PRINT THIS PAGE A European PIPE-dream, or a new pipeline?16/08/2006. Source: SJ Berwin. Simon Witney 
Last year, Britain’s biotechnology companies rallied around calls to make it easier for them to raise new money after they had floated on London’s stock exchange, says SJ Berwin. Many were frustrated by the inflexibility of the British system - which requires any new issue of shares to be offered first to existing shareholders in proportion to their shareholdings, unless the shareholders have agreed in advance to waive their anti-dilution rights. These rights, written into European and UK law, are a major inhibitor of opportunistic financings by new investors. Private equity houses, hedge funds and others find it very difficult to put new money into a company listed in Britain in return for a substantial shareholding and, perhaps, some direct management influence.
That is in stark contrast to the United States - where there are no equivalent rules, and where PIPEs (Private Investments in Public Equity) are very common.
There may be other reasons for the relative lack of PIPE deals in Europe, but “pre-emption” rights are clearly a big stumbling block, and one that was discussed by Paul Myners, chairman of British retailer Marks & Spencer and a serial report writer, in a study commissioned by the UK government published last February.
In fact, it is not the statutory rules that create the problem - they are already quite flexible - but some longstanding “Pre-emption Guidelines” issued nearly 20 years ago by a group representing major investors. These laid down the circumstances in which investors would countenance a disapplication of their pre-emptive rights, and had not been changed since. It was felt that these rules were in need of an update, and Mr Myners called for the Pre-Emption Group to be re-constituted to issue some more flexible guidance to institutional investors.
This has now happened, and revised guidance was published last week. Welcomed by the government and the biotechnology industry as a major step forward, the new guidance replaces the old rules with a set of principles that encourage companies and their shareholders to talk to each other.
The Group suggests that “non-routine” requests for a disapplication of the statutory rules - essentially those that go beyond 5% of the share capital in any one year, or more than 7.5% over three years, or would be issued at a significant discount - should be looked at constructively by shareholder groups.
The guidance lays down several considerations that they ought to take into account in deciding whether to accede to a company’s request, which include the size and stage and development of the company (small and high growth companies are more likely to succeed), other financing options, and the track record.
The obstacles to a PIPE deal in Europe remain higher than in the US - and any disapplication of pre-emptive rights will still need to be widely publicised and put to a shareholder vote - but this new guidance should make it easier for listed high growth companies to engage in a more constructive dialogue with their shareholders about bringing in new money from outside investors.
Simon Witney
SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on our services to the private equity industry please contact Simon Witney in our London office 020 7533 2222 or visit our website at www.sjberwin.com.
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