Revised institutional investor guidelines on share capital

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The Investment Management Association (the IMA) has assumed the responsibility previously held by the Association of British Insurers (the ABI) for publishing guidelines detailing the expectations for the institutional investor on share capital management. The guidelines are directed at premium listed Main Market companies though AIM companies are encouraged to adhere to the guidelines as best practice. The IMA has published revised guidelines essentially confirming the old ABI guidelines.

Directors’ power to allot
Since 2009 the ABI has accepted as routine authority for allotments of up to two-thirds of existing issued share capital (excluding treasury shares). Under the ABI’s guidelines, any amount in excess of one-third of the existing issued share capital should be applied to fully pre-emptive rights issues only and the authority should lapse at the company’s next annual general meeting. The IMA considers that this is working well and the revised guidelines do not change the position.

Disapplication of pre-emption rights
Authority for disapplication of pre-emption rights should be obtained annually by special resolution in accordance with the Pre-Emption Group’s Statement of Principles. Broadly, these provide that a routine disapplication of the statutory pre-emption rights should generally be limited to 5 per cent. of the company’s existing share capital, subject to a 7.5 per cent cumulative limit in any three-year rolling period.

Return of surplus funds
The guidelines confirm that dividends are the preferred means of effecting a distribution to shareholders, although they recognise that buybacks are a valid alternative.

Purchase of own shares
On buybacks, the guidelines again follow the ABI guidance. Shareholder authority for a buyback should be sought annually and by special resolution. Authority to purchase up to 10 per cent of the existing issued share capital (excluding treasury shares) will not ordinarily be a concern for investors. Investors will expect the authority to be exercised where it is only in the best interests of shareholders generally and normally only if it will result in an increase in earnings per share or, in the case of property companies and investment trusts, if it will result in an increase in asset value per share. Where this is not the case, there should be a clear explanation for the reasons motivating the buyback.

The guidelines discourage the use of off-market buybacks unless there is transparency as to terms and pricing.

Treasury shares
The guidelines stipulate a preference for not more than 10 per cent. of a company’s issued share capital to be held in treasury from time to time.

The guidelines also address dealings by companies in derivatives over their own shares, scrip dividends (where dilution concerns are expressed), dividend reinvestment plans and discounted share issues by investment trusts.

WM Comment
The IMA guidelines should be required reading for Main Market companies and their advisers and also for aspiring AIM companies. Whilst there is no legal obligation to comply, institutional investors will expect to see compliance and will demand an explanation if there is not.