HM Treasury publishes the outcome and recommendations of the UK Secondary Capital Raising Review
On 19 July 2022, HM Treasury published the final report (the "Report") of the UK Secondary Capital Raising Review, which was established following a recommendation in Lord Hill's 2021 UK Listing Review to explore how capital raising by existing publicly traded companies could be made more efficient. The Report considers 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 over the near- to medium-term. The Report proposes a holistic package of 'bold and brave' reforms which, alongside those in the UK Listing Review, HM Treasury's ongoing prospectus regime review and the FCA's ongoing work on changes to the listing regime, it believes will lead to a UK listing regime that is modernised and fit for purpose.
Maintain and enhance the UK pre-emption regime
- The principle of pre-emption should be preserved and enhanced as an important shareholder protection in the UK market.
- The Pre-Emption Group ("PEG") to be put on a more formal footing with a revised governance structure, dedicated website, transparent appointment process, membership review and annual reporting.
Increase the ability of companies to raise smaller amounts of funds quickly and cheaply
- PEG guidelines to be amended to allow Companies to issue up to 20% of share capital (10% for any purpose plus 10% for an acquisition or specified capital investment) under annual shareholder dis-application - making PEG's temporary COVID-19 allowance permanent.
- Companies required to consult with key shareholders, follow soft pre-emption, explain reasons for fundraising and give due consideration to the involvement of retail investors in all placings.
- Companies also required to report publicly on compliance with PEG guidance and other relevant details following a placing (using a template form to be produced by PEG) and in their next annual report.
Support additional flexibility for capital hungry companies
- PEG guidelines to be updated to give companies that need to raise larger amounts of capital (e.g. tech and life sciences companies) the flexibility to request a dis-application of pre-emption rights in excess of 20% per year or over a longer period if supported by shareholders, up to a limit of 75%.
- Companies to also have the ability to put in place increased dis-application authorities at the time of IPO, subject to full disclosure.
Involve retail investors in all capital raisings
- Companies required to give due consideration to retail investors and how to involve then as fully as possible on all capital raisings including undocumented placings, e.g. by using a technology-driven solution or through a 'repair'-style follow-on offer after an institutional fundraise.
- The Report suggests follow-on offers are made on the same terms as the institutional placing using a cleansing statement and short-form offer document, are limited to a maximum of 20% of the placing size, capped at £30,000 per investor and are open for five trading days.
Near- and medium-term recommendations
Reduce regulatory involvement in larger fundraisings
- The Report recommends that regulatory involvement in secondary fundraisings should be removed as a default, since existing listed companies are already subject to disclosure and other continuing obligations and existing shareholders have already made an investment decision with respect to 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 duplicative disclosure on most fundraisings.
- The FCA sponsor regime, including the requirement for sponsor declarations, should also not apply in relation to secondary fundraisings. This would bring the UK into line with the majority of other major markets, where similar regimes do not exist for secondary offerings.
- Having removed the requirement for a sponsor declaration on working capital, the current market approach to working capital diligence and comfort on undocumented placings should be followed on all secondary fundraises, potentially saving significant cost and time on this workstream.
- The FCA's approach to restricting the disclosure of assumptions underlying working capital statements should be revised to allow companies greater flexibility. In addition, the FCA's approach to importance of vote' wording on reconstructions and refinancings, if retained, should be revised to focus on the rationale for the level of fundraise and use of proceeds.
Make existing fundraising structures quicker and cheaper
- The offer period for rights issues and open offers to be reduced from ten to seven business days.
- The notice period for shareholder meetings other than AGMs to be reduced to seven clear days.
- Existing customary annual allotment and dis-application authorities from shareholders to be extended to cover all forms of fully pre-emptive offers. The pre-emption provisions in the Companies Act should also be amended to align with existing market practice, permitting the exclusion of certain overseas shareholders and dealing with fractional entitlements and the offering of new shares to holders of other securities such as convertible bonds.
- The FCA should amend the listing regime to permit excess application facilities on rights issues to help reduce the level of disclosure associated with large 'rump' placings.
- To address the need for appropriate legal and accounting comfort under US securities laws where offers are made to institutional investors in the US (which has historically required the publication of a full prospectus), companies should be able to provide enhanced disclosure in their annual reports (e.g. around risk factors and operating and financial review) on an optional basis. For a fundraise, this enhanced annual disclosure can then be supplemented with a shorter offer document and more focused diligence process, making the overall process quicker and more efficient.
- The Report also recommends clarifying that investment banks and financial advisers are not liable for any of a company's offer documents under the disclosure regime.
Increase the range of choice of fundraising structures for companies
- Additional fundraising structures should be available to use in appropriate circumstances, including the adoption of Australian-style features to increase speed and support pre-emption.
- Cleansing notices (confirming that all market disclosure is accurate and up to date) should be used at the launch of non-prospectus fundraises to help streamline disclosure.
- The existing shareholding interest process under s.793 of the Companies Act should be enhanced so that the identities of ultimate beneficial owners are disclosed in order to help companies identify institutional and non-institutional shareholders and provide greater visibility of their shareholder registers more generally.
- Relevant industry groups should agree and make publicly available standard form terms and conditions to use with institutional investors on secondary fundraises, reducing time and cost in negotiating bespoke terms.
Establish a task force to drive digitisation in market infrastructure
- To facilitate a move to a fully digitised 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 Digitisation Task Force with an independent chair and terms of reference to explore changes to the existing regulatory regime such as providing greater participation for underlying beneficial owners, and technological innovations such as distributed ledger technology.
Implementation of the Report's recommendations falls to a variety of stakeholders, including HM Treasury, the Department for Business, Energy and Industrial Strategy ("BEIS"), the FCA, PEG and relevant industry bodies to take forward. Shortly following publication of the Report, both the FCA and PEG publicly welcomed its findings, and we therefore expect the Report's immediate recommendations around PEG and the enhanced pre-emption regime to be implemented relatively quickly.
HM Treasury also announced on 19 July that it would take forward the Report's recommendation to establish a Digitisation Task Force and appointed Sir Douglas Flint, chairman of abrdn plc, as chair. The taskforce's terms of reference were published on 20 July and it is due to publish its final recommendations by spring 2024.
We also expect that the FCA, HM Treasury and BEIS will take the Report's other recommendations into account as part of their ongoing work to revise the UK prospectus and listing regimes.
The White & Case team is reviewing the Report's detailed conclusions and recommendations and will provide further analysis and commentary on the Report and its implications for the UK market in due course. If you would like to discuss any matters related to this paper in the meantime, please contact White & Case.
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