If social security is the third track of American politics, pre-emption is the inviolable core of London market management.
The idea that existing shareholders should get first dibs when companies raise money, rather than diluting interests by force, is seen as somewhat peculiar in the rush of the US capital markets. But it is a concept guarded with quasi-religious zeal in the Square Mile (and is indeed entrenched in British corporate law).
Those aware of any threat have reviewed the capital raising launched by the government last month will, among other things, look at whether there were lessons learned from the relaxation of pre-emptive rights during the pandemic. In April 2020, the usual limits for non-pre-emptive placements, of 5-10 percent of share capital, was lifted for eight months up to 20 percent in an effort to facilitate and expedite urgent capital acquisitions.
Do not be afraid. Mark Austin, the Freshfields Bruckhaus Deringer partner who leads the review process for the Treasury, said the principle of pre-emption is a “long-standing and sacred feature of the London market and is not up for debate”.
He added that the review “will explore ways to make it faster and cheaper to raise money, with better use of technology, while giving more choice of fundraising structures to issuers and with greater involvement of smaller shareholders”.
It is both welcome and overdue. There is currently an abyss for issuers, between raising a small amount of money quickly and cheaply through a (non-advance) accelerated book building and going around the whole pig with a rights issue, which is a few can take weeks of preparation, requires a prospectus and is open for 14 days in the market.
Some ideas being considered have been overlooked before. After the difficulties that banks had in the financial crisis to raise money, a proposal (which went nowhere) was that the UK adopts Australian model, known by a variety of acronyms including Rapids and Areo. It divides the transaction into the larger institutional portion, which is completed within a few days, and the retail offering, which takes longer. Pre-sale pre-sale is respected and market risk is quickly reduced, which means a cheaper process.
The adoption of such a structure undoubtedly presents legal and logistical challenges in the UK. But the ability to raise money quickly and in a way that is fair to all investors is more important to London’s competitiveness as a global center than, for example, the wider use of dual-class equity structures, as suggested by the Hill review earlier. this year . Fast-growing companies need money with some regularity. Competing to buy assets, or companies, in markets like the US requires fast and reliable fundraising.
However, given the importance of pre-emption preference, the review may usefully suggest that some of the structures around it be strengthened. It’s strange – though terribly British – that the group that oversees the approach to something so crucial is so poorly defined.
The members of the Voorkoop group are drawn from bodies that represent different types of investors or market participants. But his makeup is not widely known and it does not meet regularly. There is a website that is impossible to find (unless someone send it kindly to you).
Several people close to the Pre-Emption Group said they were unsure of the process for To replace Simon Fraser, the popular and respected chairman who died last year after playing a critical role in easing the rules to enable emergency fundraising. The nomination of a chairperson may fall to the Financial Reporting Board, which acts as the secretariat for the group. But no one seems completely sure. “None of this stuff has been written down,” one concerned person muses.
The coronavirus pandemic underlined the importance of rapid access to capital in a crisis and the influence of the Advance Purchase Group to protect the practical application of this basic investor protection. The continuing importance of pre-emption in the London market is a reason for more clarity, more transparency and for strengthening the processes around it.