Coronavirus - FCA announces additional measures to aid listed companies with fundraisings - UK

• United Kingdom

• Coronavirus - M and A issues
• Corporate
• Financial services and markets regulation

09-04-2020

Listed companies and recapitalisation issuances

The FCA has announced a series of measures aimed to assist companies in raising additional capital in response to the Coronavirus crisis, whilst at the same time aiming to retain appropriate protections for investors.

As discussed in our briefing here, many listed and quoted companies are already raising, and are likely to continue to seek to raise, funds on the capital markets in an effort to repair balance sheets and aid recovery as a result of the COVID-19 pandemic.

The FCA measures, which are designed to relax the application of certain regulatory requirements that would otherwise normally apply,  endorse the Pre-Emption Group’s (PEG’s) relaxation of its Statement of Principles on 1 April 2020 in relation to smaller issuances (again, discussed in our briefing here) and also introduce temporary measures applicable to larger fundraisings which may require a prospectus, such as rights issues and open offers. Where the FCA is making specific interventions, these measures are intended to remain in place until the FCA advises otherwise for the duration of the Coronavirus crisis.

Smaller share issues – Pre-emption group guidelines

The FCA statement of policy notes the statement published by the PEG on 1 April 2020 about its expectations for issuances during the Coronavirus pandemic, which recommends that investors consider on a temporary basis supporting issuances by companies of up to 20% of their issued share capital (see our briefing for more details).

The FCA notes that this will allow companies to raise relatively significant amounts of new capital quickly, making use of the exemption under the Prospectus Regulation which allows up to 20% of share capital to be issued without a prospectus.

Whilst welcoming this development, the FCA notes that the PEG’s guidance should be considered carefully. The PEG statement sets out the conditions that should be complied with when making use of the additional flexibility and also states that issuers should, so far as possible, effect issuances on a ‘soft pre-emptive basis’. This concept was not further elaborated on in the PEG statement.

Helpfully, the FCA has provided some guidance on ‘soft pre-emption’, explaining that issuers and their brokers should seek to allocate shares to investors in placings “in accordance with an allocation policy that seeks, to the extent possible within the constraints of the exercise, to replicate the existing shareholder base”, albeit recognising that the nature of a non pre-emptive placing is such that not all shareholders will be able to participate in it. The FCA further notes that issuers have an important role to play in delivering ‘soft pre-emption rights’ by exercising their right to be consulted on and to direct allocation policies in accordance with Article 40(5) of the MIFID Delegated Regulation (EU) 2017/565[1].

Share issues where a prospectus is required

The FCA reminds companies and their advisers of the ability to use a simplified form of prospectus tailored for secondary issues that is available where the relevant criteria under Article 14 of the Prospectus Regulation are met. This regime omits certain information from the prospectus that would otherwise normally be required to be included (in particular, the operating and financial review) on the basis that such information will already have been disclosed and otherwise be available to investors as a consequence of the publication in the issuer’s most recent annual report and accounts and other announcements required by the Market Abuse Regulation and other regulation. The simplified prospectus regime is available for use in connection with secondary issues where companies have been admitted to trading on a regulated market or an EU growth market for at least 18 months.

Since the Prospectus Regulation came fully into force in July 2019, there have been doubts expressed about whether companies would make use of the simplified prospectus regime, which has been expanded to a wider range of issuances than the previous regime under the Prospectus Directive, on the basis that investors and underwriters would prefer the ‘full’ form of prospectus to be used. As the FCA notes, it is also unlikely to be an option where the offer has a US element. However, given this endorsement from the FCA, which encourages companies to make use of the simplified disclosure regime whenever possible, it may be that we will see more companies seeking to make use of the simplified regime in the current climate.

Working capital statements

The FCA notes that the current situation is making the underlying due diligence work required to support unqualified working capital statements in prospectuses significantly more challenging, particularly with regards to the requirement to model reasonable worst-case scenarios in light of the unprecedented and constantly evolving situation and uncertainties surrounding the effects of the Coronavirus pandemic on businesses and the economy. The FCA’s view is that the application of the existing requirements which require the binary choice of either ‘clean’ or qualified working capital statements (the latter being very rare in normal circumstances), without any adjustment, would not assist investors in reaching an informed assessment of whether a particular company is otherwise financially sound (absent the effects on its business brought about by the Coronavirus and Governmental measures to combat it) in that it would only likely lead to a raft of qualified statements which would not do a great deal to assist investors in ascertaining the underlying viability of issuers’ businesses absent the Coronavirus.

The FCA has therefore set out a different approach to be applied for the provision of ‘clean’ working capital statements in the current environment, as follows:

• Key modelling assumptions underpinning the reasonable worst-case scenario will be permitted to be disclosed in an otherwise clean working capital statement.
• These assumptions may only be Coronavirus-related. They must be clear, concise and comprehensible. Non-Coronavirus assumptions may not be included.
• There must be a statement that the working capital statement has otherwise been prepared in accordance with the recommendations adopted by the European Securities and Markets Authority (ESMA), available here and the technical supplement published by the FCA alongside its policy statement which sets out further details of this approach.

In addition, when taking the above approach, issuers must be mindful of the need for the prospectus to be consistent throughout and the FCA has emphasised that disclosure elsewhere in the prospectus, for example in the risk factors, cannot otherwise qualify the working capital statement. The FCA has recognised that issuers will inevitably seek to include a risk factor on Coronavirus-related disruption which may address the risks relating to uncertainties as to duration and severity of impact and has stated that it will consider such risk factors in conjunction with the working capital statement in light of its view that disclaimers to the working capital statement should not be included. This consideration will be on a case-by-case basis and will, together with the working capital statement and the related disclosures referred to above, be a significant area of focus and debate with the FCA as part of the prospectus approval process.

Again, this approach will apply until the FCA advises otherwise for the duration of the Coronavirus crisis.

General meeting requirements under the Listing Rules

To address the challenges of holding a general meeting in the context of the Government’s social distancing and essential travel guidance and to alleviate time constraints, the FCA is also temporarily modifying the Listing Rules on a case-by-case basis with regards to Class 1 and related party transactions requiring shareholder approval.

Companies will be able to apply to the FCA for a dispensation from holding a general meeting. To take advantage of this, they will need to have obtained at the time at which they announce the relevant transaction and publish the shareholder circular, or will need to obtain (following announcement and publication of the circular), written undertakings from a sufficient number of shareholders (eligible to vote under the Listing Rules) as would be necessary to meet the relevant threshold for obtaining shareholder approval of a resolution proposed at a general meeting confirming that they approve of the proposed transaction and would vote in favour of such a resolution to approve the relevant transaction if a general meeting were to have been held.

As stated above, the undertakings can either be obtained before announcing the transaction or, alternatively, companies can announce the transaction and publish a circular stating that they are yet to obtain written undertakings from a sufficient number of shareholders. In the latter case, issuers will have to release an additional announcement once they have received undertakings sufficient to meet the approval threshold.

A technical supplement to the policy statement sets out further details in relation to how this policy will operate.

A dispensation may only be obtained from the FCA for general meetings required under the Listing Rules for the transactions stated. Therefore, any companies that may need to hold a general meeting in connection with a fundraising will still be faced with logistical difficulties of holding this in the light of the UK Government’s ‘stay at home’ measures. However, practical guidance has already been issued as to how such meetings may be held in the current climate. Such guidance is discussed further in our briefings here and here.  

Comment

Given the fast-moving situation and the impact that the Coronavirus pandemic is having on the balance sheets of a significant number of listed companies, the FCA has sought to move relatively quickly in some limited areas to facilitate capital raisings being implemented more quickly.

The intervention made by the FCA in relation to working capital statements, in particular, is to be welcomed as an effort, in challenging circumstances, to try to balance the interests of companies in seeking to raise capital quickly and efficiently in the context of the relevant regulatory requirements whilst, at the same time, recognising the importance of continuing to provide investors with meaningful and useful information about issuers’ working capital positions, as they are likely to be impacted specifically by Coronavirus-related factors, which they can rely on in coming to an informed assessment of the assets and liabilities, profits and losses, financial position and prospects of issuers.

The FCA’s relaxation of the requirements in the Listing Rules for shareholder approval to be obtained for Class 1 and related party transactions in general meetings is also likely to be welcomed by companies undertaking fundraisings, particularly where they may have a relatively small number of significant shareholders supportive of the issuance and who would otherwise have been eligible to vote under the Listing Rules whose undertakings can get them to the approval threshold in short order.

Useful links

Press release: Additional primary market measures to aid listed companies

FCA statement of policy listed companies and recapitalisation issuances during the Coronavirus crisis

Technical  supplement – working capital statements in prospectuses and circulars during the Coronavirus epidemic

Technical supplement – modification of general meeting requirements under the Listing Rules

[1]        Article 40(5) of the MIFID Delegated Regulation (EU) 2017/565, which states as follows: “Investment firms shall involve the issuer client in discussions about the placing process in order for the firm to be able to understand and take into account the client's interests and objectives. The investment firm shall obtain the issuer client's agreement to its proposed allocation per type of client for the transaction in accordance with the allocation policy.”