Mark my words - Austin Review calls for sweeping reforms to UK secondary capital raisings regime

In October 2021, Mark Austin was appointed as independent chair of the UK Secondary Capital Raising Review (the "Review"). The final report of the Review was published on 19 July 2022 and complements the ongoing Primary Market Effectiveness Review (see our ECM Insight). The aim of both reviews is to enhance the attractiveness of UK capital markets, building on the Lord Hill Review published last year. The ambitious initiative is an important step in the ongoing process of advancing the competitiveness of London's capital markets and has been welcomed by the FCA.

Headline recommendations

The Review was guided by the principles of cost-efficiency, choice, and enabling retail investors and presents a holistic package of reforms to modernise the UK listing regime.  

Enhancing UK pre-emption rights regime

Pre-emption rights remain the bedrock of shareholder protection in UK capital markets. Therefore, the Pre-Emption Group ("PEG") should have an enhanced role, on a more formal footing, becoming a key stakeholder in UK capital markets. The proposed enhancements to the PEG include:

• Greater formalised and transparent governance structure
• Dedicated and easily accessible website
• Ongoing review of the group's membership and annual reporting

Increasing the speed and lowering the cost of fund raisings

The capital markets' quick response to the COVID-19 pandemic was largely assisted by the relaxation of PEG's Statement of Principle, and the Review suggests that the temporary measure should become a permanent feature. Mr. Austin thus proposes raising the threshold for share issues from 10% to 20%, subject only to prior shareholder approval at a company's annual general meeting. To protect shareholders' interests, checks and balances would accompany this change. In particular, the Review proposes requiring companies to consult with shareholders, follow soft-pre-emption, publicly report to the market on how any placing was conducted (PEG will produce a template for this) and give due regard to the participation of retail investors.

Improved flexibility for 'capital hungry' companies

Whilst the principles of pre-emption are to be maintained and enhanced, the Review recognises the need for balance to attract capital hungry companies, such as life sciences and tech companies, which require larger amounts of capital to support rapid growth. Mr. Austin, therefore, recommends that such companies should be able to raise more than 20% of their existing share capital non-pre-emptively either each year or for a longer period with the support of shareholders, up to 75%. These companies would be able to, with the appropriate supporting disclosures, put in place increased dis-application authorities at the time of IPO.  

Reducing regulatory red tape

The Review is clear that, since existing listing companies are already subject to ongoing disclosure and similar obligations, and their existing shareholders have already made an investment decision on the company, that the starting point in subsequent raisings should be that there is no regulatory involvement in these activities. To further reduce the regulatory hurdles that companies raising capital face, the Review puts forward that the requirement to publish any information that is already available to the market be removed. Consequently, the FCA's oversight over secondary fundraisings would be significantly reduced.

More specifically, the Review recommends:

• Raising the threshold at which a prospectus is required for admission to trading of securities from 20% to 75% to eliminate duplicative disclosures;
• The disapplication of the FCA sponsor regime in relation to secondary fundraisings (already the case in most other major capital markets);
• With the consequential removal of the sponsor declarations on working capital that would follow the removal of the sponsor regime, current market practice with respect to working capital diligence and related comfort on undocumented placings could be followed on all secondary raisings, which would potentially reduce cost and time; and
• Revising the FCA's current approach to restricting permitted disclosures of assumptions underlying working capital statements and where important of vote wording is required, revising the FCA's approach to focus on the use of proceeds and the rationale for the level of the fundraise.

Quicker and cheaper existing pre-emptive fundraising structures

The consensus in the market has been for some time now that open offers and rights issues take too long and are too expensive. In addition to the reduced regulatory involvement, the Review proposes:

• shortening the offer period for rights issues and open offers from 10 to 7 days; and
• reducing the minimum notice period for general meetings other than AGMs to seven clear days.

Other changes

The Review recommends a wider range of fundraising structures being made available to companies where the circumstances are reasonable. Several other recommendations focus on the disclosure process on offerings and streamlining the disclosure regime: permitting companies to make 'cleansing notices' at the outset of offers confirming all information on them is published and up to date; tasking industry groups with agreeing standard terms and conditions to be deployed by companies to institutional investors on secondary fundraises; and helpfully (for the investment banks and brokers advising fundraising companies), clarifying that financial advisers and banks are not liable for any of a company's offer documents under the disclosure regime for secondary fundraisings.

Further proposals include a move to an Australian-inspired offer process for smaller fundraisings, as well as introducing a default presumption that retail investors will be included in a fundraising.

Digitisation taskforce

The Review also considers changes such as raising the priority of a drive towards digitisation, through establishing a Digitisation Taskforce.

On 20 July 2022, the government published Terms of Reference: Digitisation Taskforce (the "Taskforce"), accepting fully the recommendations set out in the Review. Its stated objectives include:

• Improving the CREST system of share ownership;
• Eliminating the use of paper certificates for publicly traded companies; and
• Extending digitisation options to existing and new private companies.

Bold reforms come not a day-too-soon as London's capital markets aim to boost their attractiveness to international companies and investors

There has long been universal consensus amongst UK capital markets participants regarding the need for modernisation and reform of the secondary markets. Capital markets serve to draw vital equity and other capital into the economy and in order to do so, they must function efficiently and cost-effectively. These recommendations would help boost the attractiveness of the UK to fast-growth and those 'capital hungry' companies, as well as benefiting investors and other market participants by reducing the time, cost and burden otherwise associated with follow-on capital raisings.

The implementation of the recommendations set out in the Review now falls to numerous stakeholders – namely, the HM Treasury, FCA, PEG, and the Department for Business, Energy and Industrial Strategy ("BEIS"). The UK Government's prompt full acceptance of the Digitisation Taskforce recommendation for example, taken together with the statements already published by the FCA and PEG in response to the Review (welcoming the changes), would suggest that they are primed to act.

If London is to continue to mix with the frontrunners across the global financial services community, the changes will not stop here and further, equally bold reforms will no doubt continued to be recommended.