In addition to supporting the recent temporary relaxation of the Guidelines on Non-Pre-Emptive Issuances, the Financial Conduct Authority (‘FCA’) has announced several COVID-19 crisis-response measures aimed at facilitating equity fundraising by public companies with a listing on AIM or the Main Market of the London Stock Exchange whilst also retaining fundamental investor protections.
The measures, set out in the FCA’s “Statement of Policy: listed companies and recapitalisation issuances during the coronavirus crisis” (the Policy Note), include a combination of temporary policy interventions and reminders of some existing options for companies and their current and prospective shareholders.
1. Pre-Emption Group Guidelines
On 1 April 2020, the Pre-Emption Group (‘PEG’), a UK industry body comprised of listed companies, investors and intermediaries aimed at promoting best practice in protecting investor’s pre-emption rights, published a statement about its expectations for issuances during the coronavirus crisis. The PEG has recommended that, on a temporary basis until 30 September 2020, investors consider approving dis-applications of pre-emption rights in respect of up to 20% of their issued share capital, rather than the usual dis-application, as set out in its Statement of Principles, of 5% for general corporate purposes and an additional 5% for specified acquisitions or investments. More can be read on our analysis of this statement here.
In its Policy Note, the FCA welcomed the PEG guidance on placings of new shares as striking the right balance between pre-emption rights of existing shareholders and the need for transactions to be done as efficiently as possible given the economic environment. The FCA noted, in line with the PEG guidance, that listed companies should effect such issuances on a ‘soft pre-emptive basis’, meaning that companies and their brokers should seek to allocate shares to investors in placings “in accordance with an allocation policy that seeks to replicate, to the extent possible, the existing shareholder base.”, whilst at the same time recognising that the nature of the non-pre-emptive placing is such that not all shareholders will be able to participate in it. The FCA further notes that companies have an important role to play in delivering such rights to be consulted on and to direct allocation policies in accordance with Article 40(5) of the MIFID Delegated Regulation (EU) 2017/565(1).
2. Prospectus: Working capital statements
In the Policy Note, the FCA clarified its expectations regarding how working capital statements are presented in prospectuses in the near term. The purpose of a working capital statement in a prospectus is to inform investors whether, in the opinion of the company, the company and its group have sufficient working capital for the period of 12 months from the date of the prospectus. The FCA views this statement as a key protection for investors.
Working capital statements included in a prospectus may take two forms, either:
- an unqualified working capital statement where the company confirms it has sufficient working capital for at least twelve months from the date of the prospectus – these unqualified statements, in accordance with ESMA guidance, are not generally permitted to include any caveats, qualifications or assumptions; and
- qualified working capital statements where the company is required to state that it does not have sufficient working capital for its present purposes – an explanation must then be provided and a proposed action plan to remedy the existing shortfall must also be included.
The rationale for not permitting assumptions for an unqualified working capital statement is that, according to the ESMA guidance, this places an onus on investors to reach their own conclusion regarding the adequacy of current working capital of a company. The FCA has confirmed that it supports this approach and that the inclusion of a qualified working capital statement is a relatively rare event in the UK.
However, given the significant economic uncertainty created by the COVID-19 pandemic, the FCA notes the challenge of providing an unqualified working capital statement. A challenge accentuated by ESMA’s requirement for companies to model a reasonable worst-case scenario, an extremely difficult exercise in the current economic environment.
In its Policy Note, the FCA states that existing requirements which require the choice of either a ‘clean’ or a qualified working capital statement (especially where the latter is not often used), without any adjustment, would not assist investors in reaching an informed assessment of whether a company’s balance sheet is healthy. It would likely lead to many qualified statements which would not facilitate a review by prospective investors about the underlying viability of the business.
Accordingly, the FCA has adopted a different approach to working capital statements which will apply for the duration of the COVID-19 crisis only. The full detail of this is set out in a technical supplement and a brief overview of this approach is as follows:
- companies making an otherwise clean working capital statement will be permitted to disclose key modelling assumptions underpinning the reasonable worst-case scenario to the extent these relate to the COVID-19 crisis only;
- these assumptions must be clear, concise and comprehensible and may only be coronavirus-related. The technical supplement sets out examples of factors that may be included in such disclosure, as well as examples of disclosures the FCA would not expect to see; and
- there must be a statement that the working capital statement has otherwise been prepared in accordance with the ESMA Recommendations and the additional FCA technical supplement.
This approach can only be used where both of the following conditions are met:
- the company and its advisers are of the opinion that the company and its group have sufficient working capital for at least 12 months from the date of the prospectus/circular and this is supported and prepared in line with ESMA guidance; and
- the COVID-19 assumptions underpinning the reasonable worst-case scenario are considered to be subject to significant uncertainty.
Additional disclosure of COVID-19 related assumptions may not be appropriate for all companies proposing to make a clean working capital statement and, equally, a qualified working capital statement may still be appropriate for some companies.
3. Prospectus: Shorter form
The FCA has also encouraged companies which are eligible to avail of the new simplified prospectus regime which was introduced by the Prospectus Regulation last year (see here for our briefing on this development) and which is tailored for secondary issuances. These prospectuses recognise that the investor base already has access to a range of information relating to the company and is focused on changes which have occurred since the publication of the most recent annual report. The simplified prospectus regime is available to companies which have had securities admitted to trading on a regulated market or an SME growth market for at least 18 months. The FCA noted that where an offer has a non-EU component, such as a US offering, then this form of prospectus may not be appropriate.
Since the Prospectus Regulation came into force in July 2019, doubts have been expressed as to whether companies would avail of the simplified prospectus regime, given the prevailing view that investors and underwrites prefer the use of a full form prospectus. This endorsement from the FCA could, however, see an increase in those availing of the regime, at least for the duration of the FCA’s Policy Note.
4. General Meeting Requirements
The current restrictions on movement of persons is impacting companies’ ability to hold general meetings in line with social distancing and essential travel constraints. This coupled with necessary notice periods and time restraints as to when these meetings can be held, is creating a significant compliance challenge for companies. To address this, the FCA is temporarily modifying its Listing Rules on a case-by-case basis and for the duration of the COVID-19 crisis. Companies will be able to apply to the FCA for a dispensation from the requirement to hold a general meeting for the purposes of approving Class 1 and related party transactions which would otherwise require shareholder approval at a general meeting.
In order to apply for the dispensation, the company will need to either:
- prior to publishing the circular or announcement of the transaction, have obtained written undertakings from a sufficient number of shareholders (eligible to vote under the FCA’s Listing Rules) as would be necessary to meet the relevant threshold for obtaining shareholder approval; or
- publish a circular which states that they will be applying for the dispensation but that the undertaking from a sufficient number of shareholders has not be obtained. Once the company has received sufficient written undertakings, it can then issue an additional announcement confirming the undertakings have been received.
In order to provide further guidance, the FCA issued a technical supplement to the Policy Note. A dispensation may only be obtained from the FCA for general meetings required under its Listing Rules for the transactions stated, not for general meetings required elsewhere.
5. The Market Abuse Regulation
The FCA has also reminded companies that the management and control of inside information is as important as ever. The Market Abuse Regulation (MAR) remains in full force and companies are obliged to fulfil all regulatory obligations under MAR for the duration of the COVID-19 crisis.
Given the current volatility of the markets and the fact that companies may need to move quickly to raise capital, the endorsement of the PEG Guidance by the FCA and the intervention in relation to working capital statements will be of benefit to companies with a UK listing who are considering equity fundraising as a means of mitigating the impact of the COVID-19 crisis.
Contributed by Paul McNamara and Roisin Culligan