The long-anticipated UK Secondary Capital Raising Review has landed. The Review was led by Freshfields partner, Mark Austin, following consultation with numerous market participants. The Review follows Lord Hill’s UK Listing Review and fits with the Treasury’s Prospectus Regime Review and the FCA’s Primary Markets Effectiveness Review. It strikes an ambitious and positive tone, motivated by the need to modernise the UK listing landscape post-Brexit.
The overarching goals of the Review are to increase the efficiency of the capital raising process to allow companies to raise money to grow and develop as quickly and cheaply as possible and attract new companies to list in the UK. The recommendations, if implemented swiftly, should enhance the global competitiveness of UK capital markets and drive the UK economy generally.
Recommendations
The recommendations in the Review are focused on eight broad areas which are described in more detail below:
- Maintain and enhance the pre-emption regime
- Increase the ability of companies to raise smaller amounts of funds quickly and cheaply
- Support additional flexibility for capital hungry companies
- Involve retail investors in all capital raisings
- Reduce regulatory involvement in larger fundraisings
- Make existing fundraising structures quicker and cheaper
- Increase the range of pre-emptive offer structures for companies
- Raise the priority of an ambitious ‘drive to digitisation’ to facilitate innovation, stewardship and improved market infrastructure
Maintain and enhance the pre-emption regime
The Review recommends immediately overhauling the Pre-Emption Group (“PEG”) so that it is on a more formal footing with revised terms of reference, updated governance structure and new reporting obligations. There should be a transparent appointment process for new members following a review of current membership to ensure it is representative of current stakeholders in the UK capital markets. The Review suggests that PEG should have a dedicated searchable website with pre-emption regime information and that companies should make a filing with PEG to report on how pre-emption guidelines were followed (or not) following each capital raise.
Increase the ability of companies to raise smaller amounts of funds quickly and cheaply
The Review recommends immediately increasing to 20 per cent the amount of issued share capital that companies can issue for cash without pre-emption (from the 10 per cent currently recommended by PEG), subject to certain conditions, following the successful temporary adoption of the higher limit during the Covid-19 pandemic[1].
As with the current 10 per cent threshold, the new extended authority will require approval by a company’s shareholders at its AGM with 10 per available for any purpose with the additional 10 per cent reserved to finance or refinance acquisitions or specified capital investments. Given many companies’ AGMs will not take place until Spring 2023, the Review proposes that investors should support companies looking to raise more than 10 per cent on a non-pre-emptive basis before their next AGM.
The Review proposes that use of this authority should be conditional on the company: i) providing an explanation of the reasons for the fundraising and the use of proceeds; ii) consulting with key shareholders to the greatest extent possible; iii) making the issue on a soft pre-emptive basis (i.e. approaching institutions already on a company’s shareholder register); iv) involving management in the allocation process; and v) giving due consideration as to how to involve retail and existing investors. The Review also proposes that companies should disclose, in the week following the placing, details on how these conditions were met.
If a cash box structure is employed, then it should only be used to raise funds up to the company’s existing pre-emption disapplication authority. Practically therefore, after the pre-AGM transitional period, a cashbox should be used only to increase a company’s distributable reserves rather than to circumvent pre-emption requirements.
Support additional flexibility for capital hungry companies
One of the most pragmatic recommendations in the Review confronts the reality that high growth companies often require larger amounts of capital during their early growth cycle after IPO. The Review recommends that PEG guidance should be updated immediately to allow for such businesses to seek approval from shareholders to raise larger amounts (in excess of the 20 per cent referred to above), potentially over longer timeframes. Where new companies hope to utilise this flexibility, it should be fully disclosed in IPO offer documentation.
Involve retail investors in all capital raisings
The Review encourages companies to give due consideration to the interests of retail shareholders, as well as other existing shareholders, with a view to involving them in any offers as fully as possible. One Review proposal is that a follow-on offer, similar to a model used in Norway, might be adopted whereby an issuer carries out a retail placing to its existing shareholders, following an institutional placing, giving sufficient time for shareholders to become aware of the offer and to make an informed investment decision (particularly relevant where shares are held in paper form). Such an offer could be combined with retail investor platform offer solutions currently available on the market (e.g. via PrimaryBid) which run to the same timetable as an institutional placing.
Specific recommendations within the Review in relation to follow-on offers suggest guidance in PEG’s Statement of Principles to cover matters including which category of shareholder should qualify, a £30,000 cap on the amount for which an individual retail investor can subscribe, limiting the size of the offer to 20 per cent of the initial placing’s size, a price restriction and timing and offer period stipulations. Such suggestions are pragmatic and should appeal to both retail and institutional investors as they help to ensure that the initial institutional placing is not detrimentally affected by the follow-on offer. The Review suggests for follow-on offers made available to retail investors that the company should issue a cleansing statement, as is practice in Australia (confirming the company is in compliance with its disclosure obligations) and an offer booklet setting out the terms of the offer.
Reduce regulatory involvement in larger fundraisings
HMT’s Prospectus Regime Review is removing the requirement for a prospectus to be issued for offers post-IPO, delegating the decision on when to require a prospectus for an application for admission of shares to the Official List to the FCA. Currently that threshold is 20 per cent over any 12-month period, meaning that any rights issue or open offer incurs the cost and timing implications of the production of a prospectus and subsequent FCA approval. The Review therefore proposes that the threshold for publication of an admission to trading prospectus for a secondary issue of shares should be increased from 20 per cent to 75 per cent of a company’s existing share capital. This threshold would capture circumstances where there is a material shift in what it means to be invested in an issuer, whilst smaller and ordinary course offers would be best served with focused disclosure via a cleansing notice and offer document approach, ideally with public release of an investor presentation.
The Review further advises that no sponsor need be required in connection with a secondary fundraising. Sponsor appointments should however be retained on IPOs and other major transactions (where a circular is to be approved by the FCA, e.g. related party and significant transactions and rescue situations).
Make existing fundraising structures quicker and cheaper
To make fundraisings quicker, the Review proposes reducing the minimum offer period for rights issues and open offers to seven business days (currently 10 business days for premium listed companies and 14 calendar days where the issuer is incorporated in England and Wales). Further, in anticipation of when securities infrastructure supports such a move, legislation should be changed now to allow the Secretary of State to reduce the notice period for general meetings to seven clear days.
To incentivise the use of pre-emptive offers, the Review proposes that the customary AGM authority to directors to allot shares for up to two-thirds of issued share capital for a fully pre-emptive rights issue should be expanded to include any pre-emptive offer (e.g. open offers or follow-on offers) and separately that the Listing Rules be amended to allow excess application mechanics to be attached to rights issues so that existing shareholders can apply to take up shares that are not taken up by other shareholders, at the offer price. It further proposes that the Companies Act be amended to avoid the need to seek shareholder authority by special resolution to disapply pre-emption rights for an otherwise fully pre-emptive rights issue to deal with technical issues, such as excluding shareholders in countries where expensive and time-consuming regulatory processes may be required and dealing with fractional entitlements.
The Review discusses the introduction of an enhanced continuous disclosure regime for companies to opt into which would allow a shorter, non-duplicative offer document to be used. Alternatively, all additional offer disclosures could be published in an extended press release. Both routes would be governed by the usual director liability regime and would negate the need for a lengthy and costly prospectus which is time-consuming to draft and repetitious of information already in the public domain.
Increase the range of pre-emptive offer structures for companies
As mentioned previously, a cleansing notice is advised where a prospectus will no longer be required. The Review takes a detailed look at other fundraising structures in Australia and recommends that section 793 of the Companies Act should be amended so that companies can seek from shareholders information about key decision makers and contact details, as well as have the ability to delegate information requests to third parties. Another export from Australian markets, the Review recommends that standard form terms and conditions are developed for use with institutional investors for secondary fundraisings.
Raise the priority of an ambitious ‘drive to digitisation’ to facilitate innovation, stewardship and improved market infrastructure
Some of the most innovative recommendations in the Review relate to the proposal for digitisation of shareholdings. Following a detailed discussion of the issues presented by the complex shareholding landscape, both in terms of regulatory framework and intermediary nominee share-holding practices, the Review makes practical suggestions. The scale of the challenge faced in developing a coherent dematerialised securities system is put into context with an enlightening description of how the CREST system was developed with buy-in from a vast range of market participants and how this was essential for its success.
The Review encourages the Government to set up a Digital Taskforce with independent chair to establish a timeline for reform and the creation of a dematerialised securities settlement system. The Review moves on to identify certain core principles on which such a system should be based, being: i) Analysis; ii) Equality; iii) Communication; and Simplification. In terms of underlying technology for the new system, the Review highlights that distributed ledger technology (block-chain tech) should be considered by the new Digital Taskforce due to its capacity for data to be synchronized and shared in a decentralised way in order to achieve an efficient, transparent and resilient settlement system.
Next Steps
Please contact Charles Howarth, James Parkes or Sarah Etherington with any questions or comments in relation to this article. The full Review is available here.
The information held in this PDF / on this webpage is for general purposes and guidance only and does not purport to constitute legal or professional advice.
[1] As previously suggested by CMS partner Charles Howarth in his Law-Now update on 1 October 2020 (available here).
