PEG publishes new guidance on disapplication of pre-emption rights

The Principles – which replace the pre-emption principles published by PEG in 2015 - follow recommendations made by HM Treasury's UK Secondary Capital Raising Review (the "Review"), further details of which we shared in our ECM Insight here.

A summary of the key changes implemented by the Principles is set out below.

Annual disapplication threshold increased

The Principles increase the aggregate annual disapplication threshold from 10% of a company's issued share capital to 20%. Up to 10% of a company's issued share capital may be issued on a non-pre-emptive basis on an unrestricted basis and up to an additional 10% of a company's issued share capital may be issued on a non-pre-emptive basis for the purpose of an acquisition or a specified capital investment (as defined in the Appendix to the Principles).

Alongside each of the 10% authorities, a company may seek further disapplication authority for up to an additional 2% for the purpose of a 'follow-on offer' to retail investors and existing shareholders after a placing. This change recognises the recent increased participation of retail investors in non-pre-emptive issues. The Principles set out the expected features of such follow-on offers, including that qualifying shareholders should be entitled to subscribe for shares up to a monetary cap of not more than £30,000 (such cap to be set by the company) and that the number of shares issued in the follow-on issue should not exceed 20% of the shares issued in the non-pre-emptive placing it relates to.

Notwithstanding this additional follow-on authority, until the proposals in HM Treasury’s UK Prospectus Regime Review outcome paper (published in March 2022) are implemented market practice will continue to be limited by the current public offer prospectus requirements, meaning that a follow-on offer to retail investors will require a prospectus where it is greater in size than €8 million and the aggregate size of a non-pre-emptive placing and any associated follow-on offer in a rolling 12-month period will require a prospectus for admission to trading where it exceeds 20% of the company's existing issued share capital. 

Conditions for use of annual general disapplication authority

When issuing shares pursuant to a general disapplication of pre-emption rights, the Principles advise that companies should, prior to the announcement of the non-pre-emptive issue, consult with major shareholders (to the extent reasonably practicable and permitted by law) and give due consideration to the involvement of retail investors and existing investors not allocated shares as part of the placing.  

Companies should also clearly explain why they are undertaking the non-pre-emptive issue and how they propose to use the proceeds of the issue.  

Within one week of the non-pre-emptive issue, companies should report publicly on the issue via an RIS using the template provided in the Principles (see part 2B of the Principles). The next annual report published by a company following a non-pre-emptive issue of shares pursuant to a general disapplication of pre-emption rights should also include the information included in the post-transaction RIS.

Enhanced authority for 'capital hungry' companies

Companies that need to raise larger amounts of capital more frequently ('capital hungry companies') may seek additional disapplication authority provided that the reason for exceeding the above thresholds is specifically highlighted when the request for a general disapplication is made. Such authority can be sought both in connection with an acquisition or a specified capital investment. Companies that are in the process of an IPO and know that they will be 'capital hungry companies' should disclose this fact in the IPO prospectus.

Next steps

Companies should adhere to the Principles when seeking general disapplication authorities and their next AGM. However, noting that the 2022 AGM season has almost come to an end, there are transitional arrangements available in the event that companies wish to undertake urgent and/or exceptional non-pre-emptive offers before their next AGM.

This is just the first phase of implementation of several recommendations that came out of the Review in relation to pre-emption rights. We wait to see, in the near to medium term, what amendments the Investment Association may make to its guidance on allotment authorities to align with the Principles and whether the statutory pre-emption provisions in the Companies Act 2006 will be revised to align with established market practice for the disapplication of pre-emption rights on a rights issue or open offer.