The Statement of Principles
Pre-emption rights give existing shareholders in a company the right to subscribe for their pro rata share of any new shares in that company issued for cash, providing them with protection against inappropriate dilution of their investments. Pre-emption rights are enshrined in law and, under the Companies Act 2006, may be disapplied only by a special resolution of shareholders at a general meeting of the company.
Whilst not undermining the importance of pre-emption rights, a degree of flexibility is appropriate in circumstances where issuance of equity securities on a non-pre-emptive basis would be in the interests of companies and their owners. The Statement of Principles aims to provide clarity on the circumstances in which such flexibility might be appropriate and the factors to be taken into account.
The Statement of Principles provides guidance on the factors to be taken into account by companies and investors when considering the case for disapplying pre-emption rights.
The Statement of Principles provides a framework for early and effective dialogue between a company and its shareholders. It is not a set of rules; rather, it is intended to provide a basis for discussion of the business case between companies and their investors as they consider pre-emption issues within the framework of the Companies Act 2006 and UK Listing Rules requirements.
Companies should note that consultation on the basis on which disapplication is sought must be specific and unequivocal to be considered appropriate. If they propose to deviate from the Statement of Principles companies are encouraged to make a specific case to their shareholders to explain why this appropriate.
The Pre-Emption Group was re-formed in 2015 to consider market changes, developments in best practice and whether consequential revisions to the Statement of Principles may be appropriate. The Group approved a new Statement of Principles in March 2015. The 2015 Statement of Principles reconfigures the 2008 Statement of Principles, covers the use of cashboxes and encourages additional disclosure.
The Statement of Principles intends to provide a basis for open and early communication between companies and their major shareholders. Where additional flexibility is sought, boards and investors are encouraged to approach their discussions in an open and constructive spirit.
On 5 May 2016 the Pre-Emption Group published a template resolutions
outlining good practice in requests for disapplication. The template resolutions provides for companies to propose separate resolutions to authorise companies to:
- disapply pre-emption rights on up to five per cent of the issued share capital; and
- disapply pre-emption rights for an additional five per cent for transactions which the Board determines to be an acquisition or other capital investment as defined by the Statement of Principles.
The template illustrates an approach which investors consider to be good practice. The Pre-Emption Group recommends companies use the template when putting forward resolutions to disapply pre-emption rights. The Pre-Emption Group would expect most companies to use the template resolutions for meetings held after 1 August 2016. However, companies are responsible for ensuring that the resolutions that they propose are effective to achieve their purpose.