UK’s Pre-emption Group releases monitoring report on updated principles

The Financial Reporting Council’s pre-emption group (PEG) has released a report showing the progress of implementation of the Statement of Principles (principles), which were updated in 2015 to reflect market changes. The PEG found that the revised principles were largely adhered to while the FRC said the report’s findings showed the importance of open dialogue and engagement between investors and the companies to which they have allocated their capital.

The principles provide that a company may seek authority by special resolution to issue non-pre-emptively for cash equity securities representing: – no more than five per cent of issued ordinary share capital in any one year; and – no more than an additional five per cent of issued ordinary share capital provided that, in the circular for the Annual General Meeting at which such additional authority is to be sought, the company confirms that it intends to use it only in connection with an acquisition or specified capital investment which is announced contemporaneously with the issue, or which has taken place in the preceding six-month period and is disclosed in the announcement of the issue.

The key changes to the principles were making it clear that they apply to both UK and non-UK incorporated companies whose shares are admitted to the premium segment of the Official List of the UK Listing Authority and that they apply to all issues of equity securities that are undertaken to raise cash for the issuer or its subsidiaries, irrespective of the legal form of the transaction, including, for example, “cashbox” transactions.  The changes also gave flexibility to undertake non-pre-emptive issuance of equity securities in connection with acquisitions and specified capital investments, consistent with existing market practice and provided greater transparency on the discount at which equity securities are issued non-preemptively.

The report looked at the implementation of the principles for shareholder meetings held between 12 March 2015 and 12 March 2016 using information sourced from the Manifest database, public filings on company websites and other sources such as the London Stock Exchange. The research found that in those 12 months FTSE 350 companies proposed 351 general authorities to issue or allot, all of which were approved. It was found that 351 general resolutions to disapply were proposed. Only one of these resolutions was defeated, that of the general authority to disapply on the issue of shares for cash of up to five per cent of capital at SVG Capital. Looking at support for approved disapplications across the FTSE350, FTSE Small Cap and FTSE Fledgling indices more than 98 per cent support was achieved by 62 per cent, 70 per cent and 62 per cent of resolutions at the companies in the three indices respectively. The group found that FTSE Fledgling companies received slightly lower levels of support (78 per cent of resolutions receiving more than 95 per cent support as opposed to 81 per cent at FTSE350 companies) despite the smaller amount of capital subject to the disapplication.

The group has also produced template resolutions for the disapplication of pre-emption rights complying with the PEG’s principles to assist companies. This template recommends companies propose two separate resolutions to cover the disapplications envisaged by the principles. In 2016, the PEG said it will be looking for continued improvement in disclosure of the intended and actual disapplication of pre-emption rights and for all companies to engage with their shareholders and adhere to the letter and spirit of the statement of principles.

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