Secondary Capital Raising Review Recommendations

NB: Updated 12 December 2022 

On 19 July 2022, the Treasury published its UK Secondary Capital Raising Review Recommendations (the “SCRR Review Recommendations”) which focus on improving the ability of companies to finance their businesses through public capital markets in a cheaper, quicker and easier manner.  The UK Government has accepted the SCRR Review Recommendations in full. [1]

A total of 21 recommendations were made, based on four broad principles: (a) pre-emption rights; (b) cost & efficiency; (c) choice; and (d) enabling retail investors. Below we have summarised the key proposed recommendations. 

1. Immediate changes recommended by the Treasury, which could be made by the Financial Reporting Council and Pre-Emption Group (“PEG”), include:

1.1 Improving the ability of companies to raise smaller amounts of funds quickly and cheaply by undertaking larger placings

As a permanent change, the PEG’s Statement of Principles should permit a company to annually issue up to 20% of its existing share capital non pre-emptively (this relaxation was first introduced in 2020 due to Covid-19). Under this recommendation, 10% would be available for any purpose and the further 10% restricted to an acquisition or a specified capital investment, as per the existing Pre-Emption Group definitions. [2] Disclosure of the placing to the market would still be required. 

1.2 Additional flexibility for capital hungry companies

The PEG’s Statement of Principles should also permit a company to seek shareholder authority at its annual general meeting (“AGM”) for the disapplication of pre-emption rights of more than 20% in any one year or over a longer period. For companies undergoing an initial public offering (“IPO”), the putting in place, size and duration of an enhanced authority should be fully disclosed in their IPO offer documentation.

1.3 Involving retail investors in all capital raisings

Companies should give due consideration to the interests of retail shareholders and how to involve them in all capital raisings.

2. Near term changes include: 

2.1 Most secondary capital fundraisings should no longer require a prospectus 

The threshold to publish an admission to trading prospectus in relation to a secondary fundraising should be increased to at least 75% of the existing share capital (from the current 20% threshold in the UK Prospectus Regulation). This would exclude most secondary fundraisings from the requirement to issue a prospectus. 

2.2 Sponsors not required for secondary fundraisings

Removing the requirement for a company to appoint a sponsor in relation to a secondary fundraising, save for sponsor declarations on a circular linked to a material acquisition. 

2.3 Timetable for fundraising made quicker 

At present the Companies Act 2006 (the “Act”) requires an offer period for rights issues and open offers of ten business days. This should be shortened to seven business days. The Act and the FCA Handbook should be aligned to clarify the method of calculating minimum offer periods.

The notice period for shareholder meetings other than AGMs should also be reduced to seven clear days at “the appropriate time”, shortening the period for shareholder approval regarding capital raisings. 

Annual allotment and pre-emption rights disapplication of up to two-thirds of shareholders’ issued share capital should be available for all forms of pre-emptive offer (including open offers), and not, as at present, only fully pre-emptive rights issues. 

 2.4 Drive to digitisation 

All shareholders – institutional and retail – should hold their shares in a fully digitised form and the holding of paper-based certificates should be eradicated. 

Conclusion 

Overall, the recommendations are a move in the right direction to support UK listed companies looking to undertake secondary fundraisings.  Nevertheless, the implementation, and therefore the benefits, of the recommendations are likely to be fragmented as timescales will vary, while investors and issuers will also need time to adapt to the changes.

Update: Since originally publishing this article, on 4 November 2022, the Pre-Emption Group published its new Statement of Principles on disapplying pre-emption rights (“2022 Statement of Principles”), together with template resolutions.[3] The 2022 Statement of Principles implements the recommendations discussed above in section 1, with immediate effect, and supports a further disapplication authority of up to 4 percent (2 percent for disapplication authority and 2 percent for an acquisition or specified capital investment) for the purposes of a ‘follow-on offer’  to retail investors and existing shareholders after a placing. 

 

[1] Mansion House Speech by the Chancellor of the Exchequer - GOV.UK (www.gov.uk)

[2] SCRR Report (SCRR report (13 July final) (publishing.service.gov.uk))

[3] PEG_Statement-of-Principles.pdf (frc.org.uk)

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