WHEN STRUCTURING fundraisings in the last 12 months, a number of listed companies have chosen to use a placing and open offer structure. Recent examples include main market companies such as Sportingbet, Stobart Group and JJB Sports, as well as AIM companies such as Noventa and Healthcare Locums. Good corporate governance is often named as one of the main reasons, but why choose this structure?
For all companies, whether on AIM or the main market, an institutional placing is still the most common structure. For AIM companies, an institutional placing is much simpler, quicker and cheaper: it can be usually structured so as to fall within an exemption from the prospectus rules, Thus, it avoids the requirement to produce a UKLA-approved prospectus, which involves significant time and expense on the part of the company. However, for companies listed on the main market, this exemption only applies if the placing is less than 10% of the issued share capital of the company.
The main disadvantage of an institutional placing is that it is an offering made only to selected subscribers, which may include some existing shareholders. Those not falling within the definition of a qualified investor or another exemption to the Prospectus Rules will be excluded.
The placing and open offer structure takes the form of an institutional placing but is combined with an open offer to existing shareholders. Any shares not taken up by existing shareholders are placed with the institutional investors who participated in the placing element.
Under the prospectus rules, a company (including those on AIM or the main market) is required to produce a UKLA-approved prospectus if it makes an offer to the public. With the introduction of changes from 1 August this year, this has meant that any company with more than 150 shareholders that are not qualified investors in any EEA state, as well as any company raising more than €5m (£4.3m), is required to publish a prospectus if it is offering shares to existing shareholders or more widely than an institutional placing. This is in addition to the requirement for companies on the main market to produce a prospectus when they are issuing 10% or more of their existing share capital.
A fundamental cornerstone of corporate governance is the extent to which publicly traded companies dis-apply pre-emption rights. In particular, the pre-emption group has set out a statement of principles aimed at companies with a premium listing on the main market with which such companies are expected to comply. This statement of principles says that no more than 5% of the company’s issued share capital should be issued in any one year for cash and no more than 7.5% in any three-year rolling period.
Placings and open offers by main market companies
Companies listed on the main market are required to produce a prospectus where they are issuing 10% or more of the issued share capital of the company. This requirement has made the placing and open offer structure particularly attractive to main market companies when they are: issuing more than 10% of their issued share capital; not giving a discount of more than 10%; and seeking to give all shareholders the opportunity to participate in a discount or to protect themselves from dilution. Indeed, the last twelve months have seen a number of placings and open offers for main market companies, which have either been at a discount of up to about 6% or been fundraisings conducted at a premium to the market price, but where a significant number of shares are to be issued (e.g. about 50% of the existing issued share capital is to be issued).
Under the listing rules, main market listed companies cannot use the placing and open structure where the discount to be given is greater than 10% unless they have a pre-existing authority or specific authority from shareholders. Indeed, the ABI has suggested that the rights issue is a preferred structure for any fundraisings where the discount is greater than 7.5% or the dilutive effect of an offering is greater than 15-18%, as a matter of good governance. A key difference between a placing and open offer and a rights issue is that shareholders cannot trade their rights to subscribe in a open offer nor benefit as a lazy shareholder if there is increased demand for shares not taken up by existing shareholders. Therefore, shareholders will lose that benefit, unless a more unusual compensatory open offer structure is used, if they cannot take up their rights under an open offer. The use of prospectuses for a rights issues is also currently udner review. It may be that rights issues will become more attractive than open offers if rights issues benefit from a proportionate prospectus, for main market listed companies.
Placings and open offers by AIM companies
For companies whose shares are admitted to trading on AIM, the pre-emption group’s guidelines and ABI’s guidelines are less vigorously applied, although AIM companies are encouraged to comply. One of the consequences of this is that placing and open offers are more common with AIM listed companies, even where the discount is greater than 7.5% or the dilutive effect is greater than 15-18%, as there is no AIM equivalent to the listing rule requirement of not giving a greater than 10% discount without shareholder approval.
A further reason why the placing and open offer structure can be particularly attractive for AIM companies is that AIM companies often tend to be smaller than main market companies and can benefit from the prospectus rules changes. Accordingly, AIM companies can offer shareholders the ability to participate in a placing and open offer without going to the additional time and cost of preparing a UKLA-approved prospectus, provided that they fall within the exceptions. This has resulted in the recent trend where an institutional placing is combined with a small open offer element.
In times of market volatility, some companies are forced to offer a significant discount or carry out more dilutive placings in order to continue to finance the company. Due in part to the volatility, speed is often a key consideration and the most popular form of fundraising is still the institutional placing, despite any corporate governance concerns.
For main market companies, the placing and open offer structure remains popular where a prospectus is required and the issue is either quite dilutive or at a discount of up to 10%. However, issues beyond this should be structured as a rights issue, as a matter of good governance.
On AIM, placings and open offers are a popular structure where issues fall within the an exemption to the prospectus rules. This structure acknowledges good corporate governance where significant discounts are issued or issues are particularly dilutive.
Alexander Keepin is a corporate finance partner in Berwin Leighton Paisner’s public markets team