Advancing a key recommendation from Lord Hill’s March 2021 UK Listings Review, the UK Secondary Capital Raising Review (the Review) has published its recommendations for improving capital raising processes for existing issuers on the UK's capital markets. The Review sets out a holistic package of measures to reform and update the secondary capital raising regime, making it materially cheaper, more inclusive and more efficient. 

Overarching principles

Overarching the recommendations of the Review are four broad principles

1. The maintenance of the principle of pre-emption rights for existing shareholders is not in question.
2. The fundraising structures available to issuers should be as efficient as possible in terms of time and cost, while ensuring that appropriate standards of investor protection are preserved. Technology should be employed as appropriate to help achieve this.
3. The choice of structures available to companies on the UK's capital markets that want to raise capital should be as broad as possible.
4. As much of a company's existing shareholder register as possible, including retail investors, should be able to participate in any capital raising in a timely way, whatever its structure.

Recommendations

The Review includes 21 key recommendations based on these principles. In summary, they are as follows.

Maintain and enhance the pre-emption regime

Recommendation 1: The Pre-Emption Group, the group that publishes guidance on the disapplication of pre-emption rights and monitors and reports on how this guidance is applied, should be put on a more formal and transparent footing. 

Increase the ability of companies to raise smaller amounts of funds quickly and cheaply

Recommendation 2: The routine support for disapplication resolutions of up to 20% of a company's issued share capital, first introduced by the Pre-Emption Group at the start of the COVID-19 pandemic, should become permanent. It should continue on the same basis, i.e. up to 10% for any purpose and up to 10% to fund an acquisition or a specified capital investment.

Recommendation 3: After a placing, companies should report publicly on how the placing was carried out. There should be a short, template form downloadable from the Pre-Emption Group’s website for this purpose. The report should be made available publicly via an RIS in the week after the placing. 

Recommendation 4: In connection with undocumented placings, cash box structures (which legally involve an issue for non-cash consideration and therefore avoid the application of pre-emption rights) should only be used for up to the amount of the pre-emption disapplication authority that has been granted by shareholders at a company’s most recent annual general meeting, as a mechanism to increase the company's distributable reserves. 

Support additional flexibility for capital-hungry companies

Recommendation 5: Shareholders should support companies that need to raise larger amounts of capital more frequently, if appropriate in the circumstances, if they request a disapplication of pre-emption rights of more than 20% in any one year or a disapplication over a longer period. Any disapplication should be subject to prior shareholder approval. For newly listed companies, the putting in place, as well as the size and duration, of an enhanced authority at IPO and any intention to seek further authorities on the same or similar terms in the future should be fully disclosed in their IPO offer documentation.

Involve retail investors in all capital raisings

Recommendation 6: On all capital raisings, including undocumented placings of up to 20% of issued share capital, companies should give due consideration to the interests of retail shareholders, as well as other existing shareholders, and how to involve them in the offer as fully as possible. Companies should consider the most appropriate method by which to do this, taking into account both the company’s and the market circumstances at the time of the placing, as well as the constitution of their shareholder register. 

Recommendation 7: On an IPO that involves a retail offer, a prospectus should only have to be made available to the public at least three working days before the end of the offer (not at least six working days before the end of the offer, as is currently the case). 

Reduce regulatory involvement in larger fundraisings

Recommendation 8: Admission to trading prospectuses should remain subject to prior FCA approval but should only be required for secondary offers where the offer size is at least 75% of existing share capital (currently 20%).

Recommendation 9: A secondary offer should not generally trigger the need to appoint a sponsor. The working capital diligence approach currently followed on placings should be followed on all secondary fundraises where there is no sponsor. 

Recommendation 10: The FCA’s approach to working capital statements, whereby clean statements cannot be accompanied by the disclosure of assumptions, should be reconsidered and revised to allow greater flexibility of approach and a disclosure-based approach.

Recommendation 11: The current overlap between working capital diligence exercises and the work that issuers are required to undertake to give going concern statements and viability statements in their annual reports should be addressed.

Make existing fundraising structures quicker and cheaper

Recommendation 12: The offer period for rights issues and open offers should be shortened so that an offer is open for acceptance for seven business days rather than 10 business days. There should be alignment between the Companies Act 2006 and the FCA Handbook which currently use different methods of calculating minimum offer periods.

Recommendation 13: To avoid unnecessary delays in the capital raising process, the Companies Act 2006 should also be changed to give the Secretary of State the flexibility, without further primary legislative change, to reduce the notice period for shareholder meetings other than annual general meetings from 14 to seven clear days. As this would currently represent a challenging timetable for investors that hold through an intermediated shareholding chain, the shortened timetable should only be implemented once the necessary operational systems are in place. 

Recommendation 14: Companies should continue to be able to seek annual allotment and pre-emption rights disapplication authorities from their shareholders of up to two-thirds of their issued share capital. Whereas, at present, this two-thirds authority is only available for fully pre-emptive rights issues (a one-third cap applies to all other offers made in compliance with statutory and Listing Rule pre-emption provisions), it should be extended to include all forms of pre-emptive offer, including for example open offers.

Recommendation 15: The pre-emption provisions in the Companies Act 2006 should be amended to align them to the process that is usually followed on a rights issue or open offer when a disapplication resolution has been used to modify statutory pre-emption rights. This will allow listed companies to exclude shareholders in cost-prohibitive jurisdictions, greater flexibility on how to deal with fractional entitlements and the inclusion in the offer of holders of other securities (e.g. convertible bondholders) that have a contractual right to be included.

Recommendation 16: The listing regime should be amended to cater for the ability to have excess application mechanics attached to rights issues. These would allow existing shareholders to apply to take up shares that are not taken up by other shareholders, at the offer price, as is already the case for open offers.

Recommendation 17: To avoid the need for a full prospectus where shares or rights not taken up by existing shareholders are marketed and offered overseas, companies should be able to opt in to an enhanced continuous disclosure regime. This would bolster their disclosure in certain areas that are particularly relevant to a fundraising and could be relied on in a fundraising in the following year. Under this approach, a shorter, non-duplicative offer document, together with the enhanced disclosure package and an efficient diligence process, would be sufficient for the necessary legal comfort to be given by law firms to the underwriting banks on an offering made outside the UK. An alternative would be for all the supplemental offer disclosure to be published in an extended press release at the time of the offer.

The usual director liability regime for market disclosure should apply to the offer document, any other documents and information published by a company in connection with a secondary fundraising that does not require a prospectus. 

Increase the range of choice of fundraising structures for companies

Recommendation 18: The Australian concept of a "cleansing notice" should be adopted in the UK where a secondary issue involving a public offer does not require a prospectus. In a cleansing notice, a company at the time of a fundraising confirms publicly that it is in full compliance with its market disclosure obligations and that it is not delaying the disclosure of any inside information. Such a statement will help streamline disclosure where offers are made without a full prospectus.

Recommendation 19: Ahead of a move to full digitisation of shareholdings, section 793 of the Companies Act 2006 should be amended so that, in addition to the information about its shareholders that is already provided to a company when it does a section 793 "sweep", the identity of the ultimate investment decision-maker or beneficial owner in relation to a share is also disclosed.

Recommendation 20: Standard form terms and conditions with institutional investors for use on secondary fundraisings should be agreed by the market and made available publicly.

Raise the priority of an ambitious "drive to digitisation" to facilitate innovation, stewardship and improved market infrastructure, which is actioned by a Digitisation Task Force with an independent chair and a clear set of principles to be followed.

Recommendation 21: The move to a digitised shareholding system should be made more of a priority. It should be coordinated and driven by a newly established Digitisation Task Force, with an independent chair to head it and a technically experienced second-in-command. 

Next steps

The Review recognises that some of its recommendations will be capable of implementation more quickly than others and that their implementation will involve government, regulators and industry groups. In terms of what to expect and when, the Review suggests responsibilities and timetables as follows.