H is for hungry capital companies - life sciences businesses and the new Pre-Emption Group Principles
The Financial Reporting Council (FRC) has issued a new Statement of Principles on behalf of the Pre-Emption Group (PEG) which apply to listed companies. The new Principles are of particular interest to life sciences companies as they include a new concept of 'capital hungry companies' which, subject to certain conditions, may be able to disapply pre-emption rights above the usual thresholds. Following input from BIA, life sciences companies were specifically mentioned in HM Treasury's UK Secondary Capital Raising Review. Tom Page, Partner at Stephenson Harwood, summarises the key changes implemented by the Principles.
Annual disapplication threshold increased
The Principles increase the aggregate annual disapplication threshold from 10% of a company's issued share capital to 20%. Up to 10% of a company's issued share capital may be issued on a non-pre-emptive basis on an unrestricted basis and up to an additional 10% of a company's issued share capital may be issued on a non-pre-emptive basis for the purpose of an acquisition or a specified capital investment (as defined in the Appendix to the Principles).
Alongside each of the 10% authorities, a company may seek further disapplication authority for up to an additional 2% for the purpose of a 'follow-on offer' to retail investors and existing shareholders after a placing. This change recognises the recent increased participation of retail investors in non-pre-emptive issues. The Principles set out the expected features of such follow-on offers, including that qualifying shareholders should be entitled to subscribe for shares up to a monetary cap of not more than £30,000 (such cap to be set by the company) and that the number of shares issued in the follow-on issue should not exceed 20% of the shares issued in the non-pre-emptive placing it relates to.
Notwithstanding this additional follow-on authority, until the proposals in HM Treasury’s UK Prospectus Regime Review outcome paper (published in March 2022) are implemented market practice will continue to be limited by the current public offer prospectus requirements, meaning that a follow-on offer to retail investors will require a prospectus where it is greater in size than €8 million and the aggregate size of a non-pre-emptive placing and any associated follow-on offer in a rolling 12-month period will require a prospectus for admission to trading where it exceeds 20% of the company's existing issued share capital.
Enhanced authority for 'capital hungry companies' – potentially including life sciences companies
There is a new ability for companies that need to raise larger amounts of capital more frequently ('capital hungry companies') to seek additional disapplication authority provided that the reason for exceeding the above thresholds is specifically highlighted when the request for a general disapplication is made. Such authority can be sought both in connection with an acquisition or a specified capital investment. Companies that are in the process of an IPO and know that they will be 'capital hungry companies' should disclose this fact in the IPO prospectus.
Although it remains to be seen how this new flexibility will be applied by companies in practice and, critically, how investors will respond to requests for higher disapplication levels, it is potentially a significant change for companies who take advantage of it. This may include life sciences companies given the high-growth nature of much of the sector which means they might need to raise larger sums and more frequently than other sectors. The previous rules made this difficult as the BIA, which has lobbied for a change in the rules, explains here. The BIA welcomes the changes. Dr Martin Turner, Head of Policy and Public Affairs, comments:
"Efficient capital raising is key for the growth of UK life science companies so the more flexible rules around pre-emption rights are good news for our sector. Now that the PEG Principles make clear some companies have a legitimate need to disapply rights in certain circumstances, we hope shareholders, and their advisers and representatives, adopt a flexible approach."
The key here, as ever for listed companies, is engagement with investors. Any circular accompanying a request for enhanced disapplication should fully and clearly state the reasons why it is being sought. The more specific it can be, the more likely it will receive a sympathetic hearing from investors.
Furthermore, as the Principles acknowledge, there is likely to be less resistance from investors if they know what they are buying into at the outset. So if a company knows it will be capital hungry before it comes to market at IPO, it should fully explain that in its prospectus or AIM Admission Document, preferably with guidance as to levels of capital which will be needed and approximate timeframes. An obvious example of this is a company that is developing a product that will require funding for clinical trials.
It should be noted that for Premium listed companies there is still a requirement that a prospectus must be published when offering over 20% of the company's issued share capital in a 12-month period. Producing a prospectus is a time-consuming and expensive process. The UK authorities are currently looking into reforming the prospectus regime so this 20% rule may change but in the meantime it is likely to restrict use of the new 'capital hungry companies' pre-emption flexibility for Premium listed companies. The rule does not apply to companies whose shares are listed on AIM.
Conditions for use of annual general disapplication authority
When issuing shares pursuant to a general disapplication of pre-emption rights, the Principles advise that companies should, prior to the announcement of the non-pre-emptive issue, consult with major shareholders (to the extent reasonably practicable and permitted by law) and give due consideration to the involvement of retail investors and existing investors not allocated shares as part of the placing.
Companies should also clearly explain why they are undertaking the non-pre-emptive issue and how they propose to use the proceeds of the issue.
Within one week of the non-pre-emptive issue, companies should report publicly on the issue via an RIS using the template provided in the Principles (see part 2B of the Principles). The next annual report published by a company following a non-pre-emptive issue of shares pursuant to a general disapplication of pre-emption rights should also include the information included in the post-transaction RIS.
Companies should adhere to the Principles when seeking general disapplication authorities and their next AGM. However, noting that the 2022 AGM season has almost come to an end, there are transitional arrangements available in the event that companies wish to undertake urgent and/or exceptional non-pre-emptive offers before their next AGM.