For those public companies whose financial year ended on 31st December, AGM season is now fast approaching. Company minds will be turning to AGM resolutions that permit companies to issue shares for cash consideration, without being obliged to first offer the new ordinary shares to current shareholders. To issue the shares non-pre-emptively. This guide outlines below considerations relevant to the disapplication of pre-emption rights by PLCs.
An Explanation of pre-emptive rights
In simple terms, pre-emptive rights give existing shareholders first refusal to acquire new shares so that they can maintain the same proportion of shares following an allotment, i.e. their shareholding proportion does not fall upon allotment, and so their holding is not diluted.
This right applies to private, public, and listed companies and needs to be observed unless:
- The circumstances permit an exemption,
- A specific exclusion is available under the Companies Act 2006 (the ‘Act’), or
- A disapplication of pre-emption rights is authorised by shareholders.
Before a company can offer shares to non-shareholders, it must first offer existing shareholders the option to buy a number of the new shares. Existing shareholders can forego participation in the new share issue, however if they wish to participate, then they can acquire a number of shares that leaves the shareholder with the same percentage of total issued share capital as they held before the issue of the new shares. This is subject to the specified exclusions and exceptions provided by the Act (mentioned below). This is the case unless the company seeks permission from shareholders to disapply the right of pre-emption. This company is not treated as a shareholder, and so treasury shares are not included in the calculation.
Definition of Equity securities and ordinary shares
Before proceeding, it is worth noting for completeness that the right of pre-emption applies to allotment of “equity securities” and such allotments must be offered to holders of “ordinary shares” (section 561).
Section 560 of the Act defines:
equity securities as “(a) ordinary shares in the company; or (b) rights to subscribe for, or to convert securities into, ordinary shares in the company”.
ordinary shares as “shares other than shares that as respects dividends and capital carry a right to participate only up to a specified amount in a distribution” (emphasis added).
Exemptions to pre-emptive rights
Sections 564 to 566A of the Act specify the exemptions to the right of pre-emption in the case of:
- The allotment of bonus shares
- Issue of shares for non-cash consideration
- Shares held or allotted or transferred pursuant to an employees’ share scheme
- For companies in financial difficulty: allotments carried out as part of a compromise or arrangement sanctioned in accordance with Part 26A of the Companies Act 2006.
Pre-emption exclusions
The Act provides for two exclusions:
- Exclusion of requirements by private companies (section 567), and
- Exclusion of pre-emption right: articles conferring corresponding right (section 568).
Disapplying pre-emptive rights
The focus of this article is the process a public company needs to follow to disapply pre-emptive rights for a proposed share issue at a general meeting of shareholders, typically, the company’s AGM.
What follows in outline below refers to companies whose articles are governed by the Act. Companies whose articles reflect prior Companies Acts (e.g. incorporated before 1 October 2009) need to be mindful whether continuing authorities to issue shares remain available to directors now, and whether authorised share capital restrictions operate. When it comes to share issues, are a company’s articles restrictive when it comes to allotting equity securities pre-emptively? Are there any shareholder agreements that restrict the issue of new shares?
There can be a lot to consider here, and MSP Company Secretarial can help a company establish what authorities are required and what needs to be done to issue shares non-pre-emptively.
Contact us for more information.
Why issue shares with pre-emptive rights disapplied?
The common reason for a company wanting non-pre-emptive share issue is to raise finance promptly in order to pursue new opportunities. The Act provides for two approaches to issuing shares non-pre-emptively: when a company wishes to have a general authority to issue shares sometimes over an extended period, and where a company wishes to fund a specific activity.
General authority to issue shares non-pre-emptively
The Act allows for the disapplication of pre-emptive rights for a share issue where directors are acting under general authority to allot shares granted under section 551 of the Act (power of directors to allot shares etc: authorisation by company). This can involve a large volume of shares that can be allotted over a period of 5 years. So, a specified maximum number of shares can be issued within the powers granted by the company’s articles for a period of up to 5 years subject (typically) to passing an ordinary shareholder resolution. These share issues may be made non-pre-emptively if the company’s articles permit them to be, or by passing a special shareholder resolution (section 570 – disapplication of pre-emption rights: directors acting under general authorisation).
Defined funding requirement and allotting shares non-pre-emptively
At times, a company is interested in raising capital to pursue a defined investment opportunity, and elects to raise finance at its AGM from a third-party who acquires shares for cash (hence, non-pre-emptive issue is attractive). In these circumstances, a defined share issue with pre-emptive rights disapplied is achieved by special shareholder resolution in accordance with section 571 (disapplication of pre-emption rights by special resolution) of the Act.
Directors still need to be authorised to allot shares in the normal manner (section 551 authority), and following such authorisation, disapplication of pre-emptive rights can be achieved at the same AGM with a special shareholder resolution.
In proposing this resolution, it must not only be recommended by the directors, but a written statement needs to be sent to shareholders addressing the following points before the resolution is proposed (section 571(6)):
- The directors’ reasons for making the recommendation
- The amount to be paid to the company in respect of the equity securities to be allotted, and
- The directors’ justification of the amount to be paid.
Sale of treasury shares
A company wishing to sell treasury shares needs to follow the requirements of section 573 of the Act if the sale of the treasury shares is to be made on a non-pre-emptive basis. In essence, such sale is treated similarly to an ordinary share issuance.
Shareholder resolutions
Shareholder resolutions fall into two categories: ordinary and special resolutions. Ordinary resolutions require a majority vote (i.e. over 50%) in favour of the resolution to be passed. Special resolutions require no less than 75% of shareholder votes to be in favour of the resolution in order for the resolution to be passed.
Note that a special resolution proposed must be identified as a “special resolution”. Where a resolution is required by the company’s articles or by the Act to be passed as a special resolution by shareholders and the resolution is not explicitly proposed as a special resolution in the notice of meeting, the resolution is defective and will be ineffective even if voting in favour of the resolution at the shareholder meeting exceeds 75%.
The Pre-emption Group guidance for allotting shares non-pre-emptively
The Pre-emption Group has produced A Statement of Principles (the most recent being published in November 2022) based on investor groups’ feedback that guide companies when proposing to raise funds by issuing equity securities for cash on a non-pre-emptive basis.
Details of the Group can be found here. The Group’s principles are intended to apply to companies whose equity securities are admitted to the Main Market on the London Stock Exchange, however, the Group encourages AIM-listed companies to adopt the principles as well. It is the Group’s view that companies “that do not comply with [these] principles are likely to find that their shareholders are less inclined to approve subsequent requests for a general disapplication”.*
The principles cover the following circumstances, addressing the size of any issue and the grounds for justification when:
- Companies propose a general disapplication of pre-emption rights for shareholder consideration;
- When companies consider using a general disapplication to issue shares non-pre-emptively; and
- Companies propose a specific disapplication of pre-emption rights for shareholder consideration.
For circumstance 1, in outline, the Group guides companies to limit non-pre-emptive authorisations to no more than 20% of issued ordinary share capital (excluding any issued share capital held in treasury) in any one year where up to 10% can be used for general funding, plus up to another 10% for an acquisition or specified capital investment (Principles, Part 2A(3)). Disapplication so authorised should last for a period of no more than 15 months or until the company’s next AGM, whichever is the shorter period (Principles Part 2A(5)).
There is guidance on follow-on offers: up to 2%.
The Group’s guidance does not specify limits in circumstance 3 (as mentioned above) as the disapplication considered relates to specified funding requirements and so the guidance describes the details and justifications the company should provide to shareholders.
Note too that the Group guides companies to treat the sale of treasury shares for cash as an issuance of shares.
[* Pre-Emption Group (2022) “Disapplying Pre-emption Rights. A statement of principles”, Part 1: Application of the principles, part 1(5), p.3, available here.]
Implementation preparations to allot shares non-pre-emptively
From a position where there is no pre-existing authority to allot shares then a Board meeting is required to:
- Consider and approve the shareholder resolutions required, and
- Call a general meeting to pass the related resolutions.
Resolutions required to issue shares will address (i) a general authority as an ordinary shareholder resolution under section 551 of the Act to allot shares; (ii) by special shareholder resolution as required by section 570 to grant a general authority to disapply pre-emption rights, or for a defined funding requirement, a special shareholder resolution as required by section 571; and (iii) a resolution of the board to call the shareholder meeting at which the resolutions will be proposed.
In the case of a special shareholder resolution proposed under section 571, the directors must make a written statement before the resolutions are proposed giving their reasons for recommending the resolution, the amount to be paid to the company from the proposed allotment, and their justification for that amount.
When preparing the resolutions, companies need to be mindful of any restrictions present in their company articles or shareholder agreements.
Drafting resolutions
Given the complexities in properly obtaining authorities, care needs to be taken when drafting resolutions and MSP Company Secretarial is available to draft the resolutions required in line with a company’s articles and the relevant sections of the Act.
Contact us for more information.
Companies with a listing as a ‘commercial company’
A commercial company proposing to issue shares under section 551 of the Act needs to produce a circular that complies with:
- UKLR 10.6.1R (authority to allot shares)
- UKLR 10.6.2R (disapplying pre-emption rights)
Current practices regarding disapplying pre-emptive rights
The practice of proposing disapplication of the pre-emptive rights is a common feature of AGMs within the FTSE 350.
A review of market practice by Practical Law for 2024 AGMs of FTSE 100 and FTSE 250 companies* reported that 97% of FTSE 100 and 94% of FTSE 250 companies requested authority from shareholders to disapply pre-emptive rights under a general authority. For enhanced disapplication, the percentage fell to 80% and 81%, respectively. The report noted that there has been an increase in companies looking for authority to the maximum issue level of 20% recommended by the Pre-Emotive Group, and notably for companies seeking authority at this level is the request for the extra 2% follow-on authority.
[* Practical Law “Annual reporting and AGMs 2024: What’s Market practice?”, published 20 November 2024 (Thomson Reuters, available here).]
Holding the shareholder meeting
The company needs to prepare a notice of meeting depending upon whether the resolutions will be proposed at a general meeting of shareholders or at the company’s AGM. Details justifying the non-pre-emptive allotment of shares pursuant to a section 571 resolution must sent to shareholders.
Allotting shares non-pre-emptively: Frequently Asked Questions
What is an allotment of shares?
Though allotment of shares and issuing of shares are terms commonly used interchangeably, an allotment occurs when “a person acquires the unconditional right to be included in the company’s register of members” (CA2006, s. 558), at which time the intended new shares are unissued. Shares are issued to the registered member following allotment. So, a company intending to issue shares as part of a fund-raising programme, say, will first allot shares under CA2006 Part 17 (A company’s share capital) Chapter 2 (Allotment of shares: general provisions).
What is the difference between pre-emptive rights and first refusal?
The principles of pre-emptive rights for shareholders outlined in this article refers to the issuing new shares by a company and so increasing the share capital of the company. Most likely in the case of private limited companies, whose articles may require it, a shareholder wishing to sell his/her shareholding should offer their shares to existing shareholders, i.e. offer fellow shareholders first refusal.
What is an equity security?
An equity security is financial instrument, most often an ordinary share, that relates to ownership of a company. As mentioned in the article, Companies Act 2006 gives a definition of “equity security” which, in summary, refers to ordinary shares with a right to distributions from a company in a proportion to their level of ownership (s. 560(1)), i.e. its proportion of equity share capital (s. 548).
What is the difference between a share allotment and a transfer of shares?
Allotting shares in a company occurs when the shares are newly created. Specifically, allotment occurs “when a person acquires the unconditional right to be included in the company’s register of members” (CA 2006 s. 558). That is, when the shareholder to whom the allotment is made is entitled to be listed in the share register for the shares.
A transfer of shares relates to existing shares. It refers to a change in ownership from one member (shareholder) to another. A transfer of shares is sometimes referred to as a stock transfer.
Allotting shares non-pre-emptively: Related Topics
AGM’s – Adopting Financial Statements as the First Resolution
Contact MSP Company Secretarial
This guide can only give an overview of the requirements for disapplying pre-emptive rights for public companies proposing a share issue. MSP Company Secretarial is experienced helping PLCs with all stages of the process to issue shares pre-emptively or non-pre-emptively, and holding general meetings. We can support with
- Disapplication of pre-emptive rights for private companies
- Detailed requirements for preparations for general meetings of shareholders
- Allotment of shares by public companies for non-cash considerations
- Updates to company registers, amending of association and related filings required by AGMs, general meetings, and share issues.
- RNS announcements required
- Impacts of share issues on MAR related responsibilities
- Drafting of board and shareholder resolutions
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