Investment Association publishes updated Share Capital Management Guidelines
The Investment Association ("IA") has published a revised version of its Share Capital Management Guidelines (the "Guidelines"). The updated Guidelines are in response to the recommendation that they be revised in the report published in 2022 by Mark Austin's UK Secondary Capital Raising Review (the "Report").
The Guidelines were last published in 2016 and outline the expectations of IA members where companies seek shareholder approval for the allotment of new shares and the disapplication of pre-emption rights. Whilst the Guidelines apply only directly to premium listed companies, companies with a standard listing (or with shares admitted to the High Growth Segment of the LSE) and those listed on AIM are also encouraged to adopt them as a matter of best practice.
The UK Secondary Capital Raising Review was established in October 2021 with the aim of improving the efficiency of capital raisings by listed companies. Its recommendations were published in in July 2022 in the Report, which included a proposal to amend the Pre-Emption Group Statement of Principles (the "PEG Principles"). A revised version of the PEG Principles was published in November last year (on which, see our ECM Hub Insight). As well as incorporating recommendations from the Report, the IA also supports the revised PEG Principles in these updated Guidelines.
Key updates to the Guidelines
IA members will continue to regard an authority to allot up to two-thirds of the existing issued share capital as 'routine'. However, any amount exceeding one-third of existing issued shares should now apply to all forms of fully pre-emptive offers and not just rights issues. IA members expect companies to justify why they have chosen specific capital raising structures and why such structures are beneficial for the company and its shareholders.
The Guidelines have been updated to reflect the new PEG Principles which permit companies seeking an annual authority for the disapplication of pre-emption rights in respect of up to 20% of a company's issued share capital, plus an additional 4% for any follow-on offer.
IA members expect companies seeking a disapplication of pre-emption rights of up to 24% of their issued share capital to use the Pre-Emption Group's template resolutions wherever possible.
IA members have asked the Institutional Voting Information Service ("IVIS")- the IA’s voting research service- to "Red Top" (the highest level of warning available) companies that:
a) seek as routine a disapplication of pre-emption rights in excess of 24% of the issued share capital permitted by the PEG Principles (other than 'capital hungry companies, on which see further below); or
b) seek a disapplication of pre-emption rights which, whilst being up to the permitted 24% of issued share capital, does not:
i. track the Pre-Emption Group's template resolutions;
ii. confirm the shareholder protections in Part 2B of the PEG Principles; and
iii. provide that follow-on offers will include the expected features set out in paragraph 3 of Part 2B of the PEG Principles.
Capital Hungry Companies
Under the revised PEG Principles, companies that need to raise larger amounts of capital more frequently (termed 'capital hungry companies') may seek additional disapplication authority in excess of 24% of issued share capital provided that the reason for exceeding the 24% threshold 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 their IPO prospectus.
IA members support this approach and IVIS will "amber-top" pre-emption authorities exceeding the 24% threshold for companies that disclosed that they are a capital hungry company at the time of their IPO.
IA members express concern about the dilutive effects of scrip dividend issues, preferring that any shares offered in lieu of dividends be sourced from shares purchased in the market (Dividend Reinvestment Plans, “DRIPs”) rather than by primary issuance. The guidelines expect that any authority to offer scrip dividends by issuing new shares should be renewed at least every three years.
As for valuing scrip dividends, the Guidelines provide that the number of shares to be allocated in lieu of the dividend should be calculated based on the average of the middle market quotations for such shares on the London Stock Exchange over the five business days beginning on the ex-dividend date.
Any proposed cancelation of a scrip dividend arrangement offer shall only be acceptable if shareholders are provided with a clear rationale and explanation for it.
Issuance of Shares by Investment Trusts
In the case of Investment Trusts, the Guidelines make clear that new shares should not be issued below net asset value (NAV) and treasury shares should only be re-issued at a discount that is lower than the weighted average discount at which all those shares held in Treasury have been repurchased.
Boards must always explain to shareholders why they believe it is in their interest to hold shares in Treasury for potential re-issuance at a discount rather than cancelling them upon their repurchase.
IVIS will "red-top" pre-emption authorities greater than 20% of the issued share capital (excluding shares held in Treasury).
The IA confirms that it has updated the Guidelines in consultation with the UK Shareholders' Association and ShareSoc. It is worth noting that, whilst the Guidelines have been updated to incorporate all fully pre-emptive offerings (as recommended by the Report), IA members still expect companies to explain their particular choice of capital raising structure and its appropriateness in each case. They highlight that rights issue are still often preferred by retail investors and note that even the Report refers to rights issue as being the 'gold standard' of investor protection (given the combination of tradeable subscription rights and the possibility of monetary compensation for any dilution suffered by non-participants).
The IA has committed to keeping the Guidelines under review as market and regulatory approaches develop, including in light of the recommendations made in the Report regarding the definition of pre-emption rights in the Companies Act 2006.