevant company’s issued share capital, provided that there is no offer to the public.  However, the majority of cash box placings since July 2017 have complied with the PEG’s guidance, meaning that they tended to be limited to 10% of the issued share capital.  This new guidance may therefore encourage issuers to embark on cash box placings of up to 20% of their issued share capital, even where the authority obtained at their last AGM to issue shares on a non-pre-emptive basis is less than 20%.     

Should you have any questions regarding the temporary changes to the PEG’s Statement of Principles, please contact Kate Ball-Dodd or Harriet Hainsworth.