Proposed Recommendations from the U.K. Secondary Capital Raising Review Final Report
On 31 March 2021, HM Treasury published its U.K. Listing Review chaired by Lord Hill. One of the recommendations of the Listing Review was to bring together a group of experts to investigate and review how further capital-raising processes and procedures could be made more efficient, thereby promoting investment in U.K. capital markets.
On 12 October 2021, HM Treasury published its call for evidence in relation to a review of the capital-raising processes associated with the U.K. capital markets entitled “the UK Secondary Capital Raising Review”. Following the closure of this consultation exercise, HM Treasury published its final Report on 19 July 2022. While there will be various implementation timetables for the recommendations in the Report, the Report can be viewed as part of the U.K. Government’s holistic review of the U.K. financial markets and regime in an effort to strengthen the attractiveness of the U.K. market and better compete on a global stage.
A More Competitive U.K. Market
The Report introduces a total of 21 recommendations that address various areas, including to:
- maintain and enhance the preemption regime;
- increase the ability of companies to raise smaller amounts of funds quickly and cheaply;
- support additional flexibility for capitalhungry companies;
- involve retail investors in all capital raisings;
- reduce regulatory involvement in larger fundraisings;
- make existing fundraising structures quicker and cheaper;
- increase the range of choice of fundraising structures for companies; and
- raise the priority of an ambitious ‘drive to digitisation’ to facilitate innovation, stewardship and improved market infrastructure.
Each of these areas involved different recommendations to address these issues. The overall focus of the recommendations is to make the U.K. public markets more competitive by streamlining regulatory processes and procedures for capital raising, whilst maintaining the high level of regulation and corporate governance that is a cornerstone of the markets’ reputation.
Maintain and Enhance the Pre-emption Regime
The Report highlights the importance of the principle of pre-emption and that it needs to be properly preserved and enhanced, as it is a key shareholder protection for investors in the U.K. market.
- Recommendation 1: The Pre-Emption Group (PEG), a body that represents listed companies, investors and intermediaries and issues best practice documents regarding authorities to disapply pre-emption rights and other guidelines on pre-emption rights, should be put on a more formal and transparent footing.
There are various proposed practical steps to be implemented as part of this recommendation including revising the PEG’s corporate governance structure, setting up a dedicated PEG website, more transparent process for appointments with PEG, a review of membership with PEG and an annual reporting process.
Increase the Ability of Companies to Raise Smaller Amounts of Funds Quickly and Cheaply
A key area of importance identified in the Report is increasing the ability of companies to be able to raise smaller amounts of funds quickly and at a lower cost. This is again aimed at enhancing the attractiveness of the U.K. markets for companies.
- Recommendation 2: Routine support for disapplication resolutions up to 20%, on a 10%+10% basis.
The ability for companies to issue up to 20% of their issued share capital on a non pre-emptive basis was an interim measure implemented during the height of the COVID-19 pandemic. It gave companies greater flexibility to raise capital as a means of allowing businesses to avoid cost and expense usually involved when needing to go beyond the 10% limit. This recommendation would amend PEG guidelines to allow for this 20% issuance to become permanent (10% for any purpose, plus 10% for an acquisition of specified capital investment).
- Recommendation 3: Post-transaction reporting.
This recommendation would require companies to report publicly on how the fundraising was carried out and how PEG guidelines were complied with. It would involve filling out and filing a template form through the PEG website detailing the required information.
- Recommendation 4: PEG guidance to restrict use of the cash box structure to circumvent pre-emption rights.
To avoid any issues related to cash box structures (such as the circumvention of pre-emption rights) and the effect this might have on the overall confidence in the U.K. markets, this recommendation sets out proposals in connection with undocumented placings, whereby cash box structures should only be used for up to the amount of the pre-emption disapplication authority that has been granted by shareholders at the most recent annual general meeting.
Support Additional Flexibility for Capital-Hungry Companies
- Recommendation 5: PEG guidance to support case-by-case consideration of higher disapplication authorities for capital-hungry companies.
This recommendation would allow, in appropriate circumstances, a company to have more flexibility raising money by requesting a disapplication of share pre-emption rights of more than 20% in any one year (or a disapplication period over a longer period) if supported by shareholders and only up to a limit of 75%.
This recommendation would extend to initial public offerings (IPOs) also allowing companies to increase disapplication authorities, at IPO, with any disapplication subject to a full disclosure.
Involve Retail Investors in All Capital Raisings
The Report also focuses on increasing the overall involvement of retail investors and the importance to the U.K. market of doing so through the use technology to allow greater access .
- Recommendation 6: Issuers should give due consideration to the interests of retail shareholders, as well as other existing shareholders, and how to include them in a non-pre-emptive offer as fully as possible.
This recommendation would require companies to give due consideration to the involvement of retail investors in all capital raisings of up to 20% of issued share capital, including undocumented placings with the focus being on leveraging technology to find a solution to better involve retail investors.
- Recommendation 7: Shorten the period a prospectus for an IPO involving a retail offer has to be made available to the public to a maximum of three working days.
In effect, any IPO which involves retail investors/offers would limit the amount of time the prospectus is made available to the public; it is currently six working days, and the recommendation is that this should be reduced to a maximum of three working days.
Reduce Regulatory Involvement in Larger Fundraisings
The Report is recommending that as a default, regulatory involvement in secondary fundraisings should be reduced or removed. The reasoning is that existing listed companies are already subject to various continuing obligations and disclosure requirements as part of remaining listed, and their shareholders have already made the decision to invest in those companies.
- Recommendation 8: Admission to trading prospectuses should remain subject to prior Financial Conduct Authority (FCA) approval, but should only be required for secondary offers where the offer size is at least 75% of existing share capital.
This recommendation will reduce regulatory involvement and unnecessary costs by reducing the requirement to produce a prospectus unless the offer size exceeds a 75% pre-emption right threshold, up significantly from the current 20% threshold.
- Recommendation 9: A secondary offer should not trigger the need to appoint a sponsor.
In relation to the FCA’s sponsor regime, it is proposed that the need for the appointment of sponsors and sponsor declarations should not be applicable to secondary fundraisings. This is generally standard practice in other major markets across the globe and would bring the U.K. market in line with similar sponsor regimes.
- Recommendation 10: Revise the FCA’s approach to working capital statements, whereby clean statements cannot be accompanied by disclosure of assumptions made by the company in making its confirmation, to allow greater flexibility.
As the requirement generally for a sponsor declaration in relation to working capital has been removed, this recommendation focuses on applying this to secondary fundraises, which has the potential to improve overall efficiency and saving costs and expenses in the transaction.
- Recommendation 11: Address current overlap between working capital diligence exercises and annual report disclosures.
There is currently an overlap between working capital diligence exercises and the work that issuers are required to perform in relation to going concern statements, viability statements and due course resilience statements. This recommendation proposes to address this crossover to again reduce work and costs involved in transactions.
Make Existing Fundraising Structures Quicker and Cheaper
The Report notes the need for fundraising structures to be quicker and cheaper so that companies can implement/access funds, as this can affect the attractiveness of the U.K. markets for capital raising.
- Recommendation 12: Reduce minimum offer period for rights issues and open offers to seven business days.
As set out in this recommendation, it is proposed that the minimum offer period is reduced. At present, the Companies Act 2006 and FCA handbook use different methods of calculating minimum offer periods, and these should be aligned to clarify the obligations for listed companies.
- Recommendation 13: Flexibility to reduce the notice period where a general meeting is required.
It is proposed to amend legislation to give the Secretary of State the flexibility to be able to reduce the notice period for shareholder meetings (other than Annual General Meetings) to seven clear days. Again, the aim is to allow companies greater flexibility to call meetings to address company business and/or issues.
- Recommendation 14: Change scope of the two-thirds authority to allot.
Along with the proposed update to pre-emption provisions below, this proposal would allow companies to seek up to two-thirds of their issued capital for their annual allotment and share pre-emption right disapplication authorities from shareholders, with these authorities extending not just to rights issues but to all forms of pre-emptive offers made on the basis set out in recommendation 15 below.
- Recommendation 15: Update pre-emption provisions in the Companies Act 2006.
It is proposed to align the pre-emption provisions of the Companies Act 2006 with a process that is usually followed on a rights issue or open when a disapplication resolution is used to modify statutory pre-emption rights. This would include various other steps including the ability to exclude shareholders in overseas jurisdictions, giving the flexibility to deal with fractional entitlements and permitting new shares to be offered to securities holders with a contractual right to them as if they were holders of ordinary shares.
- Recommendation 16: Ability to have excess application mechanics attached to rights issues.
It is proposed that the listing regime should be amended to allow excess application mechanics to be attached to rights issues, in relation to when existing shareholders can apply to take up shares that are not taken up by other shareholders. This would help reduce the level of disclosures associated with large ‘rump’ placings.
- Recommendation 17: Companies should be able to opt-in to an enhanced continuous disclosure regime.
It is recommended that companies should be able to opt-in to an enhanced disclosure regime, which could be done by a more detailed disclosure in their annual report that covers specific areas such as risk factors, business overview and other operating and financial considerations. This approach would entail the creation of a smaller non-duplicative offer document that can be put together with this enhanced disclosure package. This process would help create a simpler and more straightforward process that gives the necessary legal comfort.
Increase the Range of Choice of Fundraising Structures for Companies
The Report puts forward recommendations to increase the choices available regarding different fundraising structures.
- Recommendation 18: The concept of a "cleansing notice" should be adopted in the U.K. where a secondary issue involving a public offer does not require a prospectus.
This recommendation is to adopt the Australian concept of a “cleansing notice”. A cleansing notice is where a company, at the time of fundraising, confirms publicly that it is in full compliance with its market disclosure obligations and that it is not delaying the disclosure of any inside information. Again, this would streamline and improve the disclosure process reducing unnecessary duplication of documents saving time and cost.
- Recommendation 19: Amend section 793 of the Companies Act 2006 to additionally require disclosure of the identity of the ultimate investment decision-maker or beneficial owner in relation to a share.
It is recommended that the existing the shareholder interest process under section 793 be enhanced so that the identities of the ultimate beneficial owners are disclosed, in order to help companies identify institutional and noninstitutional shareholders thereby providing greater visibility of their shareholder registers.
- Recommendation 20: Standard form terms and conditions with institutional investors for use on secondary fundraises should be agreed and made available publicly.
It is recommended that relevant industry groups should agree and make publicly available standard form terms and conditions to use with institutional investors on secondary fundraises, with the aim to reduce time and cost that arises in negotiating bespoke terms and conditions.
Raise the Priority of an Ambitious ‘Drive to Digitisation’ to Facilitate Innovation, Stewardship and Improved Market Infrastructure
- Recommendation 21: Move to a system where all shareholders, institutional and retail, hold their shares in fully digitised form.
This recommendation specifically focuses on digital access to the U.K. capital markets by proposing to move to a system where all shares are fully digitised. Part of this would involve the formation of a Digitisation Task Force and a clear set of principles to be adopted. The Report acknowledges the continuous digitisation of global markets, the rise of digital currencies and the need to fully digitise securities and stay ahead of the curve are key to making the U.K. market competitive.
This would follow the lead of other major jurisdictions that have set up or are setting up digital-based task forces in relation to digital markets, securities, cryptocurrencies and decentralised finance (DeFi) lending schemes.
Implementation and Timetable for Recommendations
Due to the various areas of capital markets laws dealt with in the Report, the implementation of the Report’s recommendations will need to be handled by a variety of stakeholders. This would include the PEG, the FCA, HM Treasury and the Department for Business, Energy and Industrial Strategy (BEIS). In particular, the FCA and PEG have been publicly vocal about approving the recommendations. It would seem likely, therefore, that the recommendations regarding PEG, for example, in relation to the pre-emption regime may be adopted and implemented with relative speed.
While the HM Treasury has announced it is preparing to work on the implementation of the Digitisation Task Force, the other recommendations that HM Treasury, FCA and BEIS would be responsible for implementing are most likely to be dealt with as a part of their ongoing workload.
As such, the U.K. capital markets are primed for change over the next 12-24 months, with the aim of being more competitive and to increase and attract more investment. Armstrong Teasdale welcomes the recommendations and steps taken by the various stakeholders in reviewing, and looks forward to their codification and implementation over the coming months.
Disclaimer: This publication is provided by Armstrong Teasdale Limited for informational purposes only. The information contained in this publication should not be construed as legal advice. Any questions or further information regarding the matters discussed in this publication can be directed to Armstrong Teasdale’s U.K. Capital Markets team.