Smaller investors should not be edged out when listed companies raise funds in coming weeks, according to a letter sent by several prominent fund managers and the bosses of the country’s largest investment platforms and online stockbrokers.
Because of the coronavirus pandemic, the normal 5% pre-emption rules that give all existing stockholders first refusal on issues of new shares has been suspended until September.
With some companies selling their shares at major discounts, this means retail investors are often being doubly disadvantaged.
An open letter has been sent to chief executives of all listed UK PLCs raising concerns “that UK retail investors are not receiving their entitlements to participate in these often discounted fundraisings”.
Published on Monday, the letter was signed by the founders, chief executives and chairmen of, among others, Hargreaves Lansdown, AJ Bell, Standard Life Aberdeen, Interactive Investor, The Share Centre, Killik & Co and 888 Holdings, as well representatives of the Quoted Companies Alliance and ShareSoc, together with small cap fund managers Andy Brough and Gervais Williams.
“While we recognise the need for businesses to raise equity capital in an expedited fashion, we are concerned that no protections are being afforded to retail investors,” the letter said.
New shares have been sold “at discounts to already depressed prices” by companies including a £247mln fundraising by Asos (LON:ASC), a £200mln placing for Hays (LON:HAS), a £20mln top-up for Hotel Chocolat (LON:HOTC), the massive £1bn raised by Informa (LON:INF), £15mln for Joules (LON:JOUL), £16mln for MJ Gleeson (LON:GLE), a £216mln equity issue for SSP (LON:SSPG) and £166mln for WH Smith (LON:SMWH).
“We encourage UK PLCs and their boards to protect individual shareholders and employees by respecting their rights to participate alongside the institutional investors, management teams and board members,” the letter said.
Rather than just practising good governance, companies should reward retail investors for their “unprecedented support for UK PLCs” in recent weeks, the letter said, pointing out that smaller investors have represented more than 20% of the volume on the FTSE All Share, with 60-70% of the volume being buy orders. Moreover, according to the Office for National Statistics, retail investors own 9.5% of FTSE 100 companies and 19.4% of smaller UK listed companies.
“UK stockbroking platforms are reporting over three-fold increases in new account openings. They can and should represent a powerful source of funds for listed companies,” the letter said.
If companies are worried about the administration and timing of getting small shareholders involved, the signatories highlighted financial technology, such as Primary Bid, that can enable small investors to take part in placings.
The group of City figures called for UK PLCs to consider FCA guidance by “exercising their right to be consulted on, and to direct, bookrunners’ allocation policies” and ensure a tranche of shares is available each time for private investors as part of any fundraise, and for all deal advisers to “ensure retail investors are part of their thinking when structuring a fundraise”.
Temporary measures on
At the start of this month, the Pre-Emption Group, an industry body comprised of listed companies, investors and intermediaries, published a statement recommending a loosening of expectations for issuances during the coronavirus crisis.
Pre-emption rights exist to ensure that existing investors have first-refusal rights - but not an obligation - to invest in future fundraising rounds of the company in order to maintain their level of shareholding in a company.
Normally, these are set at 5% for general corporate purposes, with an additional 5% for specified acquisitions or investments.
The Pre-Emption Group on 1 April recommended “investors consider supporting issuances of up to 20% on a case-by-case basis”, rather than 5%, with a recommendation to apply this until 30 September.
Financial regulator the FCA welcomed the recommendation but called for ‘soft pre-emption’ for share placings, where the bookrunner allocates shares to investors in accordance that tries to replicate the existing shareholder base.
It admitted that it was “likely not all shareholders will be able to participate”.
So-called ‘soft pre-emption’ (in relation to a placing of shares) is where the bookrunner allocates shares to investors in accordance with an allocation policy that seeks, to the extent possible within the constraints of the exercise, to replicate the existing shareholder base. The limitations of the exercise mean, however, that it is likely not all shareholders will be able to participate.