New Pre-Emption Monitoring Report emphasizes need for best practice

The Pre-Emption Group has published a Monitoring Report on the implementation of its March 2015 Statement of Principles and the use of its template resolutions for pre-emption disapplication requests. The report spans much of the 2016 AGM season and the beginning of this year’s AGM period (mid-March 2016 to 1 February 2017).

The Principles were updated in 2015 to allow companies to seek an additional 5% authority to disapply pre-emption rights for the purposes of an acquisition or specified capital investment (further to the commonly sought general 5% authority). The template resolutions were published last May and recommend that requests for a 10% disapplication authority should be unbundled into two separate resolutions.

Similarly to the Pre-Emption Group’s Monitoring Report published in 2016, overall this Monitoring Report concludes that companies are following the Pre-Emption Group guidance, but more could be done. In particular the Pre-Emption Group notes that in its latest review period there have been examples of possibly poor consultation and disclosure. It urges companies to address both the spirit and letter of the Principles and advises that, while a request for a general disapplication is likely to be supported where it meets the relevant criteria, this does not reduce the importance of effective dialogue and timely notification. As always, companies not adhering to the Pre-Emption Group guidance risk losing shareholder support.

The Pre-Emption Group also states that it intends to monitor the use of pre-emption on an ongoing basis, particularly because of the new Prospectus Regulation.

To help companies to comply with key points the Monitoring Report contains a new Appendix of best practice and disclosure.

Key findings and recommendations of the Monitoring Report are as set out below.

Use of the additional 5% authority

  • The greater flexibility granted to companies with the 10% authority, includes expectations about how it is used. Companies should use the additional 5% authority for acquisitions and specified capital investments, regardless of the legal form of the transaction.
  • Early and effective consultation between investors and companies on proposed issues should be specific, unequivocal, explicitly address whether pre-emption authority is to be used and give reasons for the issue of shares. When such authority is used, investors expect disclosure of the circumstances that led to its use and a detailed description of the consultation process undertaken.
  • In the period covered by this Monitoring Report, two FTSE 100 and ten FTSE 250 companies raised funds non-pre-emptively. These issues were all for less than 10% of the share capital, with six for less than 5%, but some of the issues of more than 5% appear not to abide by the Statement of Principles.

Requests for pre-emption disapplication authorities

  • As we noted in our AGM Alert 2017 client publication last January, the template resolutions appear to have been accepted by investors since their introduction half way through the last AGM season and have now been adopted by most companies as best practice. Only two issuers in the FTSE 250 have failed to unbundle a 10% request since companies were expected to do so (from 1 August 2016).
  • Most investors think that an additional 5% disapplication authority should not be applied for automatically, but only when appropriate.
  • It appears that most organisations which had applied for a 10% disapplication in the past did so again in this monitoring period.
  • A significant majority of the FTSE 350 resolutions for allotment and disapplication authorities are put to shareholders at AGMs and the greatest number of requests come from financial sector companies.

Voting

  • Companies of all sizes received significant support for their capital authority requests, and, in general, there was a relatively low rate of abstention on this type of resolution.
  • Across the FTSE 350, resolutions for the additional 5% disapplication authority received less support than resolutions for the first general 5% authority. The Pre-Emption Group believes that this may reflect concern about the proposed use of the additional authority and previous company practices.
  • Two resolutions in the FTSE 350 were withdrawn in the monitoring period and both were for disapplications of up to 10%.
  • Only one FTSE 350 disapplication resolution was defeated, and, rather surprisingly, this was a request for a general 5% authority only.
  • Companies are reminded that if they experience significant votes against a disapplication resolution, they should comply with the UK Corporate Governance Code recommendation to explain, in announcing the voting results, what actions they intend to take to understand the reasons behind this result.