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With the coronavirus (COVID-19) pandemic continuing to cause significant economic turmoil, many listed companies may need to raise funds quickly through equity capital fundraisings.
Equity fundraisings by listed companies can be split into two different types: pre-emptive offerings and non-pre-emptive offerings. In a pre-emptive offering, such as a rights issue or an open offer, shareholders are given the opportunity to subscribe in the fundraising pro-rata to their existing shareholdings. In a non-pre-emptive offering, such as a placing, shares are offered to selected investors and this will see the holdings of existing shareholders in the company diluted.
The key types of secondary fundraisings which a listed company may consider in an emergency situation are discussed below.
In a placing, shares are usually offered to a selected group of institutional investors for cash. The placing is generally structured so that it falls within one of the exemptions from the requirement to publish a prospectus which saves time and cost. There is an exemption from the requirement to publish a prospectus in relation to an offer of shares to the public where shares are offered to qualified investors only or are offered to less than 150 persons. In addition, there is an exemption from the requirement for a prospectus for the admission of shares to a regulated market where the shares represent less than 20% of the shares already admitted to trading. Accordingly, a placing to institutional investors of a number of shares representing less that 20% of the existing issued share capital will not need a prospectus.
The directors will need shareholder authority to provide them with authority to allot the placing shares and to disapply statutory pre-emption rights unless existing authorities are in place. It is usual for a listed company to pass resolutions at each annual general meeting (AGM) providing the directors with these authorities. A listed company will need to follow the Share Capital Management Guidelines published by the Investment Association to only give authority to allot new shares up to an amount equal to two-thirds of the existing issued share capital with any amount in excess of one-third of existing issued share capital applied to fully pre-emptive rights issues only.
In relation to the disapplication of pre-emption rights, a listed company will usually stay within the limitation set out in the Statement of Principles issued by the Pre-Emption Group (PEG). This allows the company to disapply pre-emption rights in respect of 5% of issued share capital in any one year for any purpose with an additional 5% for an acquisition or a specified acquisition capital investment. However, on 1 April 2020 PEG published a statement on its expectations during the coronavirus (COVID-19) pandemic. It recommends that investors, on a case-by-case basis, consider supporting issuances by companies of up to 20% of their issued share capital until 30 September 2020. If this additional flexibility is sought:
the company should fully explain the particular circumstances, including how it is supporting stakeholders
a representative sample of the company’s major shareholders should be properly consulted
as far as possible, the issue should be made on a soft pre-emptive basis (with existing shareholders favoured in terms of participation)
the company’s management should be involved in the allocation process
where the issue is up to 20% of its issued share capital, the company will be expected to disclose in its next annual report information about the consultation undertaken prior to the issue and the efforts made to respect pre-emption rights given the time available, and
existing share awards should not be normalised to negate the dilutive effect of the extended issue and the company’s directors will be held accountable for their decisions at the next AGM
The PEG Statement of Principles also provides that the offer price of the shares should not be more than 5% below the market price.
A cashbox placing is a type of placing which is structured so as to constitute a share-for-share exchange to make use of the exemption under the Companies Act 2006 (CA 2006) which allows companies to issue shares on a non-pre-emptive basis for non-cash consideration. A cashbox placing is therefore a useful method for a listed company needing to raise money quickly as it falls outside the pre-emption regime in CA 2006.
PEG’s Statement of Principles applies to all issues of equity securities that are undertaken to raise cash for a listed company, irrespective of the legal form of transaction and so a cashbox placing will be subject to the limits for non-pre-emptive offers in the Statement of Principles as varied temporarily by the statement put out by PEG on its expectations during the coronavirus (COVID-19) pandemic. Accordingly, assuming a listed company has sufficient authority to allot shares it will be able to use a cashbox structure to do a fundraising of up to 20% of its issued share capital fairly quickly without the need for further shareholders authority (although it will need to consult with major shareholders and follow the other requirements set out in PEG’s statement issued on 1 April 2020).
As with a straight cash placing the PEG Statement of Principles requires that the offer price should not be at more than a 5% discount to market price.
A rights issue generally involves an offer of shares to the public (as the offer is made to all the company’s shareholders) and this will normally require the publication of a FCA approved prospectus which increases transaction costs and timing. However, there is no limit on the size of the issue or on the offer price at which the rights shares are offered. Accordingly, rights issues are useful for large fundraisings and can be done at a deeply discounted price.
The company will need shareholder authority to give the directors authority to allot the rights issue shares—there may be sufficient authority in place given at the last AGM but a large rights issue will probably need further shareholder approval.
As there is no limit on the size of the discount to the market price at which shares can be offered (although shares cannot be issued at less than their nominal value), rights issues are frequently offered at a large discount in order to encourage shareholders to take part in the offer.
In certain circumstances, it may be preferable to disapply statutory pre-emption rights so that the company has more flexibility to exclude certain overseas shareholders from the rights issue (where these shareholders live in jurisdictions with onerous securities registration requirements) and also to aggregate fractional entitlements to shares and sell these for the benefit of shareholders.
A rights issue must be open for shareholders to accept for at least ten business days under the Listing Rules.
On 25 March 2020 (ahead of PEG’s recommendation that investors support non-pre-emptive issuances of up to 20% of issued share capital), SSP Group plc completed a cashbox placing and subscription of shares by directors raising £216 million. The number of new shares issued represented 19.3% of the issued share capital of the company. The company stated that the company’s directors and senior management had consulted with major shareholders ahead of the release of the announcement of the proposed fundraising as the size of the issue was above limits then in place for pre-emptive offers as set out in the PEG Guidelines.
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