Disapplication of pre-emption rights: Back to the future

In line with the Recommendations, the revised Statement of Principles increases the limit of the authority that can be sought for non-pre-emptive issues to a maximum of (i) 10% of issued ordinary share capital for disapplications for any purpose; and (ii) an additional 10% of issued ordinary share capital for acquisitions or specified capital investments announced contemporaneously with the issue or in the last 12 months (increased from six months). These thresholds have doubled from 5% in each case and the increase means that, subject to certain conditions (please see below), companies will now be able to seek disapplication of pre-emption rights up to a maximum of 20% of their issued share capital, as they were temporarily able to do during the COVID pandemic.

In each case, companies are also allowed to seek a further authority of up to 2% of issued ordinary share capital, to be used for a "follow-on" offer (please see below for further details).

The Statement no longer sets a threshold for a rolling three-year period, so the new thresholds will work on a year-by-year basis.

In accordance with the Recommendations, the new Statement emphasises the need to give due consideration to whether retail investors and existing investors who are not allocated shares should be able to take part in the placing. There are two options for inclusion:

• Using a retail investor platform where this is proportionate in the context of the issue; and/or:
  
  
• Making a follow-on offer, which is expected to have the following features:
  
  
  • limited to 20% of the number of shares issued in the placing using the 10% general disapplication;
    
    
  • monetary cap of £30,000 per ultimate beneficial owner;
    
    
  • issue price which is equal to or less than the offer in the placing; and
    
    
  • announced at the same time as, or as soon as reasonably practicable after, the announcement of the placing.

The revised Statement includes new provisions in respect of "capital hungry companies": companies that need to raise larger amounts of capital more frequently. Such companies may:

• seek additional disapplication authority, whether or not in connection with an acquisition or specified capital investment; and
  
  
• seek disapplication authority for a longer period than the normal 15 months,

provided that, in each case, the reason is specifically highlighted at the time of the request.

An IPO applicant wishing to be considered as a "capital hungry company" should disclose this in its IPO prospectus and may want to put in a place a disapplication on the above basis prior to IPO, provided there is clear disclosure to investors.

Under the revised Statement, the issue of securities pursuant to a general disapplication is subject to the following conditions:

• consultation with major shareholders prior to announcement (as far as reasonably practicable and permitted by law);
  
  
• due consideration as to the involvement of retail investors and existing investors not allocated shares;
  
  
• explanation of the background to, and reasons for, and the offer the proposed use of proceeds;
  
  
• as far as practicable, making the issue on a soft pre-emptive basis;
  
  
• involvement of company management in the process of allocating the shares issued; and
  
  
• making a post-transaction report (please see below for further details).

The section of the Statement dealing with requesting a specific disapplication remains unchanged.

Whereas the 2015 Statement required certain details of the issue to be included in the company's next annual report, going forward companies will need to make a "post-transaction report" in a prescribed format, with detailed information relating to:

• the transaction, including (i) offer size and percentage of issued share capital and (ii) settlement date;
  
  
• use of proceeds, including details of any acquisition or specified capital investment;
  
  
• quantum of proceeds, including details of both the gross and net proceeds raised by the offer;
  
  
• discount – the discount that the issue price represented to the market price;
  
  
• allocations – including details of (i) whether shares were allocated on a soft pre-emptive basis (and details of any allocations made otherwise than on a soft pre-emptive basis) and (ii) the role of management in the allocation process;
  
  
• consultation - confirmation that major shareholders were appropriately consulted; and
  
  
• retail investors – explanation of (i) how due consideration was given to the interests and involvement of retail investors and existing investors not allocated shares as part of the pre-emptive process; and (ii) the approach taken.

The post-transaction report should be announced via a regulatory information service, as well as being submitted to the Pre-Emption Group for inclusion in its Pre-Emption Database. This information should also be included in the company's annual report following the issue.

The Statement reiterates that a cashbox structure should be regarded as an issue of equity securities for cash and is therefore subject to the disapplication limits. A vendor placing is however not regarded as an issue for cash, but the Statement repeats the established expectation as to clawback (where it exceeds 10% in size and/or 5% in discount).

The Pre-emption Group states that companies should obtain shareholder approval for capital raising under the new Statement of Principles at their next AGM, using the new template resolutions. However, it understands that there may be urgent, exceptional circumstances between now and a company's next AGM where there may be a wish to exercise a non-pre-emptive offer under the new regime. In such cases, it recommends that issuers follow the transitional arrangements set out in the Recommendations until such time as shareholders can vote on the new pre-emption regime. These arrangements reflect the conditions for the use of the disapplication (please see above) and include soft pre-emption; proper explanation of the reasons for the issue; consultation with major shareholders; post-transaction reporting; and consideration of retail shareholder inclusion. The arrangements also include a helpful summary of the way in which the revised Statement can be applied to allow companies to make use of the revised approach in the period prior to their next AGM (including using cash box structures where existing pre-emption authorities are not sufficient) and before all legislative and regulatory steps are in place to update the UK prospectus regime.

For further information on this topic, or for help with preparing for upcoming AGMs in light of these changes, please get in touch.