Pre-emption rights are a cornerstone of UK company law and provide shareholders with protection against inappropriate dilution of their investments. They are enshrined in law by the 2nd Company Law Directive and the Companies Act 1985, which provides that they 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 new equity issuance on a non-pre-emptive basis would be in the interests of companies and their owners.
The principles set out in this paper aim to provide clarity on the circumstances in which flexibility might be appropriate and the factors to be taken into account when considering the case for disapplying pre-emption rights and making use of an agreed authority for a non-pre-emptive share issue.
Companies, institutional investors and voting advisory services all have an important role to play in ensuring the effective and flexible application of this guidance:
- Companies have a responsibility to signal an intention to seek a non-pre-emptive
issue at the earliest opportunity and to establish a dialogue with the company’s shareholders. They should keep shareholders informed of issues related to an application to disapply their pre-emption rights.
- Shareholders have a responsibility to engage with companies to help them understand the specific factors that might inform their view on a non-pre-emptive issue by the company. They should review the case made by companies on its merits and decide on each case individually using the usual investment criteria. Where a shareholder does intend to vote against a resolution to disapply preemption rights, the Institutional Shareholders’ Committee Statement of Principles on the responsibilities of shareholders makes clear that it is best practice to explain in advance the reasons for the decision.
- While companies should in any case consult their main shareholders, advisory services should be prepared to receive representations from companies. In such circumstances the advisory services should explain any recommendations made in light of the reasons provided. This should involve setting out the pros and cons of the proposal so that the ultimate decision maker can take an informed view.
