The FCA have issued a note from the Pre-Emption Group giving some revised “principles” to be followed by public companies. As the note says “Pre-emption rights are a cornerstone of UK company law and provide shareholders with protection against dilution of their investments”. In general UK companies cannot issue more shares without the approval of shareholders, which is why on most Annual General Meeting agendas you see two linked resolutions that permit allotment of new shares and a partial disapplication of pre-emption rights which would otherwise only permit shares to be issued in a rights issue to all existing holders. The usual amount of shares that can be issued under this “disapplication” is no more than 5% for FTSE-100 companies, which enables a reasonable number of shares to be issued to meet minor acquisitions or to meet the exercise of share options. That saves the company the trouble of called a General Meeting to approve the issuance.
But for other companies, particularly AIM companies, investors should look very carefully at the maximums that are being allowed in AGMs that are coming up. The percentage is not always stated and can be very high. Do you really want the company in which you have invested to be able to place shares with a few institutions that dilute you by 50% or more without the authority of a special general meeting?
The Pre-Emption Group was established in 2005 to lay down some principles on pre-emption resolutions but the guidelines are not mandatory (i.e. they are a voluntary code). The 5% rule was widely recognised as inappropriate for small companies, so 10% or 15% may be more fitting. But all listed companies, and AIM companies, are encouraged to follow the principles. Some of the changes in the latest principles are:
– Clarification that the scope extends to non-UK incorporated companies on the premium segment of the Official List.
– Clarification that it covers issues of equity under a “cashbox” transaction which was previously a way around the rules.
– More flexibility to undertake non pre-emptive issues to undertake acquisitions.
– Greater transparency on the discount at which equity securities are issued non pre-emptively (another major concern for private investors).
The note emphasises the need for companies to consult with their major investors about proposed disapplications of pre-emption rights. But it says “In some cases it may be appropriate for companies to consult a small number of major shareholders before making any announcement. Companies and shareholders should be mindful of the possible legal and regulatory issues in doing this” which is very pertinent if you think about it.
For the full note see this web page: https://www.frc.org.uk/News-and-Events/FRC-Press/Press/2015/March/The-Pre-Emption-Group-publishes-a-revised-Statemen.aspx
Private companies don’t require annual dispensation to issue 5-15% of new shares per anum, so why should publicly listed companies? There seems a general misconception that when you become publicly listed you have to issue small numbers of shares each year. In reality, it’s often just a disguised part of the LTIP gravy train.