Recent trends in secondary equity offerings

This article analyses key issues in recent secondary equity offerings, in particular current underwriting issues, alternative structures, use of secondary issues to fund acquisitions, pre-marketing, other key current issues and European legal changes.

 This article is part of the PLC multi-jurisdictional guide to Capital Markets. For a full list of contents visit

Nicholas Holmes and Caroline Chambers, Ashurst LLP

The scale of follow on equity issuance by listed companies in 2008 and 2009 was significantly higher than in previous years. In 2009, 59 FTSE 350 companies raised an estimated GB£50 billion (as at 1 January 2011, US$1 was about GB£0.6), compared to GB£15.5 billion in total for the years 2000 to 2007. The popularity of equity issuance led to interesting practical and legal issues, and existing market practice was significantly developed during the period, partly due to the Report to the Chancellor of the Exchequer in November 2008 by the Rights Issue Review Group (RIRG Report). 2010 saw reduced equity issuance as many companies had raised capital when needed in either 2008 or 2009. However, market practice has continued to develop during 2010. This article analyses some of the key issues and sets them in context, in particular:

  • Background to secondary equity offerings.

  • Current underwriting issues.

  • Alternative structures.

  • Use of secondary issues to fund acquisitions.

  • Pre-marketing.

  • Other key current issues.

  • European legal changes.


Background to secondary equity offerings

What is a secondary offering?

In the UK market, there are two types of follow on or secondary offering, pre-emptive and non-pre-emptive:

  • A pre-emptive offering is an offering made to existing shareholders pro-rata to their existing holdings.

  • Non-pre-emptive offerings are offers of shares to either existing or potential new shareholders which do not relate to the number of shares already held.

Pre-emptive offerings. These consist of:

  • Rights issues. A rights issue is an offering of shares to existing shareholders where the right to acquire the new shares is tradeable in itself. Shareholders who choose not to take up their entitlement are compensated to the extent that if the shares not taken up can be sold in the market at a premium to the offer price, they get the premium.

  • Open offers. An open offer is similar to a rights issue, save that the right is not tradeable and there is no sale of rights. Open offers are often combined with a placing (see below).

Non-pre-emptive offering: placing. A placing is a non-pre-emptive offering where new shares are offered to existing or potential new shareholders. The process is usually quicker than a pre-emptive offering, because placings are usually structured so that they are neither a public offer nor of sufficient size to trigger a prospectus (see below, Impact of the Prospectus Directive).

Which type of offering the company chooses depends on a number of factors, such as timing, amount to be raised, level of discount to offer price and identity of target investors.

Impact of the Prospectus Directive

Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading (Prospectus Directive) was implemented in the UK on 1 July 2005. Since then, a prospectus has been required where there is an offer to the public of transferable securities and/or an admission to trading on a regulated market of transferable securities, in each case unless a suitable exemption can be found.

In the case of existing listed issuers looking to raise additional equity finance, the most common exemption for the public offer element is that the placing is to professional investors only. For the admission to trading on a regulated market test, the most common exemption is that less than 10% of the company's share capital is being admitted to trading over any 12 month period. The admission to trading limb is not relevant for AIM companies as AIM is not a regulated market. Therefore it is possible for AIM companies to place more than an additional 10% of the company's shares with professional investors, without the need for a prospectus.

A prospectus is in practice very likely to be required for a pre-emptive offering, as the company's shareholders typically consist of more than 100 non-professionals, therefore an offer to existing holders constitutes an offer to the public for which there is no suitable exemption. The requirement for a prospectus considerably lengthens the timetable, as a prospectus can take six to eight weeks to draft and it must be approved by the UK Financial Services Authority (FSA). The Prospectus Directive has recently been amended with effect from 1 July 2012 at the latest (see below, European legal changes).




The writing of reports on rights issues (starting in November 2008 with the RIRG Report) increased in 2010 and early 2011: in particular, two reports in relation to underwriting fees have focused considerable attention on how underwriting in the UK operates:

  • The report of the Rights Issue Fees Inquiry (RIFI) constituted by the Institutional Investor Council of December 2010.

  • The report conducted by the Office of Fair Trading of January 2011 (OFT report).

These reports raised a number of issues relating to underwriting, some of which we comment on below.

Both reports note that in recent years the proportion of UK equities owned by UK institutional investors has declined from around 60% to around 40%, and that this has led to changes in sub underwriting dynamics due to the loss of potential sub underwriters. In part, the difference has been picked up by hedge funds (whose attitude and approach may be different from those of typical UK institutions and investors). However, an overall decline in the proportion of the issue that is subject to sub underwriting has occurred. The OFT report notes that 100% sub underwritten rights issues are now less common, and that the primary underwriting banks are keeping more of the principal risk.

Competitive tendering for underwriting

Both the RIFI and OFT noted that there was very little, if any, competitive tendering for primary underwriting taking place on secondary offerings by listed issuers. The OFT notes that the company's existing corporate brokers were involved in transactions as underwriters in 82 out of the 85 rights issues between 2000 and 2009 that it reviewed.

One of the reasons for lack of tendering is that companies are concerned about confidentiality, and the fear that a leak in relation to the proposed issue could lead to the company's share price going down, and also therefore a less successful outcome for the equity raise. From the company's perspective, choosing its broker as an underwriter may be beneficial as there will be less need to educate the bank, which could help shorten the timetable. One of the RIFI report's recommendations is that "Companies should, wherever possible, put the primary underwriting contract out to tender". Given that there have been very few underwritten secondary offers since publication of the report, it remains to be seen to what extent companies and banks do this in the future. Recent speculation has been that smaller companies are less likely to do this, and possibly only FTSE 100 companies may do it.

The RIFI report considers that competitive tendering for sub underwriting is worthy of further study, although respondents were generally not in favour on the grounds of practicality, based on experience of the few times it was done in the 1990s.

Sub underwriting

Set-off. In a normal sub underwriting, each sub underwriter has to take up a proportion of any unsold shares which relates to his sub-underwriting commitment. In some cases, particularly where there is a significant existing shareholder(s), the primary underwriter is required to include "set-off" in the terms of the sub underwriting. This says that each sub underwriter's commitment is instead to take up a proportion of unsold shares related to his net sub underwriting commitment. Net sub underwriting commitment means the sub underwriting commitment minus the number of shares offered to that sub underwriter as shareholder and taken up in the rights issue or open offer. So, for example, if the sub underwriter takes up its full rights entitlement, this will reduce or (if large enough) eliminate the chance of it being called on to pay up if the underwriters are called on because the issue is not 100% successful and the rights not taken up cannot be sold in the market.

Special care is needed in calculating (and therefore drafting the provision relating to) the proportion of shares to be taken up by each sub underwriter where there is set-off, to ensure that the sum of the net sub underwriting commitments (plus non sub underwritten commitments of the primary underwriters) is equal to 100% of the unsold shares.

Critics of set-off say that it is in effect giving certain professional shareholders a commission for taking up the shares, and this is not therefore treating all shareholders equally. Technically this is not correct, as they do not have to take up their entitlement under the rights issue or open offer, although in practice most do so. However, as set-off has now been positively commented on by the RIFI, the FSA is not likely in practice to object, and has not done so in the past. Favourable comments on set-off were also made by the ABI and the RIRG Report.

Until now, set-off has been seen in a minority rather than majority of pre-emptive issues. Again, it remains to be seen whether it will become more popular.

Earlier sub underwriting. The OFT report notes that companies are becoming increasingly involved in the selection of sub underwriters. It then comments on the Resolution rights issue of 2010, where the company formed a group of sub underwriters from its top ten shareholders and secured a formal commitment from them to sub-underwrite about 52% of the issue, thereby reducing the risk for the company. The structural difference meant that nearly two thirds of the 2.72% fee went to these sub underwriters. The report comments favourably on this development while noting that this may not be possible in all circumstances, particularly because the sub underwriters need to be brought inside at an early stage. In the Resolution example, the fact that the company had a very concentrated shareholder base and was therefore closer to its shareholders assisted this development. It seems unlikely that this structural change will be open to many companies.

Waterfalls. Sometimes where new investors are brought in, depending on the differing requirements among existing professional shareholders, an underwriting or sub underwriting "waterfall" is agreed. In a normal issue, obligations of underwriters/sub underwriters are in proportion to their commitments. With a waterfall, underwriters or sub underwriters may decide a different split, with some taking first or second "hits" of unsold shares.

Excess applications

Another feature making a small revival is the use in a few open offers of an excess application facility: the ability of a shareholder to apply above his pro-rata entitlement. This is not appropriate if the offer is a compensatory open offer (see below, Alternative structures: Compensatory open offers). Where there are excess applications, the terms will say that the number of shares applied for will be scaled back if there are applications for too many shares, pro rata to the number applied for under the excess application facility (but with an upper limit on the number of shares a person can apply for under the excess).

The interaction of an excess application facility with set-off (if both are used) requires careful drafting.


It has continued to be the case that companies have sought to restrict activity by underwriters which could negatively affect the success of the secondary issue. This is typically achieved by inserting a clause into the underwriting agreement, which regulates the ability of underwriters to enter into transactions involving the new shares (or related instruments) that are intended to have the economic effect of hedging or otherwise mitigating the economic risk attached to each underwriter's underwriting commitment. Typically, there is a carve-out to the restriction permitting:

  • Normal sub underwriting.

  • The underwriters to engage in ordinary course trading activity or facilitation of customer orders.

  • Transactions involving securities, derivatives or other instruments referencing a market index, where the weighting of the relevant shares in the index does not exceed a negotiated percentage.

The global co-ordinator or lead manager will also need to procure that sub underwriters agree to the same restrictions, which will then be inserted into the sub underwriting terms.

Use of larger underwriting syndicates

2009, in particular, saw an increase in the number of banks involved in underwriting syndicates and this continued in 2010. For example, on the abortive Prudential rights issue there were 33 underwriters. Given the size of that deal (GB£13.8 billion), there was clearly a need for a considerable number of underwriters, but in most instances the size of the syndicates has increased due to the desire of the company's lending banks to be involved (and of the company to involve them). This development has led to increased complexity in terms of agreeing the underlying documentation (see above, Sub underwriting: Waterfalls).

Repetition of warranties

It is now settled market practice that the company repeats the warranties at certain defined significant dates through the issue process, including on admission to trading of the relevant securities. So, in the context of a rights issue, repetition may be made:

  • At the end of the day after the ten day period during which the offer is open for acceptance.

  • On the rump placing date (the date when the unsold shares are placed in the market).

  • On the rump closing date (settlement of the sale of the rump shares, three days after placing of the rump shares).

Breach of warranty would give rise to a claim by the underwriters for damages, but not a termination right as the FSA prohibits termination post-admission. The company seeks to protect its position by negotiating certain carve-outs to this clause and these carve-outs are now becoming reasonably standard. The company typically avoids liability for breach post admission causing a diminution in the value of the underwritten shares if both:

  • The event giving rise to breach is fairly disclosed in the prospectus and any supplementary prospectus published on or before the time when the warranties are repeated; and

  • The breach arises otherwise than as a result of a breach of law or regulation or agreement, or any other default by the company or any member of its group or its respective officers and employees.

Termination rights

Both banks and companies continue to focus on termination rights in underwriting agreements. The issue here is that the bank is keen to have the right to terminate the agreement and therefore its underwriting commitment if there is an adverse change in market conditions or the business condition of the company. Conversely, the company wants the agreement to continue, particularly if the cash to be raised is needed for working capital purposes or to finance an acquisition. This is particularly the case where the acquisition is of a publicly listed target where there is a certain funds requirement. So, for example, on a takeover of a UK listed company, the UK Takeover Code (Code) requires the offeror's adviser to confirm that the offeror has cash to meet its purchase price (or confirmed access to that cash). In these circumstances, there is particular focus on both the business and market material adverse change clauses.


Alternative structures

Cash boxes

Cash boxes are commonly used for placings and rights issues or open offers and are attractive for two reasons:

  • UK statutory pre-emption rights are generally believed not to apply.

  • They may, in certain circumstances, result in the creation of distributable reserves.

It is argued that pre-emption rights do not apply, as for Companies Act 2006 (Act) purposes the issue of the new shares is treated as a share for share exchange rather than an issue for cash. The "non-cash" assets are shares in a newly incorporated company, usually incorporated in Jersey (Newco), so that no stamp duty is payable on the transfer of the Newco shares. The investment bank subscribes for the Newco shares using cash received from the proceeds of the new issue of shares by the company. The new shares are therefore exchanged for Newco shares.

The Association of British Insurers (ABI) has, in the past, raised concerns about the structure, as it perceives that it may be used to bypass pre-emption principles. These principles are promulgated by the Pre-Emption Group (a body formed from institutional investors) and state that only certain percentages of existing share capital can be issued as new shares over specified periods, to avoid dilution of existing shareholders. These concerns were raised in a letter sent to the London Investment Banking Association (now the Association for Financial Markets in Europe) and to chairmen of listed companies in February 2009. Previously, the ABI had said that they were comfortable with the structure where it was being used to raise funds for an acquisition. Companies therefore need to consider the ABI's or any other investor group's or investor's positions, if embarking on a non pre-emptive issue outside the prescribed limits.

Although Listing Rule 9.3.11 also requires pre-emption on issues "for cash", the FSA has not to date sought to prevent cash boxes on the grounds that they are in substance an issue for cash. In their Policy Statement issued in February 2010, the FSA stated (in relation to the extension of the pre-emptive requirement to overseas companies) that prevention of cash box placings is "a matter best monitored by shareholders and their interest groups".

In addition, the cash box structure can be used to create distributable reserves. In normal circumstances, section 610 of the Act requires that any premium on the issue of new shares is transferred to share premium account. This is a non-distributable reserve. However, a cash box rights (or open offer) issue structure allows merger relief to be available under section 612 of the Act and therefore this reserve may become distributable.

The Institute of Chartered Accountants in England and Wales published guidance in October 2010 (TECH 02/10) relating to the determination of realised profits and losses. The guidance states in relation to cash boxes that, going back to basic principles, the question arises as to whether the reserve is a realised profit. The guidance sets out a number of examples, but it is particularly important to note that where the funds are to be used for a specified acquisition, a distributable reserve will not be created. So, while the ABI has said that it is comfortable with a cash box structure (on a non pre-emptive offer) for a specified acquisition, it will not create distributable reserves.

It is not clear what the position would be where an acquisition target is identified and cash is raised using this structure but the acquisition ultimately fails, for example for a regulatory reason. Would the resulting reserve be distributable? It is possible that the use of cash box structures in the context of documented secondary offerings may decline in 2011 as a result of TECH 02/11, given that several recent rights issues and open offers have been undertaken on a cash box basis to create distributable reserves to fund specified acquisitions.

Cornerstone investors

A variant of early sub underwriting (see above, Underwriting: Sub underwriting), cornerstone investors have been increasingly seen on recent secondary issues. The main driver of this development has been the desire of the underwriting banks to lay off some of the underwriting risk. This has particularly been the case with rescue refinancings, where the share price has fallen too far for a pure pre-emptive offering to raise sufficient proceeds. The cornerstone investor acts as a source of additional equity capital and an actual or quasi underwriter or "early" sub underwriter. Three types of cornerstone investor can be identified:

  • A strategic "industry" investor bringing experience to the company as well as financial input, for example, the Johnston Press rights issue (June 2008).

  • An existing shareholder, for example, Colt Telecom open offer (February 2009).

  • A financial investor, for example, Management Consulting Group (see below), which can also cover sovereign wealth funds.

Cornerstone investors often invest via a firm placing alongside a pre-emptive offer, such as an open offer or rights issue. Cornerstone investors became increasingly common in 2008 and 2009 and cornerstone investors have continued to feature in 2010, for example in the placing and open offer by Management Consulting Group plc where Blue Gem LP, a private equity fund, agreed to become a long-term investor.

Compensatory open offers

Compensatory open offers are a recent development and, so far, are very rare. The structure involves the underwriting banks placing the shares not taken up at the end of the open offer period in the market so that shareholders do not lose the premium above the open offer price. This attempts to restore the value leakage for the non-accepting shareholder and is therefore similar to a rights issue in this sense, but without the nil paid dealings. The advantage is that this enables the offer to be made conditionally, for example, on shareholder approval (if existing authorities are insufficient) without extending the timetable (as would be the case with a rights issue).

Only two compensatory open offers have been seen in the UK market: Lloyds Banking Group and Songbird, an AIM listed real estate company, both in 2009. UK institutional shareholders continue to express a strong preference for rights issues unless there is a good reason to have an open offer or a compensatory open offer.

Placings and rights issues

Placings immediately before rights issues (or open offers) have become increasingly popular as a mechanic by which a cornerstone investor can be introduced to a company. Examples include Johnston Press where Usaha Tegas, a Malaysian investor, participated in a placing immediately before the rights issue.

While no difficulties arise where firm placings are combined with open offers, where they are combined with rights issues, the cornerstone investor will want to be sure that they will be entitled to participate in the rights issue (as they would not usually wish to be immediately diluted by a subsequent rights issue in which they cannot participate).

One option is to set the record date for the rights issue at close of business on the day of the shareholder meeting approving the rights issue, with the placing shares issued slightly earlier on that day, after the shareholder resolutions have been passed. At that point, the placing shares will not have been listed, and there are theoretical risks that:

  • The cornerstone investor ends up owning unlisted shares if admission never happens; and/or

  • The rights issue never takes place, for example, because of a force majeure event.

The cornerstone investor may be prepared to take this slight risk (as happened in two recent cases). The alternative structure which deals with the point is to have simultaneous issue/admission of placing shares and nil paid rights, with the rights issue specifically structured so that the cornerstone investor, as well as existing shareholders, is entitled to participate even though he is not on the register on the record date. This approach can lead to technical arguments that the rights issue is not a reorganisation for tax purposes and specific advice should be sought. A further possibility is to make the firm placing ex-rights entitlement but at a price which compensates for this.

Contingent convertible bonds

Contingent convertibles (Cocos) were used in the Lloyds Banking Group 2009 fundraising. The bonds were a debt instrument but converted into equity on certain events, for example when certain debt/equity ratios were triggered so that the company could then recapitalise. More recently, Barclays Bank has announced that it will use Cocos as a new way of incentivising senior executives and Credit Suisse has very successfully issued a tranche of Cocos to meet its regulatory capital requirements.


Use of secondary issues to fund acquisitions

The spate of equity issuance in 2008 and 2009 was primarily for working capital and balance sheet reasons, as companies sought to have a safety net during the financial crisis. Equity issuance in 2010 diminished compared to the two previous years. However, it was possible to discern a trend towards secondary issues taking place to fund acquisitions as confidence improved. Nearly half of the placings in 2010 were to raise funds for an acquisition, which is understandable given that a placing is a quicker way to raise money. It is also noticeable that many minerals and oil and gas companies sought to raise money, often by placings, to fund development opportunities, and that these fund raisings were successful due to the popularity of these types of company in the financial markets in 2010.

Key issues for early discussion are whether the secondary equity issue should be conditional on the acquisition completing and whether the acquisition should be conditional on the secondary equity issue completing.

The possibility of the acquisition not proceeding needs to be dealt with in one way or another. The issue is that equity financing once raised is difficult to return in these circumstances. One solution is to use a standby underwriting combined with bridge financing. The standby structure involves a commitment by the underwriting banks to raise equity capital at a future date once the acquisition has completed. An alternative is intermediate debt with no standby underwriting (with the issuer taking the risk that no equity issue follows). Alternatively, the company can raise equity unconditionally but explain to investors that if the acquisition does not complete, the company will use the proceeds for general corporate purposes and other acquisitions or return surplus cash to shareholders.



Pre-marketing of secondary issues has become more prevalent in the last few years due to bank and company concerns regarding the success of the proposed issue, particularly bearing in mind that many companies were seeking new funds in a rescue situation. Pre-marketing has traditionally been viewed as an area of concern for confidentiality reasons and the need to bring shareholders and potential investors over the wall (that is, to inform them of the deal, which is inside information, therefore preventing any further dealings). However, market participants have refined the practice over recent years and, provided a defined procedure is used, there are now less concerns about the practice. The procedure usually follows the order set out below:

  • Preparation of a script and possibly slides where there is to be a formal presentation. These materials are verified to ensure consistency with the draft prospectus, to check key facts and figures and that there is nothing material in the presentation that is not in the prospectus.

  • Investors are approached (initially on a no-names basis to ask if they accept becoming an insider and outlining the consequences of the investor becoming an insider) usually during a telephone call on a recorded line and, in addition, a formal meeting may take place. Confidentiality agreements may be signed before the call or the meeting, depending on the nature of the investor.

Generally, pre-marketing will be to a very restricted number of individuals. However, there is no set number which is generally held to represent acceptable market practice. Obviously, the larger the number of individuals brought over the wall and the longer the period between the approach and the announcement of the issue, the greater the confidentiality concerns. If the issue does not proceed, a "cleansing" announcement to the market may be required to address any selective disclosure issues and to enable the investors who have been brought inside to recommence dealings in the company's shares. In appropriate cases, separate US law advice should be taken as similar issues arise under US law.

Pre-marketing is likely to continue to grow in popularity as more secondary issues take place to fund acquisitions, due to the need to ensure the success of the issue to obtain guaranteed funds.


Other key current issues

Use of irrevocable undertakings

The need to obtain sufficient certainty in respect of the success of the deal has led to increased use of irrevocable undertakings on pre-emptive offerings, that is, a commitment by shareholders to take up their entitlements (or not to take up, as the case may be). If a shareholder chooses not to take up his entitlement, the banks can then approach other sources of funding, for example, a cornerstone investor and firmly place those shares, avoiding the threat of "overhang".

Other issues should be considered, for example, related party roles and the Code. The Code may be relevant if the shareholder will control 30% or more of the company's share capital, as this could lead to a compulsory bid under Rule 9 of the Code. For example, in the Vernalis placing and open offer in February 2010, Invesco Asset Management Limited, an existing shareholder, agreed to take up its open offer entitlement and to subscribe for, subject to clawback, up to 46% of the company's share capital in the placing. The UK Takeover Panel granted a conditional Rule 9 waiver so that Invesco was not required to make a mandatory bid for Vernalis, subject to shareholders approval, with Invesco not voting.

The underwriting banks will also need to consider whether the proportion of the offer covered by the irrevocable should be underwritten. Sometimes funds to pay for the shares may be obtained in advance from the relevant shareholder(s), and held in an escrow account pending admission of the new shares, in which case underwriting will not be required.


On 15 April 2010, the FSA published its report to HM Treasury on the implementation of the recommendations set out in the RIRG Report. The FSA concluded that a consultation on rule changes to facilitate compensatory open offers was not needed. However, it noted that it may be useful to clarify that requirements in Listing Rule 9.5.4R and Listing Rule 9.5.5R relating to rights issues apply equally to compensatory open offers. These requirements concern the settlement of compensation to non-accepting shareholders and the announcement of offer and rump placing results.

It also suggested that a rule should be introduced to set the minimum duration of an open offer subscription period to ten business days, to mirror the requirement set out in the London Stock Exchange's Admission and Disclosure Standards. These changes were consulted on in the FSA's consultation paper CP 11/1. The consultation also sought to clarify the length of the rights issue subscription period. The RIRG Report recommended that this be set at ten business days. However, the changes made to the Listing Rules did not set out when the first or last business day was. This has led to some confusion which it is hoped will be clarified shortly.

Allotment resolution

The ABI published new guidance relating to shareholder approval for allotment resolutions in January 2009. The guidance permits shareholders to grant an authority to allot new shares over a further one third of existing issued share capital (beyond the general authority of one third), where the additional authority is only to be used for a fully pre-emptive rights issue and where the authority will expire on the date of the next annual general meeting. This development was welcomed by the market and, in 2010, most FTSE 100 companies took the additional one third authority. However, one or two institutional investors have recently started to vote against these resolutions at annual general meetings, as they argue that the ABI only intended the guidance to be taken advantage of during the financial crisis.


European legal changes

Prospectus Directive

Directive 2010/73/EU amending the Prospectus Directive and Directive 2004/109/EC on transparency requirements for securities admitted to trading on a regulated market and amending Directive 2001/34/EC (Transparency Directive) (Amending Directive) was published in the Official Journal on 11 December 2010. This means that the Amending Directive will come into force on 31 December 2010 with a transposition deadline of 1 July 2012. The amendments aim to reduce some of the obligations which were felt to be unnecessarily onerous for smaller companies. Changes which may be relevant for secondary issues include the following:

  • The threshold for the exemption for offers to fewer than 100 non-qualified investors per member state will increase to 150.

  • There will be a reduced disclosure regime for prospectuses for rights issues made on a fully pre-emptive basis.

  • Changes to the form and content of the prospectus summary.

Some member states will implement the measures early. The UK Government has already announced that it will implement early the first measure referred to above and that it will consult early in 2011 on implementing the other changes. It is possible that the changes will affect market practice in the UK as UK rights issues tend to disapply statutory pre-emption rights so that overseas shareholders can be excluded where there are problematic securities laws issues (for example, Australia and Japan). In some cases, fully pre-emptive issues are likely to be made using the London Gazette to comply with the pre-emption requirement for non-EEA shareholders.


On 8 December 2010, the European Commission (Commission) announced a review of Directive 2004/39/EC on markets in financial instruments (MiFID). The review covered 148 questions and closed on 4 February 2011. There are two particular areas of particular concern for equity capital markets practice:

  • The Commission has proposed a change that would, in effect, result in the abolition of the UK corporate finance contact exemption. This exemption permits the bank, in an underwriting or placing context, to treat placees as corporate finance contacts, without the benefit of investor protections under MiFID.

  • The Commission wants to give detailed, prescriptive guidance on areas which, in the Commission's view, may involve conflicts of interest, such as how to allocate shares in a placing, even though no problems with current practice have emerged in the UK.

The outcome remains to be seen. The changes are on an accelerated timetable and we expect the proposals to be implemented in the UK by 2013.

CESR guidance on prospectuses relating to mineral companies

The Committee on European Securities Regulators (CESR) (now replaced by the European Securities and Markets Authority) issued guidance on preparing prospectuses when the Prospectus Directive came into force. This is widely used throughout Europe as the market standard. The guidance contains recommendations regarding disclosure by mineral companies.

On 23 April 2010, CESR published a consultation document on proposed amendments to that particular part of the guidance. The proposed amendments seek to:

  • Establish clear minimum disclosure standards.

  • Amend the rules on when a competent person's report (CPR) is required.

  • Clarify which international standards may be used.

  • Establish content requirements and competence and independence criteria for the CPR.

  • Change the cash flow forecast requirements.

We understand that a feedback statement will be published in early 2011, with the changes to be implemented shortly thereafter.


Contributor details

Nicholas Holmes

Ashurst LLP

T +44 20 7859 2058
F +44 20 7638 1112

Qualified. England and Wales, 1994

Areas of practice. Equity capital markets; M&A; structured products and equity derivatives.

Recent transactions

  • Advising Morgan Stanley, JP Morgan Cazenove and NM Rothschild in relation to Songbird Estate's GB£1.03billion placing, compensatory open offer, preference share issue and new facility.
  • Advising Citi, RBS Hoare Govett, Morgan Stanley and Lehman Brothers in relation to Imperial Tobacco Group's GB£4.9 billion rights issue.
  • Advising Citi, RBS Hoare Govett, Barclays Capital, BNP Paribas, HSBC, Lloyds TSB and Société Générale in relation to Rexam's GB£350.7 million rights issue.
  • Advising Citi and JP Morgan Cazenove in relation to Lonmin's US$457 million rights issue.

For more details of recent transactions, publications, and so on, see full PLC Which lawyer? profile here.

Caroline Chambers

Ashurst LLP

T +44 20 7859 2918
F +44 20 7638 1112

Qualified. England and Wales, 1996

Areas of practice. Equity capital markets.

Recent transactions

  • Advising on prospectus content and the Listing and Disclosure and Transparency Rules.
  • Advising on accountant engagement letters and legal opinions.

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