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FCA cuts pre-emption rights to speed up rescue funding

09 April 2020

By Adam Lloyd, Partner

If you hold shares in a company listed on any of the world’s stock markets you will be in no doubt about the devastating impact of Covid-19, not just on the health of the nation but also on the health of the economy. The thousands of companies who list their shares on the London Stock Exchange form the vast part of the wealth and job creating backbone of the UK to say nothing of their contribution to the taxman and our pensions.

The Chancellor of the Exchequer has announced an unprecedented package of support for businesses and workers but for many companies it will be the equity markets and access to new equity funding that will provide salvation.

The FCA, as the policeman and ultimate arbiter of Stock market best practice, has already made concessions on reporting standards to alleviate the strain on companies struggling to cope with the current environment. But in their latest statement of policy they have gone a lot further and some of the most fundamental principles underpinning shareholder protection have been set aside for the duration of the pandemic.

In a world where one share equals one vote, pre-emption rights protect shareholders, especially smaller ones, from the power of big shareholding blocks.  The 5% limit on new issuance plus the requirement to publish a prospectus and hold a General Meeting all limit what companies can do without shareholder approval. To help companies issue new shares more easily and therefore more quickly, the FCA has effectively set aside these important protections.

If a company can get the vital funds it needs to survive the current liquidity crisis that is a good thing, for the economy and all of us. Desperate times often call for desperate measures and the FCA has made it clear that the current relaxations are temporary. Let’s hope so. The principles that guide the original rules are not ones we should abandon lightly.