Institutional Investor Committee publication follows concern about companies’ costs of raising capital and the fees paid to advisers and underwriters
The Institutional Investor Committee (the IIC) published guidance (the Guidance) on 18 May 2011 for listed companies on how to conduct issues of new equity, particularly rights issues, by containing “leakage of value” to advisers, particularly banks and underwriters. The Guidance aims to help the capital-raising “process become cost-effective, transparent and more efficient. It outlines potential issues and suggests questions for companies to ask their advisers both before and during the rights issue process”.
The Guidance follows concern amongst institutional shareholders about the increase in both the advisory and underwriting fees paid, and discount to market price at which equity was issued, by companies during and after the financial crisis. This concern was expressed in the findings of the Rights Issue Fees Inquiry (the Inquiry) in December 2010 and the Office of Fair Trading Market Study into underwriting fees that was published in January 2011. The Guidance, in the words of the IIC press release:
“….follows mounting shareholder concern and publication last year of the [Inquiry], which concluded that a significant portion of the fees paid by companies is not a good use of shareholders’ money. A subsequent OFT report said the onus was on companies and institutional shareholders to do more to make rights issues cost-effective.”
We reported on both the OFT market study and the Inquiry in January 2011 in this post.
The Guidance covers general preparations that a company can make in case it has to raise equity in the future, and then follows a timeline from the beginning of an actual raising exercise through to the end of the process.
Background preparation for an equity capital raising
The Guidance recommends that:
- Familiarity with the capital raising process should be part of the induction for new directors and form part of the Board’s regular evaluation exercise.
- Institutional shareholders should assist companies in understanding more about the rights issues process and the role of advisers and other market participants.
- The appointment of corporate advisers and brokers should include discussion as to how a hypothetical capital raising would be handled, including on fee levels and structures.
- Companies should ask their shareholders whether and for how long they would be prepared to receive price-sensitive information in the event of a capital raising, and whether they would have the appetite to act as a sub-underwriter.
- The Board should be informed as soon as possible and a governance structure for key decision-making put in place.
- Whether existing advisers are “well placed” to act should be considered, as should the appointment of an independent financial adviser (especially if the Board has little experience of capital raising).
- Should a competitive tender for underwriting be conducted, or should an existing adviser be engaged as lead underwriter? ”It should not be a foregone conclusion that a parent bank of the corporate broker is appointed as the lead underwriter to the issue.”
- Should a rights issue be underwritten, and should it be made at a wide or shallow discount? The trade-off between the size of the discount and the underwritten fees should be given particular attention.
- The Board should request a full breakdown of advisers’ proposed fees and understand what is being paid for what purpose – for example, how much is for advice and how much is for underwriting.
- If the rights issue is deeply discounted, the Board should consider whether it is necessary to be underwritten in part or at all.
- Shareholders who are willing be made “insiders” should be consulted on the proposed issue, the fees, their commitment to take up their rights and their appetite for sub-underwriting.
- The company should understand the lead underwriter’s intentions for sub-underwriting and the implications for the identity of the company’s shareholder base if the sub-underwriters have to take up their allocation.
- The possibility of existing shareholders pre-committing to take up their allotment should be considered, as should whether “off-set” for sub-underwriters would assist the offering.
- The company should get assurance from the lead underwriter that if sub-underwriters are prepared to take a lower fee, the benefits flow back to the company and not be retained by the lead underwriter, and insist on copies of all sub-underwriting letters.
After the issue, the Board should provide shareholders with a breakdown of the difference between gross and net proceeds, so that shareholders know on what service their money was spent.
Friendly Corporate PSL
To subscribe for our free weekly update e-mail, click here.