A treasury review wants to make capital raising more efficient. But when it comes to sacred traditions, the City of London prefers refinements over radical reform. A pressure by issuers to water down pre-emptive rights – which gives shareholders first refusal on new equity – is in line with this.
The principle of pre-emption is a “sacred” feature of the London market, according to Mark Austin, the lawyer in charge. Companies are therefore focusing on a post-pandemic opportunity for dilution.
Last year, market officials raised the limit on issues that did not require pre-emptive rights allocations from 10 percent to 20 percent of a company’s shares. It has helped grateful UK businesses raise £ 43bn amid restrictions, despite protests from some retail investors. Proponents of reform also point to the success of U.S. markets in supporting growth companies. Pre-emptive rights are much less important here.
The Quoted Companies Alliance, a membership organization, calls for a permanent doubling in the pre-sale limit. This will help CEOs and CFOs in at least two situations. They can respond more quickly to short-term opportunities, such as corporate brand sales. They can also raise money more easily to finance fast-growing cash-burning companies.
There are good arguments for speeding up secondary equity financing. This can be achieved without draining pre-emptive rights. It can take months for companies to put together a rights issue prospectus. Reducing information requirements will reduce costs and save time.
Meanwhile, easing pre-emptive rights will make investing in growth companies less attractive. Option theory indicates that subscription rights are especially valuable for shareholders in businesses with volatile share prices and a need to raise large amounts of external equity.
The capital raising process can and must be improved. But looser pre-emptive rules will erode investors’ confidence counterproductively. It will only push up the cost of share capital for companies.
Deadlift unwelcome proposals without causing outrage is another great City tradition. This is how Austin should handle the QCA’s proposal.