UK Treasury report on review of secondary capital raising in the UK
HM Treasury publishes UK Secondary Capital Raising Review findings and recommendations
On 19 July 2022, HM Treasury published the final report (the “Report”) of the UK Secondary Capital Raising Review, which was compiled following a recommendation from Lord Hill’s 2021 UK Listing Review to explore how raising of capital by existing listed companies could be made more efficient. The report takes into account feedback from market participants and comparable capital raising structures in other jurisdictions and makes a number of recommendations, some to be implemented immediately and others in the short to medium term. The report proposes a holistic set of “bold and courageous” reforms which, alongside those of the UK listing review, the ongoing review of the UK Treasury’s prospectus regime and the ongoing work of the FCA on changes to the registration regime, should, in its view, lead to a registration regime in the UK. which is modernized and fit for purpose.
Maintain and strengthen the UK pre-emption regime
- The principle of pre-emption should be preserved and strengthened as an important shareholder protection in the UK market.
- The Preemption Group (“PEG”) will be put on a more formal basis with a revised governance structure, dedicated website, transparent nomination process, membership review and annual report.
Increase the ability of companies to raise smaller funds quickly and cheaply
- PEG guidelines are to be amended to allow companies to issue up to 20% of share capital (10% for all purposes plus 10% for a specified capital acquisition or investment) on an annual opt-out by shareholders – making the PEG’s temporary COVID-19 allocation permanent.
- Companies are required to consult with major shareholders, follow a soft pre-emption, explain the reasons for raising funds and give due consideration to the involvement of retail investors in all placements.
- Companies are also required to report publicly on compliance with PEG guidelines and other relevant details following a placement (using a model form to be produced by the PEG) and in their next report. annual.
Supporting additional flexibility for capital-hungry businesses
- The PEG guidelines need to be updated to give companies that need to raise larger capital (e.g. tech and life sciences companies) the ability to request a waiver of pre-emptive rights further 20% per year or over a longer period if supported by shareholders, up to a limit of 75%.
- Companies should also have the ability to put in place enhanced opt-out powers at the time of IPO, subject to full disclosure.
Associate individual investors with all fundraising
- Companies are required to give due consideration to retail investors and how to involve them as fully as possible in all capital raisings, including undocumented placements, for example by using a technology-driven solution or through the through a “repair” type follow-up offer after an institutional fundraiser.
- The report suggests that follow-on offerings are made on the same terms as the institutional placement using a clean-up statement and simplified offering document, are limited to a maximum of 20% of the size of the placement , capped at £30,000 per investor and are open for five trading days.
Short and medium term recommendations
Reduce regulatory involvement in larger fundraisers
- The report recommends that regulatory involvement in secondary fundraising be removed by default, as existing listed companies are already subject to disclosure and other ongoing obligations and existing shareholders have already made a decision to investment in a company.
- The threshold at which a prospectus is required for admission to trading should be raised from the current 20% to 75% in order to eliminate unnecessary double disclosure in most fundraisings.
- The FCA sponsorship regime, including the requirement for sponsorship statements, should also not apply to secondary fundraisers. This would bring the UK in line with the majority of other major markets, where similar regimes do not exist for secondary offers.
- After removing the requirement for a sponsor statement on working capital, the current market approach to working capital due diligence and comfort on undocumented investments should be followed for all fundraisings. secondary funds, which could save a lot of time and money on this workflow.
- The FCA’s approach to restricting the disclosure of assumptions underlying working capital statements should be revised to allow companies greater flexibility. In addition, FCA’s approach to the importance of vote wording on rebuilds and refinances, if retained, should be revised to focus on justifying the level of fundraising and use of the product.
Make existing fundraising structures faster and cheaper
- The offer period for rights issues and open offers will be reduced from ten to seven business days.
- The notice period for convening general meetings other than general meetings will be reduced to seven clear days.
- The current customary annual grant and shareholder waiver powers should be extended to cover all forms of fully pre-emptive bids. The pre-emption provisions of the Companies Act should also be amended to align with existing market practice, allowing the exclusion of certain foreign shareholders and dealing with fractional rights and the offering of new shares to shareholders. other securities such as convertible bonds.
- The FCA should amend the registration regime to allow for excess application facilities on rights issues to help reduce the level of disclosure associated with large rump placements.
- To address the need for appropriate legal and accounting comfort under U.S. securities laws when offerings are made to institutional investors in the United States (which has historically required publication of a full prospectus), Companies should be able to provide enhanced disclosures in their annual reports (eg around risk factors and operational and financial review) on a voluntary basis. For a fundraiser, this enhanced annual disclosure can then be supplemented with a shorter offering document and a more focused due diligence process, making the overall process faster and more efficient.
- The report also recommends clarifying that investment banks and financial advisers are not liable for any of a company’s offering documents under the disclosure regime.
Increase the range of choice of fundraising structures for companies
- Additional fundraising structures should be available for use in appropriate circumstances, including the adoption of Australian-style features to increase speed and support preemption.
- Cleanup notices (confirming that all market information is accurate and up-to-date) should be used when launching non-flyer fundraisers to help streamline information.
- The existing participation process under Section 793 of the Companies Act should be improved so that the identity of ultimate beneficial owners is disclosed in order to help companies identify institutional and non-institutional shareholders and to offer greater visibility of their shareholder registers more generally.
- Relevant industry groups should agree and make publicly available standard terms and conditions for use with institutional investors for secondary fundraising, thereby reducing the time and cost of negotiating bespoke terms.
Establish a Task Force to Drive Digitization in Market Infrastructure
- To facilitate the move to a fully digitized system for all institutional and retail shareholders and position the UK market as a leader in this area in the longer term, the government should establish a digitization task force with an independent chair and a mandate to explore changes to the existing regulatory regime, such as greater participation of underlying beneficial owners, and technological innovations such as distributed ledger technology.
Implementation of the report’s recommendations rests with various stakeholders, including HM Treasury, the Department for Business, Energy and Industrial Strategy (“BEIS”), FCA, PEG and agencies. industries concerned to move forward. Shortly after the report’s release, the FCA and PEG publicly welcomed its findings, and so we expect the report’s immediate recommendations regarding PEG and the enhanced pre-emption regime to be implemented relatively quickly.
HM Treasury also announced on July 19 that it would act on the report’s recommendation to set up a digitization task force and appointed Sir Douglas Flint, chairman of abrn plc, as chairman. The task force’s terms of reference were released on July 20, and it is due to release its final recommendations by spring 2024.
We also expect the FCA, HM Treasury and BEIS to consider the report’s other recommendations as part of their ongoing work to revise the UK prospectus and listing regimes.