UK: How to raise equity capital

Author: | Published: 1 Jun 2011
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Even within the EU, harmonisation of capital raising is not as advanced as the Directives would make you think. Moreover, for some international investors the continuation of pre-emption rights and other limits on new issues comes as something of a surprise. The flowcharts below provide a guide through the maze of regulations, law and guidance.

All companies must follow the rules set out in the Companies Act 2006 and the UK Listing Authority (UKLA) Listing Rules. There are also a number of institutional investor bodies which provide guidance on the allotment of share capital and the disapplication of pre-emption rights. Although not legally binding, such guidance is followed as market practice. The guidance is generally aimed at companies with a primary listing on the London Stock Exchange main market, but companies listed on Aim (the Alternative Investment Market) are also encouraged to comply. Listed companies that do not wish to comply with the guidelines should discuss the matter with the relevant institutional investor body.

Authority to issue shares

Pre-emptive issue

Note 1 – Section 562 Companies Act 2006 prescribes that a pre-emptive offer should be made in hard copy or electronic form, state a period of not less than 14 days during which it may be accepted and, for shareholders who have no registered address in an EEA State, and have not supplied the issuer with such an address, be published in the London Gazette.

Note 2 – An issuer may wish to disapply pre-emption rights even though the issue of shares is to be done pre-emptively in order to:

(i) exclude overseas shareholders;

(ii) aggregate fractional entitlements and sell them in the market for the benefit of the issuer; and

(iii) deal with convertible securities.

Note 3 – The latest guidelines published by the Association of British Insurers (ABI) (in November 2009) address the recommendation of the Rights Issue Review Group that an issuer should be able to issue one-third of the company's issued share capital plus any additional amount required for deferred consideration or options; and issue a further one-third of issued share capital provided it is used for a fully pre-emptive rights issue and the given authorities expire at the next annual general meeting.

The National Association of Pension Funds (NAPF) has endorsed this proposal.

Note 4 – An offer by way of rights issue, under which invitations are given to existing shareholders to subscribe or purchase further securities in proportion to their holdings, can be done in two ways - through a rights issue or an open offer.

A rights issue is made by the issue of a renounceable letter which may be traded (as nil paid rights) for a period before payment for the shares is due. Shareholders can (i) take up their rights; (ii) sell their rights; (iii) let their rights lapse; or (iv) carry out a combination of the previous three options.

An open offer is not made by a renounceable letter or other negotiable document; the rights can not be traded. If a shareholder fails to take up his entitlement, he will not receive anything. To limit the use of open offers, the Listing Rules provide that open offers may not be discounted more than 10% (except with prior shareholder approval or pre-existing general disapplication authority).

Note 5 – If statutory pre-emption rights have been disapplied, issues in accordance with that disapplication are permitted under the Listing Rules (LR 9.3.12R(1)).

Note 6 – The Pre-Emption Group's Statement of Principles on Disapplying Pre-Emption Rights (published in 2006 and updated in 2008), which are endorsed by the ABI and the NAPF, provide that disapplication of pre-emption rights should be limited to 5% of ordinary share capital in any one year with a cumulative limit of 7.5% in any three-year rolling period.

Non-pre-emptive issue