In doing so, pre-emption rights protect shareholders from seeing their holdings diluted, hence why they are widely treasured.
However, there are times when a company may want to disapply those rights, such as to raise capital from new shareholders or to acquire another firm.
To disapply these rights, shareholders need to give permission. It’s standard for this to be a routine request at every Annual General Meeting (AGM). For these resolutions to pass, 75% of shareholders need to vote in favour. While that can never be guaranteed, here we outline some of the steps we take with clients to give them the best chance of success.
Understand your investor base
Every listed UK company has a unique investor base. Some share registers are made up of lots of smaller shareholders, while some are dominated by a handful of very large and powerful investors.
The make-up of your own shareholder base will ultimately determine your approach to investor engagement. Therefore, the first step to take is to understand who your investors are.
When clients approach us on this issue, we start by conducting a thorough analysis of their shareholder base – which can often be fairly complex – to look at how best we can advise on how likely they will support any resolution put to a shareholder vote. This includes finding out if their shareholders have any policies in place that may cause them to automatically reject such a resolution.
It’s also important to consider their past voting record. Have they voted down similar resolutions at other company AGMs? Or are they prone to oppose resolutions more generally?
If the answer to these two questions is ‘yes’, they deserve special attention, and you must develop a strategy to counter their objections.
Research the wider market
The issue of pre-emption rights is not normally contentious. However, in 2022 the Pre-emption Group (PEG) issued an updated statement of principles increasing the thresholds by which companies may disapply pre-emption rights to a total of 20%.
It also 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.
As a result of the new PEG guidelines, pre-emption rights and the increased limits were the hot topic of the 2023 AGM season – it was, and continues to be, a subject we’re asked about on a regular basis.
Last year was the first where companies could request the increased limits. What we have seen is a general reluctance among companies to be the “first mover”, with just over half (55.3%) of FTSE 350 firms seeking enhanced limits on their disapplication of pre-emption rights proposals.
We expect more companies will seek approval to disapply pre-emption rights at the increased levels in the future, although it cannot be guaranteed that shareholders will vote in favour.
Since the new guidance came into force, the vast majority of FTSE 350 firms have received support for disapplying pre-emption rights at the increased levels.
Therefore, when we work with clients, we analyse how their shareholders are currently voting and, if there are any objections, determine what those are, and how best to address them.
Engagement
We have found that while most investors understand the rationale behind disapplying pre-emption rights, others understandably require greater clarity before making a decision.
At the outset, be clear about what you’re asking for, why and what benefits disapplying pre-emption rights will bring to both the company and shareholders.
You are advised to dedicate a large section of your Notice of AGM to outlining your reasoning, but you should also look to engage with and facilitate conversations with those expected to vote against the resolution to help overcome negative votes.
Starting investor engagement early drastically improves your chances of the resolution passing.
Manage your shareholders and investors
Equiniti provides proxy solicitation services to rally shareholder support at AGMs, General Meetings, and as part of M&A activity. Whether a result of activism, stricter corporate governance requirements or tighter regulations, we can help you respond confidently.