The Pre-Emption Group published a revised Statement of Principles on 12 March 2015. Companies adopting the Statement must factor the principles into their decision-making process when considering the case for disapplying pre-emption rights.
Pre-emption rights provide shareholders with protection against inappropriate dilution of their investments. They are given statutory protection by the Companies Act 2006, which may be disapplied by a special resolution of shareholders at a general meeting of the company.
The Statement of Principles, first published in 2005 and last amended in 2008, is a set of voluntary guidelines produced by representatives of listed companies, investment institutions and corporate finance practitioners. They relate to issues of equity securities for cash other than on a pro rata basis, and they set out the extent to which disapplications of pre-emption rights are acceptable to shareholders.
The principles are aimed at companies with shares admitted to the Premium Listing segment of the Official List of the UK Listing Authority and to trading on the Main Market for listed securities of the London Stock Exchange. They apply to all listed companies irrespective of whether they have institutional shareholders. Other companies such as those admitted to the Standard Listing segment of the Official List, AIM, or the High Growth segment of the Main Market are also encouraged to adopt them.
The statement has heavyweight backing. Membership of the Pre-Emption Group comprises senior figures at major companies including Marks & Spencer Group plc and the Royal Mail Group, along with investment houses, banks and representative organisations. The Investment Management Association and National Association of Pension Funds also support the statement, so it epitomises market-standard practice.
The revised principles clarify that the statement applies:
- to UK and non-UK incorporated companies whose shares are admitted to the premium segment of the Official List; and
- to all issues of equity securities undertaken to raise cash for the issuer or its subsidiaries, regardless of the legal form of the transaction
This ensures that cashbox transactions and vendor placings which may otherwise fall outside the statutory pre-emption regime are covered.
A cashbox transaction is where a listed company issues shares to a special purpose vehicle whose principal asset is cash, in return for the entire issued share capital of that company as consideration for the issue. The statement says cashbox transactions should be regarded as being an issue of equity securities for cash, subject to the limits set out in the statement.
A vendor placing is where a purchaser allots new shares to the vendors in exchange for shares in the target company, usually below market price. These new 'consideration shares' are then placed with a bank or institutional investor in return for cash. Although a vendor placing falls outside the scope of the statement, shareholders expect a right of clawback in respect of any vendor placing representing more than 10 per cent of ordinary share capital or one that is undertaken at a discount.
The statement gives companies greater freedom to undertake non pre-emptive issues of equity securities in connection with an acquisition or specified capital investment. This allows companies to finance expansion opportunities as required. A company may seek a general authority to issue non pre-emptively for cash up to an additional five per cent of the issued ordinary share capital in any one year in connection with an acquisition or specified capital investment. This is in addition to the authority commonly secured by listed companies and renewed at each AGM, for a non pre-emptive issue of no more than five per cent of the issued ordinary share capital for wider purposes.
The company must confirm in the circular for the AGM at which such additional authority is to be sought that it intends to use it only in connection with an acquisition or specified capital investment announced contemporaneously with the issue, or one which has taken place up to 6 months prior and is disclosed in the announcement of the issue. Companies are also expected to disclose any discount at which equity is issued.
Companies that have adopted the statement should review the new principles and consider whether and how contemplated transactions may be affected.