Making and keeping capital markets attractive
Deal Deliberations
Improving the UK’s secondary capital raising regime
Against a backdrop of low investor appetite and more competitive European capital markets the UK is looking to make listing on the London Stock Exchange more attractive for fast growing and capital hungry companies. Proposals for a more flexible secondary capital raising process include improving the ability of companies to raise smaller amounts quickly and cheaply as well as supporting additional flexibility for capital hungry companies.
An efficient market requires regulators to act quickly to ensure market regulation keeps pace with market reality
Background
Although London remains the most popular listing venue in Europe by number of IPOs, the continent’s fastest growing companies have been favouring other stock exchanges to raise capital. In 2021 just two out of Europe’s ten largest IPOs took place in London, and none of the top five. Moreover, many of Europe’s tech companies have preferred listing in the US. With the London market also missing out on last year’s SPAC boom, it is becoming ever clearer that modernisation of the UK’s listing regime is a necessity.
Building on conclusions from previous reviews, The Secondary Capital Raising Review strikes an ambitious and positive tone, aiming to modernise the UK listing landscape post-Brexit. Two of its key recommendations are improving the ability of companies to raise smaller amounts of funds quickly and cheaply, and supporting additional flexibility for companies wanting to raise more capital. A quick implementation of the Review’s recommendations could better position the London market for when IPO activity picks up again.
Whilst this article focuses on two key recommendations, the Review also includes a number of other significant recommendations, including encouraging companies to engage more actively with their retail shareholders in involving them in future equity fundraisings.
Modernisation of the UK’s listing regime is a necessity.
Allowing companies to raise smaller amounts quickly and cheaply
The recommendation is to increase immediately the amount of issued share capital that companies can issue for cash without shareholder rights of pre-emption applying from 10 to 20 per cent, subject to certain conditions. This follows the successful temporary adoption of the higher 20 per cent limit during the Covid-19 pandemic, a change we previously suggested should be made permanent. When previously implemented, the first six months of the more relaxed regime saw 125 issuances of emergency fund-raising which utilised the increased threshold.
As is the position in relation to the current 10 per cent threshold, shareholders would be expected to approve the extended 20 per cent authority annually at the company AGM, with 10 per cent available to be issued for any purpose and an additional 10 per cent to finance or refinance acquisitions or specified capital investments. As many AGMs will not take place until Spring 2023, the proposal is that investors should support companies looking to raise more than 10 per cent on a non-pre-emptive basis before their next AGM.
It is proposed that use of this authority should be conditional on the company:
- providing an explanation of the reasons for the fundraising and the use of proceeds;
- consulting with key shareholders to the greatest extent possible;
- making the issue on a soft pre-emptive basis (i.e. approaching institutions already on a company’s shareholder register);
- involving management in the allocation process; and
- giving due consideration as to how to involve retail and existing investors.
Much of this reflects the practical experience of companies who issued shares when the threshold was previously increased on a temporary basis. In the week following the fundraising companies should then disclose details on how these conditions were met.
The Pre-Emption Group issued its updated Principles on disapplication of pre-emption rights, and these are in line with the recommendations of the Review and its proposed adjustments to the guidance above on issuances for cash without shareholder rights of pre-emption, in particular the increase to 20 per cent.
Supporting additional flexibility for capital hungry companies
High growth companies often require larger amounts of capital during their early growth cycle after IPO. The recommendation is that these businesses should be allowed to seek approval from shareholders to raise amounts in excess of 20 per cent, potentially over longer timeframes. New companies wanting to utilise this flexibility, should disclose this fully in IPO offer documentation.
The Pre-Emption Group’s updated Principles again confirm this recommendation, stating that capital hungry companies may seek additional authority to raise funds above 20 per cent, including over longer periods, provided that they highlight reasons for doing so.
High growth companies are often capital hungry during their early growth cycle.
A brighter outlook
Implementation of these proposals, along with other recommendations, would provide welcome extra flexibility to listed companies looking to raise equity quickly to take advantage of acquisition or investment opportunities, or simply to raise extra working capital without increasing borrowing, particularly in an environment of tightening debt markets. The hope is that these measures will attract new companies, in particular growth companies, to list in the UK, and incentivise listed companies to maintain their listing. Implementation of these and other pragmatic suggestions would mean a positive long-term outlook for UK listings and secondary fundraisings, both for companies and their shareholders. The UK can retain its attractiveness to issuers, if regulators act quickly to ensure market regulation keeps pace with market reality.
