Next steps for UK capital markets reform: UK Secondary Capital Raising Review recommendations published

HM Treasury has published the recommendations of the UK Secondary Capital Raising Review (Review). The Review sets out various steps to improve the process by which UK listed companies can raise capital on the UK equity capital markets, with a focus on those companies listed on the Main Market of London Stock Exchange. The Review makes a number of recommendations, to be addressed by a combination of the government (including the Department for Business, Energy and Industrial Strategy (BEIS) and HM Treasury) through legislation, the Financial Conduct Authority (FCA), the Pre-Emption Group (PEG) and the Investment Association to make it easier for listed companies to raise capital once they are listed in the UK. The recommendations will be of interest to both UK listed companies and companies that are considering a listing in the UK.

The Review is the latest step in the review of UK capital markets post-Brexit. The report of the Hill Review into the UK listing regime published in March 2021 (see our briefing here) recommended:

-      considering how the use of technology can improve retail participation in corporate actions and stewardship; and

-      considering how to improve the efficiency of further capital raising by listed companies.

HM Treasury subsequently published a call for evidence and launched the Review in October 2021.

The full report runs to some 260 pages. We have set out an overview of the key recommendations below.

Overview of recommendations

The recommendations made by the Review include:

1. Maintain and enhance the pre-emption regime

The Review notes that the PEG should be a central stakeholder in the UK capital markets and recommends a number of measures to put it on a more formal and transparent footing, including instituting a more formal and transparent governance structure, giving it a dedicated website and reviewing its membership to ensure it is fully representative of current UK capital market participants. It will also be required to report annually on the operation of pre-emption in the market and feed into the annual State of the City report to be produced by the Chancellor of the Exchequer, as recommended by Lord Hill.

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

The temporary relaxations which were introduced during the Covid-19 pandemic to enable companies to issue up to 20% of their share capital on a non-pre-emptive basis should be made permanent. Up to 10% should be available for use for any purpose, with up to a further 10% only being used for an acquisition or a specified capital investment. There will be certain safeguards, including consultation with key shareholders, the issue being made on a ‘soft’ pre-emptive basis as far as possible and management being involved in the allocation process. Consideration should also be given to the involvement of retail investors.

In light of the increase, companies should report publicly after a placing on how it was carried out, confirming certain specified information, e.g. how ‘soft’ pre-emption was applied, confirming that key shareholders were consulted prior to the placing and the basis on which allocations were made. This information will captured using a short template available on the PEG’s website and published via a RIS by companies in the week following completion of a placing. These forms will entered into a searchable database maintained by the PEG and the same details included in companies’ annual reports in order to inform shareholders on whether it is appropriate to grant requests for a dis-application authority at the next AGM.

In relation to undocumented placings (i.e. accelerated book builds), cash box structures should only be used for up to the amount of the pre-emption disapplication authority that has been granted by shareholders at the company’s most recent AGM. The PEG should update their Statement of Principles to reflect this.

3. Support additional flexibility for capital hungry companies

Companies that require a significant amount of capital to fund their operations or pursue their strategy should have the flexibility to request a dis-application of pre-emption rights that exceeds 20% in a year or over a longer period and this should be reflected in the PEG Statement of Principles. This will be subject to shareholder approval. Newly listed companies should disclose the putting in place, size and duration of an enhanced authority of this nature (and any intention to seek further, similar authorities going forward) in their IPO offer documentation.

4. Involve retail investors in all capital raisings

This should be considered on all capital raisings, including undocumented placings of up to 20% of share capital. It will be for the company to consider the most appropriate method to do this, including use of technology driven market solutions or by way of a follow-on offer after the institutional offer has closed. If this latter route was selected, the follow-on offer would have to be limited to no more than 20% of the size of the placing, with a monetary cap of £30,000 per investor. This amount would fall outside and be in addition to the 20% dis-application authority. The follow-on offer would also have to made on the same terms and conditions as the institutional placing, be open for five business days and be made in a short offer document containing details on offer structure, timetable, a letter from the chair explaining the background to/reasons for the fundraising, terms and conditions and use of proceeds.

5. Reducing regulatory involvement in larger fundraisings

The proposals here, in addition to HM Treasury’s reforms to the prospectus regime which will mean that prospectuses are not, as a default, required for a public offer of securities to existing shareholders, include:

-      raising the threshold at which a prospectus should be required for an admission of shares to trading from 20% to 75% of the existing share capital;

-      removing the requirement for a sponsor to be appointed in relation to a secondary fundraising;

-      greater flexibility in relation to working capital diligence on secondary fundraisings with the removal of the requirement for a sponsor declaration in relation to working capital and the adoption across the board of an approach along the lines of that adopted on undocumented placings (i.e. a working capital warranty given to the underwriting/placing bank(s) and an exercise to stress test and sensitise the company’s financial model, with the involvement by the company of accountants and financial advisers as it considers necessary);

-      the FCA’s approach to working capital statements, when and if required in the future, whereby clean statements cannot be accompanied by disclosure of assumptions made by the company in making its confirmation, should be reconsidered and revised to allow greater flexibility and a disclosure-based approach; and

-      the FRC and the FCA to review the overlap between working capital diligence exercises and the work underpinning going concern and viability statements (to be replaced in the upcoming BEIS audit reforms by resilience statements) in the annual report.

6. Making existing fundraising structures quicker and cheaper

This could be achieved by a range of measures, including shortening the offer period for rights issues and open offers (from 10 to 7 business days); reducing the notice period for shareholder meetings other than the AGM (from 14 to 7 clear days); all forms of fully pre-emptive offers being included in annual allotment and pre-emption rights dis-application authorities; amendment of the Companies Act 2006 pre-emption provisions to align with market practice on rights issues and open offers; and amendment of the listing regime to allow for excess application mechanics to be attached to rights issues.

In addition, to facilitate marketing and offering shares outside the UK, companies should be able to ‘opt in’ to an enhanced continuous disclosure regime, and the usual director liability regime for market disclosure should apply to documents and information published by a company in connection with a secondary fundraising that does not require a prospectus.

7. An increased choice of fundraising structures

The proposed measures include looking at certain accelerated fundraising structures used in Australia and assessing whether certain aspects of them could be adopted in the UK, and making agreed market standard terms and conditions with institutional investors available for use on secondary fundraises.

In addition, ‘cleansing notices’ (as used in Australia) should be adopted in the UK where secondary issues involving a public offer do 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 – i.e. cleansing the market in terms of its existing market disclosure and confirming that it is accurate and up-to-date. This (to be published alongside the company’s investor presentation and any supplementary offer document), together with the other recommendations made, including around potentially clarifying the bank liability regime, would be expected to help streamline disclosure where offers are made without a full prospectus.

Furthermore, amendments are proposed to section 793 of the Companies Act 2006 to provide for disclosure of the identity of the ultimate investment decision maker or beneficial owner in relation to a share and a set of market standard terms and conditions for use on secondary fundraisings should eb adopted.

8. A ‘drive to digitisation’

This is centred around the establishment of a Digitisation Task Force to implement a fully digitised shareholding structure in the UK. It will also identify immediate, and longer term, means of improving on the current intermediated system of share ownership, so that so beneficial owners are better able to exercise rights associated with shares which intermediaries hold on their behalf; issuers can identify and communicate more easily with the underlying beneficial owners, including on secondary capital raising offers; and efficiencies can be identified to reduce costs and time delays in the existing system.

The Terms of Reference for the Digitisation Taskforce have been published and can be read here. The Chair is asked to provide a public report on the Taskforce’s progress and initial findings by spring 2023 and to publicly set out final recommendations and an implementation plan by spring 2024.

Next steps

The Review envisages that certain recommendations could be implemented “immediately”, with others taking place in the near or medium term. It will be for bodies such as the government (including both BEIS and HM Treasury), the FCA, the PEG and the Investment Association to implement the necessary changes.

The FCA has welcomed the publication of the findings of the Review and the PEG have accepted the enhanced role that the Review has recommended. In his Mansion House speech on 19 July 2022, the Chancellor, Nadhim Zahawi, accepted all the recommendations for government set out in the Review and noted that changes will be made to the Companies Act 2006 to “shorten rights issues and the processes around them”. The London Stock Exchange has also announced the launch of a new UK Capital Markets Industry Taskforce, which aims to maximise the impact of the current programme of regulatory reforms to UK capital markets.

Comment

The government has set the objective of making UK capital markets more competitive and attractive to both UK and overseas investors following the UK’s exit from the EU. The FCA has already moved ahead at pace to implement a number of the recommendations set out in the Hill Review in relation to permitting dual class share structures on the premium segment, reducing free float requirements and encouraging the listing of special purpose acquisition companies (SPACS), tailored in part at attracting high growth technology companies. The FCA is also consulting more generally on future reform of the UK listing regime and HM Treasury has also outlined the direction of travel for the future of the UK prospectus regime, with the intention of reducing costs and the regulatory burden and introducing a more significant role for technology solutions in the fundraising process. The recommendations set out in this Review represent a significant, further step in implementing Lord Hill’s recommendations and seeking to transform the UK’s capital markets ecosystem.