Introduction

The Financial Conduct Authority (“FCA”) announced on 8 April 2020, a series of measures aimed at helping companies to raise new share capital in response to the Coronavirus crisis, while retaining an appropriate degree of investor protection. These measures cover smaller shares issues and also matters relevant for larger share issues.

Jack Kemmish, an Associate in our Corporate and Capital Markets team, comments on these measures below.

Background

The Coronavirus pandemic continues to have a major impact on economies around the world with major restrictions on social freedoms as countries battle to defeat this pandemic. However, there are encouraging signs that countries are starting to win the fight. In some places restrictive public health measures are starting to be lifted and we can hope that economic activity will soon recover. Equity and debt capital markets will perform a crucial role in this expected rebound, by providing the necessary finance to businesses.

Summary of FCA measures

Smaller share issues

On 1 April 2020, the Pre-Emption Group (“PEG”) published a statement, which was welcomed by the Association for Financial Markets in Europe, about its expectations for issuances during the Coronavirus crisis. The statement explained that the PEG:

‘recommends that investors, on a case-by-case basis, consider on a temporary basis supporting issuances by companies of up to 20% of their issued share capital, rather than the 5% for general corporate purposes, with an additional 5% for specified acquisitions or investments, as set out in the Statement of Principles that would normally apply.’

Under the Prospectus Regulation, companies can issue up to 20 per cent of their share capital without the need to produce a prospectus. The agreement set out above is important, as support by shareholders of such transactions provide companies with the opportunity to raise new capital, which could potentially be invaluable.

The PEG statement, which should be reviewed and considered carefully, explains the conditions that should be applied where companies are seeking this additional flexibility, namely:

• the particular circumstances of the company should be fully explained, including how they are supporting their stakeholders;
• proper consultation with a representative sample of the company’s major shareholders should be undertaken;
• as far as possible, the issue should be made on a soft pre-emptive basis; and
• company management should be involved in the allocation process.

In relation to a placing of shares, ‘soft pre-emption’ is where a bookrunner allocates shares to investors in accordance with an allocation policy that seeks to replicate the existing shareholder base (subject to the constraints of the exercise – not all shareholders may be able to participate). The FCA encourages issuers to deliver ‘soft pre-emption’ in placings, by utilising their right to be consulted on, and to direct, bookrunner’s allocation policies. If inside information is disclosed during the consultation process, market participants who comply with the MAR Market Sounding provisions will be protected from allegations of unlawful disclosure of the inside information.

It is worth noting that the FCA have stated they will be monitoring how these new practices are applied, and if any risks to market integrity or consumer protection arise.

Share issues with a prospectus 

Shorter form prospectuses

A new simplified prospectus tailored for secondary issuances, was introduced in July 2019 when the Prospectus Regulation came into force. The rationale for this simplified prospectus is that investors are already likely to be familiar with the company, given the information available in the public domain, and will be focussed on changes that would have occurred since the publication of the company’s previous annual report. Certain disclosures are not required in the simplified prospectus such as: an operating and financial review, disclosures on organisational structure, on capital resources, on remuneration and benefits and board practices.

The simplified prospectus option is only available for companies that have been admitted to trading on a regulated market or SME Growth Market for at least 18 months. Notably, the FCA state this will include the ‘considerable majority of listed companies’, and they encourage companies to use this simplified disclosure regime where possible.

The simplified prospectus option may not, however, be an option where the offer has a non-EU component in a jurisdiction with its own disclosure requirements.

Working capital statements

A working capital statement in a prospectus tells investors, in the issuer’s opinion, that the issuer and its group (if applicable), have sufficient working capital for their present requirements (that is for at least 12 months from the date of the prospectus). It is an important piece of information for investors to consider when investing, as it provides a forward-looking assessment for whether or not the issuer has adequate financial headroom to cover a reasonable worst-case scenario.

Under the ESMA Recommendations, a working capital statement can take two forms. It can be unqualified (‘clean’) or it can be qualified. An unqualified statement confirms that the issuer ‘has sufficient working capital for its present requirements, [that is for at least twelve months]’. If it is unqualified, it is not normally acceptable for the working capital statement to have any caveats, qualifications, assumptions, sensitivities or cross-references to risk factors. If it is qualified, the ESMA Recommendations allows, and requires, further disclosure. A qualified statement must begin with a confirmation that the issuer ‘does not have sufficient working capital for its present requirements, [that is for at least twelve months]’. It must then explain why and set out the proposed action plan to remedy the current shortfall in working capital.

Disclosure of the assumptions in the financial models underpinning the working capital statement places ‘the onus on investors to reach their own conclusion regarding the adequacy of working capital and [is] therefore not normally acceptable. The FCA supports the approach set out above, including that a clean working capital statement should not typically contain assumptions.

The impact of the uncertainty that has arisen and continues to arise, from the Coronavirus pandemic and its economic effects, has understandably made financial modelling underpinning the working capital statement more challenging. For instance, the ‘reasonable worst-case scenario’ is difficult to envisage due to the interruptions and disruptions to companies’ business, known and unknown.

The FCA have set out a different approach to working capital statements that will only apply for the duration of the coronavirus disruption. The approach will also apply to shareholder circulars published by premium listed companies, where the Listing Rules require a working capital statement to be included.

The summary of this different approach, which is contained in a technical supplement to the FCA Statement (see the link at the end of this note), is:

• 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 ESMA Recommendations, and the technical supplement to the FCA Statement of Policy on the coronavirus crisis.

General meeting requirements under the Listing Rules

As considered in our note dated 19 March 2020 titled ‘Postpone or Adjourn your AGM?’ , issuers may be facing multiple challenges in holding annual general meetings and general meetings at present.

In the FCA Statement, they address the challenges faced by certain issuers in holding general meetings pursuant to the Listing Rules, and to alleviate the time constraints imposed by the notice period for general meetings. The FCA are proposing to temporarily modify the Listing Rules on a case by case basis in respect of Class 1 transactions (LR10.5.1R(2)) and Related party transactions (LR11.1.7R). It is worth noting that the FCA Statement states ‘Premium listed companies undertaking a transaction within the scope of this policy may apply to the FCA for a dispensation for a requirement to hold a general meeting’. Standard listed companies are not able to apply for a dispensation in these circumstances. The full details are set out in a technical supplement (see the link at the end of this note).

In order to receive the dispensation:

• Issuers will need to have obtained, or will need to obtain, written undertakings from shareholders (who are eligible to vote under the Listing Rules) that they approve the proposed transaction and would vote in favour of a resolution to approve the transaction if a general meeting were to be held.
• Issuers will need to obtain a sufficient number of undertakings to meet the relevant threshold for obtaining shareholder approval. When the requisite number of written undertakings is obtained, the issuer will be required to inform the market. This could be via the relevant FCA-approved explanatory shareholder circular and announcement via a regulatory information service (RIS).

Issuers may either:

• obtain sufficient written undertakings from eligible shareholders prior to publishing a circular and announcing the transaction; or
• publish a circular that states they are yet to obtain such a written undertaking from a sufficient number of shareholders, and will be applying for dispensation. When these issuers receive sufficient written undertakings they will be required to release an additional announcement confirming the number has been reached.

The FCA intend this policy to be temporary during the coronavirus disruption and will keep the application of this approach under review. The FCA continue to support holding virtual general meetings, if possible, as a means for gaining shareholder approval.

No change to the requirements under the Market Abuse Regulation (“MAR”)

MAR remains in force and companies are still required to fulfil their obligations in respect of identification and handling and disclosure of inside information. Insider lists should still be maintained, and the FCA will monitor, investigate and enforce against any abusive behaviours. Companies, advisers and other persons who have access to inside information, should be assessing carefully what information constitutes ‘inside information’. They should take into account any impact of the coronavirus pandemic and policy responses, which potentially could alter the nature of the information, in relation to market recapitalisations.

Duration of this FCA policy

The FCA have stated that their policy interventions in respect of the working capital statements and general meeting requirements (as summarised above – with the links at the end of this note to the respective technical supplements), will apply until the FCA advise otherwise.

The guidance in the FCA Statement is applicable from 8 April 2020, and whilst they are not conducting a formal consultation, they welcome feedback from stakeholders on these measures.

Further information

For any further information, or if you have any specific queries you would like advice on, please speak to your usual Druces contact or:

• Jack Kemmish at j.kemmish@druces.com or +44 (0)20 7216 5528 

Druces’ Capital Markets team is one of the top 20 law firms in the UK for Capital Markets work on the AIM market, ranked by the number of AIM-listed clients. Druces also acts for a number of companies listed on the Standard Segment of the Main Market, as well as companies listed on the Aquis Stock Exchange.

This article has been prepared based on information available as at 8 April 2020, and is meant as a general overview only and should not be considered legal advice. If you have specific queries you would like advice on, please speak to your usual Druces contact or Jack Kemmish as set out above.

The link to this FCA Statement dated 8 April 2020 is: https://www.fca.org.uk/news/statements/listed-companies-recapitalisation-issuances-coronavirus

The link to the technical supplement dated 8 April 2020 and mentioned in the ‘Working Capital Statements’ section of this note is: https://www.fca.org.uk/publication/primary-market/working-capital-technical-supplement.pdf

The link to the technical supplement dated 8 April 2020 and mentioned in the ‘General meeting requirements under the Listing Rules’ section of this note is: https://www.fca.org.uk/publication/primary-market/modification-general-meeting-technical-supplement.pdf