Investor guidelines on share capital management

The Investment Management Association published guidelines on 28 July 2014 setting out the expectations of institutional investors on certain aspects of share capital management.

Market reCap September 2014 edition 

• AIM Notice 39 – update on directors participating in a fundraising
• Investor guidelines on share capital management
• Investor guidelines on transactions
• UKLA and AIM require sanctions confirmation
• Primary Market Bulletin No.8
• Board appointments and equality law
• The end of quarterly reporting requirements
• Proposed changes to the Takeover Code
• Engagement letters
• "Blocking" a company's shares: How to respond to a notice under s 793 Companies Act 2006

 

The Investment Management Association (IMA), which has assumed responsibility for guidance previously published by the ABI, published guidelines on 28 July 2014 setting out the expectations of institutional investors on certain aspects of share capital management. 

The guidelines apply to companies whose shares are admitted to the premium segment of the Official List.  Companies whose shares are admitted to the standard segment of the Official List, the high growth segment of the London Stock Exchange's Main Market or to trading on AIM, are encouraged to adopt the guidance.

Directors' power to allot

The ABI guidance on share allotment was last revised in January 2009, when it increased the ceiling for routine share allotments from one-third to two-thirds of the existing issued share capital (excluding treasury shares).  The IMA states this has generally functioned well. 

The guidelines confirm that IMA members will continue to regard as routine an authority to allot up to two-thirds of existing share capital.  As in the previous guidance, any amount in excess of one-third of existing issued shares should be applied to fully pre-emptive rights issues only and the authority should expire at the next annual general meeting.

Own share purchase

The IMA confirms that dividend payments remain the preferred method for regular distributions to shareholders, but guidance is provided for companies who decide that share buybacks are in the best interests of their shareholders.  Again the guidance reflects the previous ABI guidance.

Shareholder authority for a company to purchase its own shares should be sought annually, by special (rather than ordinary) resolution.  Authority to purchase up to 10% of existing share capital (excluding treasury shares) is unlikely to cause concern.

Shareholders expect that the authority will be exercised only if it is in the best interests of shareholders generally and normally only if it would result in an increase in earnings per share or, in the case of property companies and investment trusts, if it would result in an increase in asset value per share for the remaining shareholders. Where this is not expected, the benefits should be explained clearly.

Off-market buybacks are discouraged unless there is transparency on terms and pricing.

Full disclosure should be made in the next annual report, including why this method of returning capital to shareholders was used.  The effect on the holdings of major shareholders might also merit discussion.

There are particular concerns in relation to returns of capital effected through contingent dealings in a company's own shares, or in derivatives referenced to its shares.  Boards contemplating such transactions should seek specific prior authority from shareholders by special resolution (although the amount should still be counted within the general authority limit) and the company should report on the effectiveness and benefits of any such dealings in their next annual report.

Although the Companies Act no longer limits the number of shares a company may hold in treasury, the IMA's preference is for companies to hold no more than 10% of their shares in treasury.

Scrip dividends

IMA members are concerned about the dilutive effects of scrip dividend issues and normally prefer shares offered in lieu of dividends to be sourced from the market (dividend reinvestment plans).  

Any authority to offer a scrip dividend using new shares should be renewed at least every three years.

Shares to the value of the cash dividend forgone should be allocated at the average of the middle market quotations on the London Stock Exchange, as derived from the Daily Official List, for the five business days beginning on the ex-dividend date.

Arrangements to cancel a scrip dividend offer are only acceptable if a clear rationale and explanation to shareholders is provided.

 

Tom Martin is a Director in Fieldfisher's Corporate Group in London.