Pre-Emption Group publishes expectations for issuances in the circumstances arising from the COVID-19 pandemic

On 1 April 2020, the Financial Reporting Council published a statement on behalf of the Pre-Emption Group (PEG) setting-out the PEG’s expectations for issuances during the economic turbulence caused by COVID-19 pandemic.

In this note, we consider some of the limits on non-pre-emptive issuances in normal circumstances (including the use of cashbox placing structures), the detail of the statement itself and the types of companies most likely to make use of the additional flexibility shown by the PEG.

Non-pre-emptive issuances in normal circumstances

In March 2015, the PEG published an updated form of its Statement of Principles on Disapplying Pre-Emption Rights (Statement of Principles). While the Statement of Principles has no legal force, most Main Market companies, and many AIM companies, comply with it when seeking shareholder approval at their AGMs to issue shares for cash without regard to statutory pre-emption rights.

These guidelines provide, amongst other things, that:

1. a company can issue up to 5% of its issued share capital (ISC) for cash for general corporate purposes with up to an additional 5% for specified acquisitions or investments, in each case on a non-pre-emptive basis; and
2. investors should treat ‘cashbox’ placing structures as being subject to the said 5+5% limits (notwithstanding that, for statutory purposes (see details below), pre-emption rights do not apply).

Cashbox structures

Prior to the publication of the updated form of the Statement of Principles in March 2015, cashbox placing structures had been used where an issuer was seeking to issue, on a non-pre-emptive basis, in excess of 5% of its ISC. This was possible because, under a cashbox structure, the shares issued by the issuer are not, as a technical matter, issued for cash and as a result, are not subject to statutory pre-emption under the Companies Act 2006. Accordingly, those shares are not issued pursuant to the standard authority to issue shares non-pre-emptively that is obtained by an issuer at its AGM. The guideline mentioned at paragraph b) immediately above was included by the PEG in the updated form of the Statement of Principles to address this market practice.

Given that cashbox placings can be completed rapidly (using an accelerated bookbuild) and with minimal documentation (as the issuer avoids the need to convene a general meeting to seek shareholder approval for a specific disapplication of pre-emption rights), it is unsurprising that companies and their advisers are considering making use of this structure again given current events.

Issuances in circumstances arising from the COVID-19 pandemic

In order to help issuers raise equity capital in the current difficult circumstances, the PEG issued its 1 April 2020 statement. In this, the PEG recommends that investors, on a case-by-case basis and temporarily until 30 September 2020, consider supporting issuances of up to 20% of an issuer’s ISC.

The PEG has stated that, if an issuer wishes to make use of this temporary additional freedom:

1. the issuer should fully explain its particular circumstances (including how the issuer is supporting its stakeholders);
2. the issue should be made on a ‘soft pre-emptive’ basis (i.e., existing shareholders favoured in terms of participation) as far as possible;
3. the issuer’s management team should participate in the allocation process;
4. a representative sample of the issuer’s major shareholders should be properly consulted;
5. where the issuance is up to 20% of its ISC, the issuer will be expected to disclose in its next annual report information about the consultation undertaken prior to the issuance and the efforts made to respect pre-emption rights, given the time available; and
6. existing share awards should not be normalised to negate the dilutive effect of the extended issuance and the directors of the issuer will be held accountable for their decisions at the AGM following its use.

The PEG has confirmed that it will reconvene before 30 September 2020 to assess how issuers and investors have responded to this additional flexibility. It will also carry out a wider review of how the additional flexibility was used by issuers following the end of this temporary period.

The PEG reminded issuers that the Statement of Principles already permits companies to request a specific disapplication of pre-emptive rights outside of the normal 5+5% limits, and this process should continue to be respected.

The PEG also stated that this temporary pragmatic approach to the current circumstances should not be interpreted as signifying an intention by it to consider an extension beyond the normal 5+5% limits.

The full statement can be found here.

Companies most likely to make use of the temporary flexibility

The PEG’s statement will be welcomed as another option for companies considering a capital raise as a result of the impact of the COVID-19 pandemic.

It will be of relevance to issuers seeking to raise equity finance:

1. in the immediate short term (and before 30 September 2020);
2. as a result of challenges arising (or likely to arise) from COVID-19 pandemic;
3. in an amount over and above that which they could otherwise raise using existing non-pre-emptive allotment authorities (i.e. the 5+5% limits); and
4. using a cashbox placing structure.

Assuming that the guidance given by the PEG is followed, such companies (and their advisers) should be able to form a view that the use of a cashbox structure will not be considered by investors to be a breach of the Statement of Principles.

Given that the PEG’s statement has been issued in response to the extraordinary circumstances faced by quoted companies arising from the COVID-19 pandemic, we do not expect that companies proposing to seek a general disapplication of pre-emption rights at upcoming AGMs will be able to make use of this additional flexibility. For the same reason, we do not expect that companies that are materially unaffected (or likely to be materially unaffected) by the pandemic will wish to avail themselves of the additional flexibility.

Any company considering taking advantage of the flexibility shown by the PEG with an issuance of close to 20% of its ISC, will, as before, need to check carefully that no prospectus is required: for a Main Market company, this will mean ensuring that less than 20% of its ISC will have been admitted to trading over the previous 12 months (excluding any shares that were covered by a different exemption).