Pre-Emption Group extends UK listed company recapitalisation flexibility

The PEG will continue to recommend that investors consider supporting issuances by companies of up to 20% of their issued share capital over a 12-month period until 30 November. It has chosen this date to allow companies more time to assess any unforeseen consequences of Covid-19 related financial and cash flow developments.

As a general rule, existing investors have pre-emption rights, or rights of first refusal, over the issue of new shares in the capital of a company. The PEG, in its statement of principles, usually recommends that investors support company issuance of up to 5% of their issued share capital over a 12-month period for general corporate purposes, and an additional 5% for specified acquisitions or investments.

The continuing flexibility demonstrated by the PEG around pre-emption rights is commendable. However, an issuer wishing to take advantage of the flexibility now will need to be able to persuade its stakeholders why, more than six months into the pandemic, it is only now experiencing extreme circumstances such that it needs to take advantage of the ongoing relaxation to support its issuance.

The PEG's view is that, by 30 November, companies will have had a reasonable opportunity to review their liquidity requirements. After this date, it will revert to its usual recommendations.

According to the PEG, companies looking to use the additional flexibility between now and 30 November should:

• do so only if they are experiencing extreme circumstances, and issuance is required to fund an immediate concern;
• give consideration to the effect of the issuance on their retail shareholders, and how these shareholders may be able to take part in some aspect of the issuance;
• clearly disclose the date at which the status of shareholding is assessed for the purposes of pre-emption and;
• consider the guidance provided by the PEG in its original announcement of 1 April (2-page / 123KB PDF).

Companies undertaking equity fundraising are also reminded of the FCA's policy statement on recapitalisation in the context of the Covid-19 pandemic, which continues to apply.

In extending its recommendation, the PEG has acknowledged that companies and market participants have responded responsibly to the flexibility provided since 1 April. Since the start of the year, £23.7 billion has been raised on the UK markets. We have also seen companies pursue more traditional rights issues or open offers rather than large cash box fundraisings, notwithstanding the additional documentary requirements and costs. It is clear that, in the majority of cases, companies have taken into consideration the interests of all stakeholders when determining the most appropriate structure for raising new capital.