Pre-emption rights give existing shareholders in a company the right to subscribe for their pro rata share of any new shares in that company issued for cash, providing them with protection against inappropriate dilution of their investments.
Pre-emption rights are enshrined in law and, under the Companies Act 2006, may be disapplied only by a special resolution of shareholders at a general meeting of the company. Whilst not undermining the importance of pre-emption rights, a degree of flexibility is appropriate in circumstances where issuance of equity securities on a non-pre-emptive basis would be in the interests of companies and their owners. The Pre-Emption Group assist in this process.
The Pre-Emption Group publish guidance on the disapplication of pre-emption rights and monitor and report on how this guidance is applied.
Following a recent review of market practice, the Financial Reporting Council published a template resolution proposing two separate resolutions for the disapplication of pre-emption rights, each permitting issues of up to five per cent of a company’s issued share capital on a non-pre-emptive basis.
The template resolutions represent good practice and are drafted for companies incorporated in the UK but companies with premium listings incorporated outside the UK should adopt resolutions in an appropriate form.
Companies are encouraged and expected to use the template resolutions for meetings held after 1 August 2016.
The template consists of two separate resolutions to disapply pre-emption rights:
* for up to five per cent of the issued share capital; and
* for an additional five per cent for transactions which the board determines to be an acquisition or other capital investment as defined by the Pre-Emption Group’s Statement of Principles.
When the additional five per cent disapplication authority is used, companies should disclose, in the announcement regarding the issue, the circumstances that have led to its use and describe the consultation process undertaken. In addition, the Statement of Principles provides that companies are expected, where they have undertaken a placing using the disapplication of pre-emption rights, to publish in the next annual report:
* the actual level of discount achieved;
* the net proceeds raised;
* how those net proceeds were used; and
* the percentage increase in issued share capital due to non-pre-emptive assurance for cash over the three-year period preceding the issue.
The template is designed to provide additional certainty that the relevant share issue has been properly authorised.
The template requires the board of a company to determine that the additional authority will be used in the appropriate way. A board minute evidencing the directors’ determination will therefore be required and worded correctly should suffice for these purposes (assuming the directors are acting in good faith and in furtherance of their statutory duties).
As the majority of companies will have held their AGM by 1 August 2016, these new resolutions are unlikely to be tested until 2017 at the earliest.