Rights Issues & Disclosure Requirements Crib Sheet - Public Companies and Equity Finance

Rights Issues & Disclosure Requirements

1. Is there an Authorised Share Capital

   1. Is the company incorporated before 1^st October 2009

      1. Check memorandum of association for ASC

         1. 28 CA 2006 ASC is deemed to have transferred to the company’s articles

      2. Para 42 TPO 2008 Change ASC by ordinary resolution of shareholders

      3. 21(1) Adopt new articles by special resolution of the shareholders

         1. Written resolution is not possible
            

2. Do the Directors have the Authority to Allot?

   1. Under 549 CA 2006 directors must be authorised to allot shares

      1. Authorisations may be given in the company’s articles

      2. 551 CA 2006 authorisation may be given by ordinary resolution of the company

         1. Authority may last at most 5 years

   2. ABI Guidelines state that the maximum amount of relevant securities for which authority will be given is one third of the issued share capital

      1. ABI will accept an authority to allot a further one third of the issued share capital, provided the additional authority is only used for rights issues where full pre-emption rights apply, and both the general and additional authority expire at the next AGM

         1. If greater than a third of the issued share capital is actually allotted in one year, the entire board of directors must put itself up for re-election at the next AGM
            

3. Do the statutory Pre-emption rights Apply?

   1. Under 561 CA 2006 a company may not allot “equity securities” unless it has first made an offer to existing holders of ordinary shares to allot on the same or more favourable terms a proportion of those securities that is as nearly as practicable equal to the proportion in nominal value of the or ordinary shares held by them

      1. 548 CA 2006 equity securities are ordinary shares excluding any which do not have the right to participate in any surplus beyond a specified amount

      1. LR 9.3.11R when a premium listed company issues equity shares for cash, there is a continuing obligation to offer those shares first to the existing holders of equity shares in proportion to their existing holdings

         1. This principle is also supported by the Pre-emption Group, a body comprising representative of major institutional shareholders such as ABI and NAPF, through their Pre-emption Group: Disapplying Pre-emption Rights: A statement of Principles

            1. Applies to both standard and premium-listed companies on the Main Market

            2. Not legally binding

               1. Principle 5 applies to non-pre-emptive equity security issues for cash and states that existing shareholders should not have their shareholdings diluted

   2. Company will need to consider whether or not to disapply the statutory pre-emption rights

      1. 570 CA 2006 general disapplication by special resolution of the shareholders, or a provision contained in the company’s articles

         1. LR 9.3.12R(1) where statutory pre-emption rights have been disapplied, the Listing Rules requirements under LR 9.3.11R for premium-listed companies do not apply

   3. Pre-Emption Group’s Statement of Principles

      1. Is a request to dis-apply the statutory pre-emption rights routine or not?

         1. Principles 8 & 9 a request is more likely to be routine when a company is seeking authority to issue non-pre-emptively 5% or less ordinary share capital in any 1 year

            1. Principles 11, 20 & 21 A discount of greater than 5% is not likely to be routine

               1. LR 9.5.10R any discount over 10% needs an ordinary resolution of shareholders to approve

            2. Principle 10 a company needs to highlight the non-routine nature of the dis-application

               1. Principle 4 A company must communicate with shareholders ASAP

                  1. Principle 18 a non-routine request should be made at a specially convened GM although it can be made at an AGM where the company is in a position to justify its approach by providing relevant information

                     1. Principle 16 includes the relevant information

                        1. Strength of business care

                        2. Size & stage of development of the company and sector within which it operates

                        3. Stewardship & governance of the company

                        4. Finance Options

                        5. Level of dilution of value & control for existing shareholders

                        6. Proposed process following approval

                        7. Contingency plan
                           

4. Should Pre-emption Rights be dis-applied for a Rights Issue?

   1. A rights issue is by its nature a pre-emptive offer; it is an offer of shares or other securities made to existing shareholders pro rate to their existing holdings

      1. APPLY TO FACTS – What is the offer?

   2. There are however a number of reasons why the company should consider dis-applying the statutory pre-emption rights

      1. Fractional Entitlements

         1. Fractional entitlements arising in a rights issue are not allotted to the shareholders otherwise entitled to them. Instead they are either aggregated and sold by the underwriters to third parties for the benefit of the company, or disregarded

            1. The company may choose not to allot fractional entitlements in which case there is no need to disapply 561 CA 2006 as disregarding them is not a breach

            2. The company may want to receive additional cash by placing the fractional entitlements in the underwriting in which case it will need to disapply 561

      2. Overseas shareholders

         1. The Company will need to issue a prospectus in connection with the proposed offer

            1. Does it constitute an offer of transferable securities to the public in the UK within 85(1) FSMA and is it intended that application be made for the shares to be admitted to trading on a regulated market in the UK which also required publication of a Prospectus under 85(2) FSMA?

               1. In order to overcome practical and/or legal problems in sending such a document into overseas jurisdiction the company may choose to disapply 561 CA 2006

                  1. APPLY TO FACTS – in which jurisdictions are the...