New ABI Guidance on Authorities to Allot Shares
The Association of British Insurers (ABI) has recently issued new guidance on the extent of the general allotment authority (under s.80, Companies Act 1985) which it regards as acceptable for listed companies.
The new guidance replaces the ABI’s previous guidance that a resolution seeking general authority to allot one third of the existing issued ordinary share capital or the amount of unissued but authorised ordinary share capital (if less) would be regarded as routine (meaning that institutional investors who are ABI members will accept and approve it). The ABI will also now regard as routine a resolution authorising the allotment of an additional one third of the issued share capital provided that:
- the additional one third authority may only be used for fully pre-emptive rights issues; and
both the additional authority and the general authority must expire on the date of the next annual general meeting (if a general allotment authority only is obtained, that authority may be for a period of up to five years).
The ABI recognises in particular the case for ensuring that pre-emptive issues should operate within the overall headroom of one third of the company’s prevailing market value (rather than by reference to the number of shares issued). The application of this principle is not particularly clear. However, the guidance appears to state that where the additional authority is taken and:
the number of shares issued exceeds the aggregate nominal amount of one third of the issued share capital; and
the shares are issued in whole or in part by way of a fully pre-emptive rights issue where the proceeds exceed one third (or such lesser relevant proportion) of the pre-issue market capitalisation of the company,
then the ABI will expect all members of the board to stand for re-election at the first annual general meeting following the share issue.
The new guidance has been issued in response to recommendations made by the Rights Issue Review Group in its report of November 2008. That report contains numerous other recommendations for the streamlining of the rights issue process, including a proposal to shorten the statutory and non-statutory rights issue offer period from 21 days to 14 days. Further developments in response to the recommendations will be considered in future editions of Dorsey eUpdate.
The ABI will review the guidance after three years and in the meantime will monitor the use of the additional headroom. Whilst the guidance is not legally binding, many institutional shareholders use it as the basis for their voting decisions and compliance is therefore considered best practice for companies whose shares are traded on the public markets.
The ABI's guidance with respect to shareholders' pre-emption rights remains unchanged. A disapplication authority in respect of 5 per cent. of ordinary share capital in any one year will be considered routine and the cumulative limit of 7.5 per cent. within a rolling 3-year period continues to apply to use of such authorities.
A longer notice period for extraordinary general meetings? BERR Consultation
Since 1 October 2007, the Companies Act 2006 has allowed general meetings of companies (other than annual general meetings of public companies) to be called on 14 clear days’ notice regardless of the type of resolution proposed. However, the Shareholders’ Rights Directive will reverse this development for companies listed on a regulated market unless certain conditions are complied with.
Following implementation of the Directive (2007/36/EC), which must be no later than 3 August 2009, listed companies will be required to call general meetings on at least 21 clear days’ notice unless:
the calling of general meetings on 14 days’ notice has been approved by a resolution of the shareholders passed at the last annual general meeting; and
shareholders have been offered the facility to vote by electronic means accessible to all shareholders.
Where these two conditions are met, meetings (other than the annual general meeting) may be convened on 14 clear days’ notice. At the present time it is not clear how companies can satisfy the requirement for provision of an electronic voting facility and BERR is currently consulting on this. The deadline for responses is 30 January 2009.
Listed companies wishing to call a general meeting on 14 days' clear notice after 3 August 2009 should consider passing a resolution to opt out of the 21 day notice requirement at their next annual general meeting. The resolution will need to be renewed annually thereafter.
FSA clarifies disclosure obligations for PDMRs who grant security over their shareholdings
Following the “trial by tabloid” of David Ross at Carphone Warehouse, the FSA confirmed on 9 January that the grant of security over shares (by the creation of a security interest such as a pledge, mortgage or charge) is a notifiable transaction under the Disclosure and Transparency Rules (DTR 3). Directors and others who fall within the definition of “persons discharging managerial responsibilities” (PDMRs) (and their connected persons) are required to notify the company of transactions undertaken by them in the shares of the company within four business days of the day on which the transaction occurred. The company must then make an announcement of the transaction not later than the end of the business day following the receipt by it of the notification.
Although the FSA will not take enforcement action in respect of any prior failures by PDMRs, their connected persons and issuers to make the necessary DTR disclosures, all non-disclosed grants of security over shares should be notified to the market as soon as possible and by no later than 23 January 2009.
In addition to being subject to the Disclosure and Transparency Rules, companies listed on the main market are required by the Listing Rules to adopt a code on dealings in their securities by PDMRs which is no less rigorous than the Model Code annexed to Listing Rule 9.
The Model Code requires advance clearance by the chairman or designated director of all dealings by PDMRs in securities of the listed company and includes a specific requirement for clearance to be sought and obtained before security is granted. The FSA has stated that it sees no basis on which a director could have a legitimate excuse for not seeking clearance in advance where the company’s securities are to be used as collateral for a financing transaction and it expects listed issuers to deal with Model Code breaches by their directors.
Although DTR 3 does not apply to AIM companies, they are required by the AIM Rules for Companies to disclose all "deals" by directors and the definition of deal catches the grant of security over shares and so directors of AIM companies and the issuer companies are also required to disclose such deals.