Access to Capital: Guidelines on Non-Pre-Emptive Issuances Temporarily Relaxed in light of COVID-19
Temporary relaxation of the Pre-Emption Group guidelines on non-pre-emptive issuances should facilitate quick access to capital for listed companies.

 

The Pre-Emption Group (PEG) is a UK-based group established in 2005 to issue best practice guidelines on shareholder authorities disapplying pre-emption rights on the issue of new shares for cash.  PEG issued a statement this week setting out its expectations about the compliance by listed companies with PEG's Statement of Principles, given the unparalleled economic situation caused by the COVID-19 pandemic.

Outline of the PEG's Temporary Guidelines

PEG has recommended that investors should, on a temporary basis until 30 September 2020, consider approving authorities for companies of up to 20% of their issued share capital, rather than the usual authorities, as set out in its Statement of Principles, of 5% for general corporate purposes and an additional 5% for specified acquisitions or investments.

Requests for a specific disapplication of pre-emptive rights outside of the above limits, for example to fund the acquisition of a new asset, is permitted by the Statement of Principles and the PEG have stated that this process should continue to be respected. 

Accordingly, to facilitate access to more capital in the coming months, companies in the process of preparing their AGM notice should consider if any resolution to disapply pre-emption rights for cash issuances should be amended in light of this updated guidance from PEG.

Where a company decides to seek this authority from shareholders, it should:

  1. fully explain the rationale and particular circumstances of the request, including how the company is supporting its stakeholders;
  2. engage in proper consultation with a representative sample of its major shareholders; and
  3. allocate any new shares issued under the authority with the involvement of company management on a basis that allows existing shareholders to subscribe for shares in proportion to their existing holdings. 

Return of Cashbox Placings?

A cashbox placing involves the listed company establishing a new off-shore special purpose vehicle (SPV), usually in Jersey. The broker that manages the placing then agrees to subscribe for redeemable preference shares in the SPV for an amount equal to the net placing proceeds. The listed company agrees with the broker to allot and issue the placing shares to placees, who are required to pay the subscription price to the broker. The broker then conducts an accelerated book-build exercise, inviting investors to bid for placing shares. In consideration of this, the broker agrees to transfer all the shares it holds in the SPV to the listed company; the result being that the listed company issues the placing shares for non-cash consideration. Issuances of shares for non-cash consideration are not subject to statutory pre-emption rights. The SPV then redeems the preference shares, paying the redemption proceeds, which equal the net placing proceeds, to the listed company.  

While this structure has been used by companies from time to time, it fell out of common use following the publication of PEG's Statement of Principles in 2015 in which PEG raised concerns that cashbox structures were being used to circumvent pre-emption rights while having the same effect as an allotment of shares for cash.
Some companies may seek to raise capital again using this cashbox structure if their notice of AGM has already issued or if their AGM does not take place before 30 September 2020 or where they require urgent access to capital and wish to avoid the need to publish a prospectus or convene an extraordinary general meeting.

Using this structure, main market companies listed on the London Stock Exchange or Euronext Dublin could potentially raise up to 19.9% of their issued share capital, in a cost effective and time efficient manner, without publishing a prospectus or convening an extraordinary general meeting. 

Commentary

The PEG guidelines have been welcomed by many stakeholders, including by the Association for Financial Markets in Europe (AFME) and the Investment Association. They should offer companies an avenue to raise capital expediently – a welcome development during these unprecedented times.

If you are considering raising capital, please contact Mark Talbot, Brian Butterwick or your usual William Fry contact.

Contributed by Paul McNamara and Roisin Culligan

Key Contacts

Mark Talbot Partner

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