ABI relaxes its guidelines to facilitate rights issues
On 31 December 2008 the Association of British Insurers (ABI) published new guidelines on the number of shares that investors should normally be prepared to authorise the board to allot during a year and the disapplication of pre-emption rights. The change means that companies should be able to conduct major rights issues more easily and quickly than under the ABI’s previous guidelines.
In order to benefit from the new guidelines quoted companies will need to amend the forms of resolution that are proposed at their next annual general meeting or at any earlier general meeting. In addition, the new guidelines stipulate that if a company takes advantage of the enlarged headroom all of its directors will, in certain circumstances, have to stand for re-election at the next annual general meeting.
The new guidelines refer to (1) the Companies Act requirement for authority from shareholders for companies to allot new shares whether for cash or a non cash consideration and (2) rights of pre-emption conferred by the Companies Act in respect of issues of equity shares for cash. In order to understand the new guidelines, a brief explanation of those two provisions is required.
Directors’ powers to allot share capital
Under section 80 of the Companies Act, the directors of a UK company may not exercise any power of the company to allot “relevant securities” unless they are authorised to do so in accordance with the Act. This is referred to as the S 80 (section 80) general power to allot in the new ABI guidelines.
“Relevant securities” are shares in the company (other than shares allotted in pursuance of an employees’ share scheme), and any right to subscribe for, or to convert any security into, shares in the company (other than shares allotted pursuant to an employees’ share scheme).
Quoted companies have normally asked shareholders to give the directors a general authority to allot relevant securities of an amount up to one third of their existing issued share capital. This general authority to allot relevant securities would usually be in the form of ordinary resolutions (a majority of votes cast) proposed at successive annual general meetings. The one-third limit came from the ABI’s earlier guidelines that have now been replaced. It is emphasised that this limit was not an absolute limit on the amount of share capital that the directors could allot. If directors wished to allot more than this amount they would need to seek shareholders’ authority at the next annual general meeting or an earlier extraordinary general meeting for a specific issue of shares rather than a general authority not linked to a specific issue. Similarly the limits in the new guidelines are not absolute and directors may seek authority to allot relevant securities in excess of the new limits for a specific issue of relevant securities.
Disapplication of shareholders’ pre-emption rights
In addition to the requirement in section 80 for shareholders to authorise directors to allot relevant securities, the Companies Act contains a separate provision that confers a right of pre-emption on existing shareholders in respect of the issue of additional equity securities for cash. This is referred to as the S 95 (section 95) general power to disapply pre-emption rights in the new ABI guidelines.
The law requires all new equity securities to be offered to existing shareholders pro-rata to their existing shareholdings in accordance with the procedure laid down in the Act. These pre-emption rights may be disapplied by a special resolution (a majority of 75 per cent. of the votes cast) in accordance with the Act.
Under the previous guidelines at each annual general meeting quoted companies have normally asked shareholders to pass special resolutions to disapply these pre-emption rights for up to 5 per cent. of their existing issued share capital. In addition these special resolutions normally disapply the statutory pre-emption rights in respect of pre-emptive issues of shares up to one-third of their existing issued share capital. (This disapplication for pre-emptive issues is to overcome technical difficulties in a rights issue made in accordance with the pre-emption rights conferred by the Act.)
Limits under the new ABI Guidelines
The new guidelines deal with the S 80 General Power to allot in the shares as follows:
“ABI Members will regard as routine a request for authorisation to allot new shares in an amount of up to one third of the existing issued share capital.” (This is the same as under the previous guidelines).
“In addition they [ABI members] will regard as routine requests to authorise the allotment of a further one third. Such additional headroom shall be applied to fully pre-emptive rights issues only and the authorisation shall be valid for one year only.” This is the key change under the new guidelines enabling directors to seek general authority for rights issues of up to two thirds of companies’ existing issued share capital.
The new guidelines deal with the S 95 General Power to disapply pre-emption rights in broadly the same way as the previous ABI guidelines.
The statutory pre-emption rights are disapplied for a rights issue in favour of ordinary shareholders where the equity securities respectively attributable to the interests of all ordinary shareholders are proportionate (as nearly as may be) to the respective numbers of ordinary shares held by them and to the allotment (otherwise than pursuant to such a rights issue) of equity securities up to an aggregate nominal value of not more than 5 per cent. of the issued ordinary share capital of the company.
The guidelines include example shareholder resolutions illustrating the ABI’s expectations for directors’ powers to allot share capital and disapply shareholders’ pre-emption rights.
Where a further authority to allot new shares in an amount of up to one third of the existing issued share capital is taken (that is up to an additional one-third making a total of up to two–thirds) and where
- the aggregate actual usage of the authority exceeds one third as regards nominal amount and also,
- in the case of issuance being in whole or part by way of a fully pre-emptive rights issue, monetary proceeds exceed one third (or such lesser relevant proportion) of the pre-issue market capitalisation,
ABI Members will expect that all directors wishing to remain in office will stand for re-election at the next annual general meeting of the company following the decision to make the issue in question. This is designed to ensure that, if no extraordinary general meeting is required for a significant rights issue, the directors are held to account retrospectively.
New guidelines
The new guidelines can be found here.
