The UK Secondary Capital Raising Review (SCRR) makes a series of recommendations to improve capital raising processes for London listed issuers. The proposals, published on 19 July 2022, will enable larger non-pre-emptive placings, and in due course allow at least some rights issues without a prospectus or the involvement of a sponsor.
The SCRR’s recommendations focus on making secondary capital raising quicker, cheaper and more efficient while preserving pre-emption rights for larger issues, and enabling greater retail participation in fundraisings. More broadly, the SCRR urges the digitisation of UK shareholding structures in order to ease communications on capital raisings and facilitate further innovation, better stewardship and improved market infrastructure.
Background
The SCRR was initiated as one of the recommendations of the broader Hill Review of UK Listings published in March 2021 and was chaired by Mark Austin. In an introductory letter to the Chancellor of the Exchequer, the SCRR warns against merely “tinkering” with existing rules and seeks to take a more radical approach.
The SCCR has received statements of support from a wide range of industry groups and market participants, and the Chancellor of the Exchequer, Nadhim Zahawi, announced in the Mansion House speech on 19 July 2022 that the government accepts the SCRR’s recommendations in full. The Chancellor also welcomed the London Stock Exchange’s announcement on the same day of a new Capital Markets Industry Taskforce which will aim to support reform and innovation across both public and private capital markets.
Key recommendations
Enhance the pre-emption regime while allowing larger cash placings
- The principle of pre-emption, as an important shareholder protection in the UK capital markets, should be preserved and enhanced. To reflect this, the Pre-Emption Group (PEG) should be put on a more formal and transparent footing. This is already under way, with the announcement of the PEG’s support of the SCRR’s recommendations and of Keith Skeoch as the new chair of the PEG.
- The ability for companies to issue up to 20% of their issued share capital that was temporarily introduced in 2020 during the Covid-19 pandemic should be restored (from the current 10%) and the Pre-Emption Group’s Statement of Principles updated accordingly, with transitional provisions to enable companies to take advantage of the changes ahead of their next AGM.
- Non-pre-emptive fundraisings should be subject to the following conditions:
a. Up to 10% of issued share capital would be available for any purpose while the additional 10% should only be used for financing an acquisition or a specified capital investment (following the same principles as in the current Pre-emption Principles where these thresholds are 5% plus 5%)
b. The company should explain the background to and reasons for the fundraising and the proposed use of proceeds
c. To the extent reasonably practicable and permitted by law, consultation with a representative sample of the company’s key shareholders should be undertaken
d. As far as possible, the issue should be made on a soft pre-emptive basis and consideration should be given involvement of retail investors
e. Company management should be involved in the allocation process.
- Companies should report to the market immediately after a placing on how it was carried out using a template issued by the PEG and these reports should be kept on a publicly searchable database. Existing PEG guidance already sets out best practice in investor engagement and disclosure but these requirements will introduce additional formality and transparency.
- Cashbox placing structures should only be used within the amount of an existing pre-emption authority, as a mechanic to increase distributable reserves.
- Companies that need to raise larger amounts of capital more frequently should be supported by shareholders, if appropriate in the circumstances, if they request a disapplication of pre-emption rights of more than 20% in any one year or a disapplication over a longer period.
Involve retail investors in all capital raisings
- On all capital raisings, including undocumented placings of up to 20% of issued share capital, companies should give due consideration to the interests of retail shareholders, as well as other existing shareholders, and how to involve them in the offer as fully as possible. Companies should consider the most appropriate method by which to do this, taking into account both the company’s and market circumstances at the time of the placing as well as the constitution of their shareholder register. It may for example be appropriate to use a technology-driven platform for retail offers or, if a company wished to, it could include a follow-on offer that would take place after the institutional offer had closed. If this route was chosen, companies should ensure that any follow-on offer is limited to no more than 20% of the size of the placing, with a monetary cap of £30,000 per investor. This amount would fall outside and be in addition to the up to 20% disapplication authority.
Reduce regulatory involvement in capital raisings
- The FCA should remove the requirement for a prospectus for offers to existing shareholders of up to 75% of the existing share capital.
- The need for a sponsor to be appointed on secondary capital raisings should also be removed, except where the sponsor’s involvement is otherwise required (for a major transaction circular, for example)
- The FCA should allow flexibility on the approach to working capital statements and increase the focus on the rationale for raising funds and use of proceeds without requiring “importance of vote” language that requires companies to consider hypothetical outcomes when carrying out a reconstruction or major refinancing.
Make pre-emptive issues quicker and cheaper
- Annual share allotment authorities of up to two-thirds of capital should continue to be allowed (in accordance with Investment Association guidelines) but with the authority over the full two-thirds extending not just to rights issues, as is currently the case, but to any pre-emptive offer.
- Rights issue offer periods should be shortened to 7 rather than 10 business days and the government should have power to reduce general meeting notice periods to 7 days (other than for AGMs) when appropriate.
- The pre-emption provisions in the Companies Act should be adjusted to give companies the ability to exclude overseas shareholders and have greater flexibility on matters such as fractional entitlements without the need for a shareholder resolution to disapply these requirements.
- Excess application mechanics should be allowed in rights issues.
Disclosure and other documentation
- Companies should be able to opt in to an enhanced continuous disclosure regime, so that at the time of a fundraising they could publish a shorter, non-duplicative document and the overall package of information provided by them would be recognised as of sufficient standard for legal comfort to be given for the purposes of offerings outside the UK. The disclosures should be subject to the same liability standard as other market disclosures rather than the more onerous standard that applies to prospectuses. An alternative would be for all the supplemental offer disclosure to be published in an extended press release at the time of the offer. The Australian concept of a cleansing notice – an announcement issued by a company at the time of fundraising to confirm it is in compliance with its market disclosure obligations – could also be adopted to streamline disclosure practices without a prospectus.
- Standard terms and conditions should be agreed with institutional investors for use in secondary fundraises.
Transparency and digitisation of shareholdings
- The Companies Act should be amended to enable companies to identify ultimate investment decision-makers or beneficial owners and to distinguish between institutional and non-institutional holders in the fundraising context.
- Priority should be given to digitising the UK securities holding model to ensure that companies have more transparency over the ultimate owners and decision makers who control their shares, and that end investors are able to exercise their shareholder rights in an effective and efficient way. The drive to an ambitious digitised shareholding structure should be coordinated and driven by the newly established Digitisation Task Force which will be chaired by Sir Douglas Flint.
Comment
If adopted in full, the recommendations will substantially reshape the landscape for secondary capital raisings and should enable significant recapitalisations to be achieved much more rapidly. The PEG’s relaxation of pre-emption guidelines during the pandemic in 2020 to enable issues of up to 20% of shares was well-received by the market, and permanently raising the threshold for non-pre-emptive issues will give issuers increased flexibility. The increased ease and efficiency of raising further capital will benefit existing issuers as well as helping to enhance London’s relative attractiveness as a listing venue.
The logic for removing the requirement for a prospectus for pre-emptive offerings is based on the principles that existing shareholders are already familiar with the company and that ongoing disclosure rules mean that the information that investors need to make investment decisions is always available to the market – thus the only additional information needed should be any new information, including the reasons for the capital raising, its impact on the issuer and the use of the proceeds. In practice, however, for market practice to change significantly on larger issues, transaction participants will need to be comfortable with the new disclosure and liability mechanisms that will replace the existing prospectus regime. This will require market engagement to arrive at a consensus on the appropriate way to document these offerings and on the related review and assurance processes.
Timing
Some of the SCRR’S recommendations, including the changes within the PEG’s remit, will potentially have immediate impact. Those that require legislation and changes to the FCA’s rulebook will be subject to the parliamentary timetable and regulatory consultation processes, during which the detail of the new rules will be developed. This includes potential changes to the prospectus regime that will be enabled by the Financial Services and Markets Bill which was published by the government on 20 July. Other recommendations, like the digitisation drive, will need broader policy development and will take longer to bear fruit.
More information
For a copy of the UK Secondary Capital Raising Review, click here. For details of the Chancellor’s Mansion House speech, click here and for the Financial Services and Markets Bill and explanatory note, click here and here. For information about the new Digitisation Taskforce, click here.
For further information, please contact:
Lucy Fergusson, Partner, Linklaters
lucy.fergusson@linklaters.com
