The Pre-emption Group’s Statement of Principles and the additional 5%: Glencore under fire for non pre-emptive placing
Published on 19th Oct 2015
Glencore, the FTSE100 company, has provoked the ire of institutional investor bodies by undertaking a non pre-emptive placing using increased shareholder authorities obtained under revised guidelines (the Statement of Principles) published by the Pre-emption Group (Group) earlier this year.
Whilst compliance with the Statement of Principles is not mandatory, it is observed by the overwhelming majority of public companies and is endorsed by the Investment Association and the National Association of Pension Funds, as representatives of institutional shareholders and investment managers.
Background: the role of pre-emption rightsPre-emption rights are given to shareholders of UK companies by the Companies Act 2006 whenever a company issues shares for cash. These rights enable shareholders to avoid dilution of their investment as a result of new share issues by requiring such new equity to be offered to existing shareholders first, pro-rata to their existing shareholdings. As the Group notes: “Pre-emption rights are a cornerstone of UK company law and provide shareholders with inappropriate dilution of their investments“. These statutory pre-emption rights can be disapplied by special resolution. For listed companies, this means taking annual “general” authorities at each AGM which can, where necessary, be supplemented by additional specific authorities for use in connection with a proposed transaction. Two resolutions are usually proposed at listed company AGMs in order to obtain appropriate general authorities. First, a general “allotment” authority (requiring an ordinary resolution) to authorise the directors to allot shares (usually limited to an amount equal to one-third of a company’s existing issued share capital, sometimes increasing to two-thirds in connection with a fully pre-emptive rights issue). Second, a special resolution disapplying statutory pre-emption rights. This second authority applies where the company is proposing to issue new shares for cash and is the focus of the Group’s guidance. Under its previous guidance, the Group expected general disapplications to be generally limited to an amount equal to 5% of the company’s current issued share capital. |
The revised Statement of Principles
The Group’s Statement of Principles was revised in March 2015. We summarised the key elements in this earlier OC Corporate Law blog post, but the key aspect of the revised guidance in Glencore’s case was a new provision allowing companies to increase pre-emption disapplication to 10%, provided that the company confirms, in the AGM notice proposing the resolution, that the additional 5% will be only used for an acquisition or specified capital investment which is announced contemporaneously with the issue, or which has taken place in the previous six months and is announced at the same time as the issue (a Permitted Purpose).
Glencore’s placing and Investment Association reaction
Glencore took the additional authority permitted by the revised Statement of Principles at this year’s AGM. The relevant resolution, in line with emerging market practice, was framed to give the directors unrestricted authority to allot new shares equal to 10% of its existing issued share capital free of pre-emption rights, with the restriction that the additional 5% be used for a Permitted Purpose not forming part of the resolution itself, but instead forming an intention statement in the notes accompanying the resolution. This read:
“The Board intends to adhere to the provisions in the Pre-emption Group’s Statement of Principles, as updated in March 2015, and not to allot shares for cash on a non pre-emptive basis pursuant to the [disapplication] authority… in excess of an amount equal to 5 per cent of the total issued ordinary share capital of the Company excluding treasury shares… in each case other than in connection with an acquisition or specified capital investment which is announced contemporaneously with the allotment or which has taken place in the preceding six-month period and is disclosed in the announcement of the allotment.”
Less than six months later, in September this year, Glencore – faced with serious loss of confidence in the strength of its balance sheet – undertook a non pre-emptive equity placing of new shares equal to 9.99% of its existing share capital (the maximum it could undertake under the authorities obtained at the AGM without triggering the requirement to publish a prospectus). The placing was not for any Permitted Purpose. In its announcement of the placing, Glencore noted that:
“In the explanatory notes to the Company’s notice of AGM, the Board stated that it intended to adhere to the provisions in the Pre-emption Group’s Statement of Principles as updated in March 2015, and not to allot shares for cash on a non-pre-emptive basis pursuant to the authority granted pursuant to [the disapplication resolution] granted at that AGM in excess of the amounts stated in the Statement of Principles, otherwise than in connection with an acquisition or specified capital investment. In light of the matters set out in Glencore’s announcement of 7 September 2015, the Board has reconsidered its intention, and now considers that it is in the best interests of Glencore to use the authority granted…. at the AGM in order to execute the Placing in a timely fashion.”
Two days after announcement of the placing, the Investment Association, a key endorsing body of the Statement of Principles, issued a press statement, in which it commented:
“Whilst shareholders generally recognise that the company needed to strengthen its balance sheet, the use of the authority in this manner is a serious and unnecessary breach of the Principles. Most importantly, there is no evidence of any suitable consultation with existing shareholders. This sets a very damaging precedent for market practices. Pre-emption rights are a vital shareholder protection. The Investment Association, the NAPF and their members regard the Principles as a critical mechanism for safeguarding shareholder interests…. Glencore’s actions fell well short of the standards expected by institutional investors, agreed under the Principles and embraced by the company as recently as May of this year.”
Glencore is now reportedly in discussions with the Investment Association on the fallout from the placing.
Osborne Clarke comment
Glencore’s placing was undertaken in a crucible of press speculation and collapsing investor confidence, and so it is not surprising that Glencore’s directors chose to utilise the full authority given to them by shareholders at its earlier AGM to maximise its equity injection. However, the Investment Association clearly took issue with the lack of discussion with investors in advance of the placing (notwithstanding the time pressure the Glencore board would have been under). As Robert Swannell, the Chairman of the Group, commented at the time of the introduction of the revised Statement of Principles:
“The revised Statement provides a framework for early and effective dialogue between a company and its shareholders…. it’s not a rule book. The Pre-Emption Group strongly supports this focus on engagement.”
From a technical legal perspective, the resolution was framed in such a way that the directors were able to disregard the statement of intention which accompanied the resolution, without prejudicing the legal efficacy of the disapplication. As we note above, Glencore were in line with emerging market practice in this. Given that the Glencore placing represents the first high-profile situation in which the additional headroom was used other than for Permitted Purposes, it will be interesting to see whether the Group firms up the Statement of Principles in this regard – by requiring the Permitted Purpose restrictions on the use of the additional 5% to form part of the disapplication resolution itself, “unauthorised” use of the additional headroom permitted by the revised Statement of Principles could more robustly be curtailed.
