Developments in the London listing markets: Updated pre-emption right guidance and revised AQSE admission rules8 February 2023
"This is the first update to the Statement of Principles since 2015 and acknowledges the need for greater flexibility for non-pre-emptive issuances."
In this article, we focus on the updated Pre-Emption Group guidance published in November 2022 and the changes made to the admission rules for the Access and Apex listing segments of the AQSE Growth Market of the Aquis Stock Exchange (“AQSE”) which came into effect in October 2022. Our previous articles on developments in the London listing markets can be found here.
PRE-EMPTION GROUP GUIDANCE – NEW STATEMENT OF PRINCIPLES ON DISAPPLICATION OF PRE-EMPTION RIGHTS
On 4 November 2022, the Pre-Emption Group (“PEG”), which represents listed companies, investors and intermediaries, issued an updated Statement of Principles, as well as template shareholder resolutions. These are designed for use by UK listed companies when dealing with shareholder authorities to disapply pre-emption rights.
The revised principles apply to non-pre-emptive issues of equity securities for cash by all companies (wherever incorporated) with a Premium Listing on the Main Market of the London Stock Exchange (“LSE”). Companies with a Standard Listing on the Main Market or admitted to the High Growth segment of the Main Market or trading on AIM are also encouraged to adopt the principles.
This is the first update to the Statement of Principles since 2015 and acknowledges the need for greater flexibility for non-pre-emptive issuances. This became particularly apparent during the COVID-19 pandemic.
"The Statement of Principles states that there should be a case-by-case consideration of higher disapplication thresholds for certain 'capital hungry' companies."
November 2022 changes
The PEG has made several changes to its principles for public companies. The key changes relate to the following: raising the annual disapplication threshold, follow-on offers, capital hungry companies and post-transaction reports. The position in relation to cashbox structures is reiterated but unchanged.
Raising the annual disapplication threshold
The PEG has raised the annual disapplication of pre-emption rights threshold to 10% (up from 5%) of issued ordinary share capital on an unrestricted basis and an additional 10% (up from 5%) of issued ordinary share capital for use in connection with an acquisition or specified capital investment. These authorisations should last no longer than 15 months from the date of the resolutions or until the next annual general meeting (“AGM”), whichever is the earliest.
Companies looking to issue equity securities pursuant to such a disapplication should consult with their major shareholders and explain the reason for the offer and the proposed use of proceeds. Companies should also, as far as possible, make the issue on a soft pre-emptive basis (meaning that shares are allocated to investors in accordance with an allocation policy that seeks, to the extent possible, to replicate the existing shareholder base). They should also duly consider the involvement of retail investors and existing investors e.g. through a retail investor platform or a follow-on offer. The company’s management should be involved in the allocation of shares.
Companies may seek additional authority for up to a further 4% in total of the issued ordinary share capital (being an extra 2% in relation to each 10% threshold) for follow-on offers to retail investors and existing shareholders not allocated shares as part of the placing.
"Companies should obtain shareholder approval for capital raising under the revised Statement of Principles at their next AGM."
Criteria to be fulfilled for such an offer include:
- making the offer to shareholders as at a record date prior to announcement of the placing, but excluding any shareholder allocated shares in the placing;
- an individual monetary cap for qualifying shareholders of not more than £30,000;
- the issue price should be equal to or less than the offer price of the placing;
- the follow-on offer should be announced when, or as soon as reasonably practicable after, the placing is announced; and
- the follow-on offer should not exceed 20% of the number of shares issued in the placing.
Capital hungry companies
The Statement of Principles states that there should be a case-by-case consideration of higher disapplication thresholds for certain “capital hungry” companies (i.e. companies needing to raise larger amounts of capital more frequently). These companies may also seek for disapplication authorities to last longer than either the next AGM, or 15 months. The reason for seeking a higher or longer disapplication authority should be communicated at the time a request for a general disapplication is made or, where relevant, appropriate disclosure made in an IPO prospectus.
The PEG has reiterated that the principles apply to all issues of equity securities that are undertaken to raise cash for the issuer or its subsidiaries, irrespective of the legal form of the transaction. This includes cashbox structures, which the PEG says should be regarded, for the purposes of the principles, as an issuance of equity securities for cash (as they have the commercial effect of a cash issue) subject to the disapplication threshold (now 10% plus 10%). A cashbox structure is a method of raising cash from the issue of equity securities for non-cash consideration through the acquisition of a special purpose vehicle whose principal asset is cash. A vendor placing remains outside the scope of the principles (but subject to shareholder clawback in certain circumstances).
"Companies that do not comply with the letter and spirit of the principles are likely to find that their shareholders are less inclined to approve subsequent requests for disapplication."
The PEG has laid out a format in Part 2B of the Statement of Principles for companies to use in compiling post-transaction reports on how non pre-emptive issues under general disapplications were carried out. These reports must be made within a week of an issue and should be publicly announced through a regulatory information service and also submitted to PEG. The information included in any such report should also be included in the next annual report of a company.
Companies should obtain shareholder approval for capital raising under the revised Statement of Principles at their next AGM. Where companies wish to make a non-pre-emptive offer under the new regime before the next AGM due to urgent, exceptional circumstances, then the PEG recommends that issuers follow the published transitional arrangements.
It is important that UK listed companies are familiar with the principles as the PEG warns that companies that do not comply with the letter and spirit of the principles are likely to find that their shareholders are less inclined to approve subsequent requests for disapplication. However, the size and purpose of a company will affect how these principles are adopted. While previously the conservative 5% disapplication thresholds were applicable to all companies, the revised principles allow for different types of companies, such as capital hungry companies, to have more flexible capital raising requirements.
For smaller companies that need to raise large amounts of capital this will be welcome news. For larger companies, particularly those that have institutional investors, the revised principles allow for greater flexibility when considering the balance to be struck between capital raising and shareholder dilution.
CHANGES TO AQSE ADMISSION RULES
"The requirement for issuers applying to the Apex segment to publish a growth prospectus has been removed and instead an AQSE admission document can be published by the relevant issuer."
On 22 August 2022, the AQSE published a consultation paper asking for responses to a raft of proposed amendments to the admission rules for the Access and Apex listing segments of the AQSE Growth Market (see our previous note for general comments on the two primary AQSE markets, and their segment structure). Below is a summary of the key changes implemented by the AQSE following publication of its response to the consultation on 27 September 2022.
Amendments to admission document
The first material amendment to the admission rules is the standardisation of the “Additional Information” section of the admission document. This is expected to (i) streamline the admission process for issuers; and (ii) allow investors to obtain key disclosures in a more uniform manner, thereby facilitating them weighing up investment options more efficiently.
One of the new requirements of this standardised section is the disclosure of any “major shareholder”. It was initially intended that this be defined as any shareholder with at least a 5% shareholding in the relevant company. However there was some concern that this threshold would be inconsistent with the 3% threshold set out in the Disclosure Guidance and Transparency Rules (“DTRs”), so the threshold for a “major shareholder” has been set at 3% to align with the DTRs.
The AQSE has also added to the ‘Additional Information’ section a “requirement that new issues of share capital, options and warrants to major shareholders and directors be disclosed for the period covering 12 months prior to admission” in an effort to increase transparency.
Removal of requirement to publish a growth prospectus on admission to Apex segment
Since the creation of the Apex segment in 2020, companies have been required to publish a growth prospectus on admission, prepared in accordance with the UK Prospectus Regulation and approved by the FCA. In March 2022, HM Treasury published the outcome of its review into the UK prospectus regime and announced the intention to add to the list of exemptions to public offerings of securities, offers which are or will be admitted to trading on certain markets, such as the AQSE Growth Market. It also announced it will develop a mechanism by which admission documents published in accordance with the rules of markets, such as the AQSE Growth Market, can be treated as a type of prospectus.
"The market capitalisation at admission has been set at £2m for all new Access issuers."
The AQSE has sought to codify the above aims through amending the rules so that:
- the requirement for issuers applying to the Apex segment to publish a growth prospectus has been removed and instead an AQSE admission document can be published by the relevant issuer; and
- issuers that are admitted to Access that meet the applicable eligibility criteria will be able to freely transfer to Apex (as they will have already published an AQSE admission document as part of their application to the Access segment), and AQSE corporate advisers are to contact those eligible issuers to advise them of this fact.
It is hoped that this will allow issuers to have access to a greater pool of potential investors from which funds may be raised, and it has generally simplified the admission process for issuers. These changes are also likely to add to the appeal for issuers considering listing on either of the AQSE’s Growth Market segments.
Revised eligibility criteria for the Access segment
It was originally proposed to amend the eligibility criteria for Access so that issuers would be required to adopt either the QCA Corporate Governance Code or the UK Corporate Governance Code. As a result of concerns raised, the AQSE confirmed that it had dropped the proposal and would instead continue to recommend the adoption of an appropriate governance code in the form of non-binding guidance.
Minimum market capitalisation
The market capitalisation at admission has been set at £2m for all new Access issuers. This threshold only applies at the point of admission. If an issuer’s market capitalisation subsequently falls below the threshold, it will not face any penalty. The AQSE’s view is that issuers with a market capitalisation below this threshold may not be suitable for a public market such as the Access segment of AQSE, as they may not have a sufficient investor base to meet the challenges that a public company would face, thereby exposing investors to undue risk.
Minimum number of market makers
"On the face of it, the proposals have largely been received positively and they signal a clear intent of AQSE policymakers to address concerns that have been identified by investors and issuers."
The AQSE has increased the minimum number of market makers required to register at admission to two, in an effort to increase the liquidity of listed shares.
The AQSE has, following on from the FCA’s ban on the promotion of speculative mini-bonds to retail consumers, imposed a restriction on the admission of “speculative securities”. The AQSE defines these “speculative securities” as cover bonds, debentures or preference shares which:
“1. have a denomination or minimum investment of less than £100,000; and
- have been issued, or are to be issued, in circumstances where the issuer or a member of the issuer’s group uses, will use or purports to use some or all of the proceeds of the issue directly or indirectly for one or more of the following:
a. the provision of loans or finance to any person other than a member of the issuer’s group;
b. buying or acquiring investments including any asset, right or interest (whether they are to be held directly or indirectly);
c. buying real property or an interest in real property (whether it is to be held directly or indirectly);
d. paying for or funding the construction of real property.”
The AQSE has also implemented several more minor changes to the admission rules, including:
- revising the definition of a “start-up” so as to exclude issuers who undertake pre-IPO re-organisations involving a top-co without a trading history;
- revising the deadline for confirming to the AQSE the market makers at admission to four days before admission;
- revising the definition of securities not in public hands to exclude concert parties of shareholders holding 5% or more;
- clarifying the quarterly reporting timetable in the event of a modified audit report; and
- introducing the requirement for a “fair and reasonable statement” to be provided by unrelated directors on announcing related party transactions.
The amendments took effect from 3 October 2022 and it will be interesting to monitor the consequences of these (and whether they have the desired impact). On the face of it, the proposals have largely been received positively and they signal a clear intent of AQSE policymakers to address concerns that have been identified by investors and issuers. In turn, the amendments are likely to increase the view that listing on the AQSE markets (particularly the AQSE Growth Market) is a credible alternative to listing on the (arguably more widely known) markets operated by the LSE.
Both sets of changes are welcome as they illustrate that UK regulators are looking to provide greater flexibility for companies looking to raise capital and also to streamline and simplify the admission process for certain markets while maintaining investor confidence and market integrity. These are important steps towards achieving the government’s goal of ensuring that the UK’s financial markets are among the most open and attractive in the world.
For a more detailed and tailored analysis of what any of these changes may mean for you, or indeed how listing might benefit your company, please do feel free to get in touch.
London Trainee Peter Clemons also contributed to this article.