The government has published a report containing the results of the review of secondary capital raising in the UK. The report recommends significant changes to the rules governing secondary capital raisings, with a view to making the UK regime for secondary capital raisings more effective and efficient. The review is part of a proposed package of wider UK capital markets reforms derived from Lord Hill’s UK listing review.
The main recommendations of the report include:
- Maintain and strengthen preemption. The preemption group (PEG) should be formalized, with (among other recommendations) a more formal and transparent governance structure and the obligation to report annually on the functioning of the preemption regime.
- Increase the ability to quickly raise small amounts of funds. PEG should make permanent the temporary concessions it successfully introduced during the pandemic to allow companies to raise capital more quickly. This would allow companies to obtain shareholder consent at each AGM to issue up to an additional 20% of share capital on a non-preemptive basis (i.e. without the cost or process involved in a rights issue or another formal pro rata offer to existing shareholders). This would be double the current limit, but otherwise available on the same basis, with 10% to be used for any purpose and the remainder limited to use in connection with an acquisition or capital investment specified. The use of cash structures in connection with paperless investments should be restricted in accordance with these limits. A company should consult its major shareholders before undertaking an investment on this basis, provide a full explanation to the market and, where possible, make the investment on a “soft preemptive” basis and involve retail investors (see below). below). Company management should also be involved in the award process. The company must then report on the investment, both on a new form to be filed with the PEG and in its annual report.
- Allow additional flexibility for “capital hungry” businesses on a case-by-case basis. A “capital-starved” company (as signaled to investors at the time of the IPO) should not be deterred from asking its shareholders for permission to issue new shares on a non-preemptive basis beyond the new limit of 20% (up to a maximum of 75% of the existing share capital), where it can make its case to its shareholders.
- Involve retail investors more in capital raising. Fundraising companies should consider how they will engage retail investors – for example, by using a retail investor platform or by offering a separate retail offering following an institutional placement (on the a simplified offering document open for five business days and limited to a maximum of 20% of the size of the placement, with a monetary cap of £30,000 per investor, but otherwise on the same terms and conditions). Companies must then report on how they have taken care of the interests of retail investors. At the moment, existing regulatory constraints limit the involvement of retail investors, but the government’s proposed reforms to the UK prospectus regime (including the removal of the need for a prospectus for a pre-emptive offer) should further great opportunities in the future. Separately, the report also recommends that the FCA reduce the current period during which an IPO prospectus must continue to be available to retail investors before the end of the offering from six days to three days, to to encourage companies to include them in an IPO fundraiser. .
- Reduce regulatory involvement in fundraising. The existing regulatory footprint should be removed for secondary fundraisers. There should be no, or at most very little, regulatory oversight of the secondary capital raising process by the FCA. A company should not have to appoint a sponsor to provide confirmations to the FCA on a secondary fundraising, or to issue an FCA-approved prospectus regarding admission to trading, unless the size of the offering does not represent at least 75% of the existing share capital. Rather than duplicating information already available, fundraising documentation for a pre-emption offer should focus on the background and reasons for fundraising, amount and use of proceeds and, if applicable, how the transaction will affect the company’s strategy, financial viability and forward guidance (recognizing that where the circumstances are more complex or wider international distribution is anticipated, the offering documentation may need to contain significantly more information ). The report also recommends that a company could opt for an enhanced continuous disclosure regime, which includes, for example, more detailed disclosure in the company’s annual report in certain areas which could be relied upon and which could be incorporated by reference if necessary, in particular for international fundraising. In the absence of a prospectus, the usual liability regime for communication to the market by the company should apply to the published offering documentation (with a qualification provided that financial advisers and investment banks are not responsible for this documentation). Separately, the report also recommends that the FCA’s approach to working capital statements, if any in the future, be reviewed and revised to allow for greater flexibility and a disclosure-based approach.
- Make existing preventative fundraising structures faster and cheaper. Secondary offer periods should be reduced from 10 business days to seven business days for rights issues and open offers. The legal procedure for pre-emption offers should be aligned with this reduced timetable and updated to reflect the exclusions and flexibilities of market practices. Companies should still be able to ask their shareholders for annual authorizations to grant and withdraw pre-emptive rights up to two-thirds of their issued share capital, but this should extend not only to rights issues, such as c is currently the case, but to all forms of fully pre-emptive offers. The FCA should also consider amending the rights issue regime to allow for more flexible structures – for example, allowing existing shareholders to make excess demands, or the default cashless assumption of rights by non-voting shareholders. participants (where rights are sold in the market to fund the assumption of part of the shareholder’s rights) – removing or reducing the need to place a significant “tail” of unsupported shares . In addition, the government should have delegated authority to reduce the minimum notice period for shareholder meetings (other than general meetings) from 14 clear days to seven clear days, once the effectiveness of communication improves. will improve for investors currently holding their shares through intermediaries.
- Expand the range of choice of fundraising structures available to companies. The UK is expected to adopt some features of the Australian models for secondary offerings. These include the use of “clean-up notices” (i.e. the company complies with its disclosure obligations and does not delay the disclosure of inside information), offering documents that do not duplicate existing market information, involvement of both institutions and retail investors (which could be facilitated by improvements to section 793 of the Companies Act 2006 to enable companies to to identify underlying investors faster and more accurately), the lack of involvement of regulators and the use of standard market terms and conditions with institutional investors.
- Lead to the digitization of shareholding. Building on existing work, the government should prioritize an ambitious digitization campaign to facilitate innovation, management and improvement of market infrastructure, to be implemented by a Task Force on digitization with an independent chair and a clear set of principles. In addition to the elimination of paper share certificates, this should aim to ensure that the rights attached to the shares reach end investors more quickly and clearly and that investors are able to exercise these rights in an efficient manner.
The report recommends that changes to the PEG, increased annual limits on shareholder powers and greater involvement of retail investors take place immediately; other changes will require further consultation and/or legislation. The government has accepted all of the recommendations made by the report, including the need to amend the Companies Act 2006 to shorten pre-emption offers and update the processes around them. He also appointed Sir Douglas Flint to chair a new task force to examine the digitization of shareholdings (including those of private companies) and improvements to the current system of intermediary shareholding. FCA and PEG also issued statements welcoming the report.
As mentioned above, the review is part of a proposed package of far-reaching reforms for UK capital markets, derived from Lord Hill’s UK listing review, on which we have already figured out. These include changes to the listing rules on SPACs (effective August 10, 2021), changes to the rules relating to minimum free float, minimum market capitalization and dual-class share structures (effective from 3 December 2021), Government proposals for the future of the UK prospectus regime (published in March this year) and FCA proposals for the reform of IPO regimes and UK listing (published in May this year).
