What are pre-emption rights?
Pre-emption rights are the rights of existing shareholders to have first refusal on the issue of new shares, on a pro-rata basis, by a company. These rights are essential to protect shareholders against dilution of their shareholdings – they are a cornerstone of UK shareholder rights and are therefore enshrined in company law under the Companies Act 2006. Consequently, unless pre-emption rights are disapplied, issues of equity for cash must first be offered to shareholders in proportion to their existing holding.
Disapplying pre-emption rights
Unless the articles or shareholders’ agreement contains provisions to the contrary, companies can disapply pre-emption rights in certain situations by passing a board resolution or a special resolution of the shareholders at a general meeting – this requires 75% approval from shareholders who are entitled to vote, either in person or by proxy. Companies may choose to do this to raise capital from third-party investors. Importantly, this is a regular request on the AGM agenda for UK listed companies and is split into two resolutions, a resolution for an unrestricted authority and a resolution for authority specific to acquisitions or a specified capital investment only.
Changes in Regulatory Landscape
In November 2022, the Pre-emption Group (PEG) published an updated Statement of Principles and template resolutions which replaced the 2015 PEG Principles.
The guidelines increased the thresholds by which companies may disapply pre-emption rights to a total of 20% (10% unrestricted + 10% for acquisitions or a specified capital investments) and have added a new flexibility whereby companies may disapply pre-emption rights for up to an additional 4% (2% + 2%) to be used for the purposes of follow-on offers.
Why is this relevant?
2023 AGM season was the first year where companies could request the increased limits of disapplication of pre-emption rights and EQ have been tracking the adoption of the new guidelines at FTSE 350 companies.
Was enhanced authority sought?
During the 2023 AGM season, 55.3% of FTSE 350 companies adopted the new PEG guidelines and sought enhanced authority in their disapplication of pre-emption rights proposals.
What thresholds for disapplication of pre-emption rights were sought?
The majority of companies sought authority within the previous aggregate limits ie 10% or less.
What levels of pass rates were achieved in 2023?
Of the FTSE 350 companies proposing to disapply pre-emption rights, at whatever level, c.98% had their resolutions pass with c.88% of those companies receiving greater than 90% shareholder support.
What was the range of enhanced authority sought?
Of the FTSE 350 companies seeking enhanced authority, key highlights were:
- 42.3% requested the new maximum dis-application authorities ie10% + 10% thresholds and 2% + 2% authority for related follow-on offers.
- 19.1% requested the new 10% + 10% thresholds only.
- 36.6% requested the increased maximum of 10% for the unrestricted element only.
The additional flexibility to request authority for related follow-on offers was requested by 44.4% of the companies, either for both resolutions or just the unrestricted resolution.
What was the range of pass rates?
Of the FTSE 350 companies seeking enhanced limits on their disapplication of pre-emption rights proposals, c.99% of companies had their resolutions pass, with 86.6% receiving greater than 90% shareholder support.
Of the FTSE 350 companies seeking to disapply pre-emption rights, just over half (55.3%) requested the increased limits guidance. There will be varying reasons for the relatively limited uptake, such as reluctance to be a “first mover”, major shareholder’s aversity to dilution, or simply not requiring enhanced authority as the previous limits provided the flexibility the company needed.
There are many ways in which EQ have been supporting their clients on the topic of disapplication of pre-emption rights, from conducting an analyses of share registers to determine shareholder sentiment, to preparing detailed vote projections and risk assessments, and supporting with shareholder engagement on the matter.
EQ works proactively with companies to achieve positive results, utilising in-depth research and shareholder engagement to secure the best voting outcomes possible from annual and special general meetings.
Article Contributors: Sunaina Bhogun - Corporate Governance Analyst, Karen O’Donnell - Governance & ESG Knowledge Manager, Anne-Marie Clarke - Head of Corporate Governance