FCA announces measures to help listed companies to raise new share capital

On 8 April 2020, the Financial Conduct Authority (FCA) announced a series of measures aimed at assisting companies to raise new share capital in response to the COVID-19 pandemic while retaining an appropriate degree of investor protection. These measures relate to smaller share issues, issuing shorter form prospectuses, a different approach to working capital statements and modifying general meeting requirements under the Listing Rules.

The FCA measures regarding working capital statements and general meeting requirements will apply until the FCA advises otherwise. The FCA has stated that the measures are intended to be temporary during the extreme disruption of the COVID-19 pandemic.

Smaller share issues

On 1 April 2020, the Pre-Emption Group (PEG), a body whose members represent listed companies, investors and intermediaries and which provides the market with a clear view of what is regarded as acceptable practice when raising equity non-pre-emptively, published a statement about its expectations for share issues during the COVID-19 pandemic.

This varied the previous PEG guidance (from March 2015) that companies could, on a non-pre-emptive basis, issue 5% of their current issued share capital for general corporate purposes, with an additional 5% for specified acquisitions or investments. However, the 1 April guidance changes this and recommends that, on a case-by-case basis, investors should consider on a temporary basis (until 30 September 2020) supporting issuances by companies of up to 20% of their issued share capital. The investment banking industry trade body, the Association for Financial Markets in Europe (AFME), has welcomed this move.

This allows companies more flexibility to take advantage of the exception in the Prospectus Regulation permitting the issue of up to 20% of issued share capital without a prospectus.

There are conditions attached to this flexibility namely:

1. the company should fully explain its particular circumstances, including how they are supporting their stakeholders;
2. the company should consult with a representative sample of the company’s major shareholders;
3. the share issue should be made on a soft pre-emptive basis (i.e. existing shareholders favoured) so far as possible;
4. the company’s management should be involved in the allocation process; and
5. the company will be expected to explain, in its next annual report, the process it followed in relation to b) and c) above.

The FCA welcomes these developments and the increased flexibility in market practices in order to facilitate capital raising. The FCA encourages issuers to contribute to delivering ‘soft pre-emption rights’ by exercising their right to be consulted on, and to direct, bookrunners’ allocation policies. They remind participants that, where inside information is disclosed during the consultation process, market participants who comply with the market sounding safe harbour (set out in Article 11 of the Market Abuse Regulation (MAR) and in technical standards) will be protected from allegations of unlawful disclosure of the inside information.

The flexibility offered by the PEG statement will be of assistance to issuers, affected by the impact of the COVID-19 pandemic, who seek to raise equity finance in the short term in an amount in excess of previous 5%+5% limits above. It will also give assurance regarding the use of cash box structures for issues in excess of those limits. It is likely that many more companies will therefore take advantage of the intrinsic flexibility and efficiency afforded by cash box structures to execute rapid fundraisings by potentially avoiding the need for a general meeting.

Share issuances with a prospectus: shorter form prospectuses

Issuers wanting to raise capital during the COVID-19 pandemic, may want to take advantage of the simplified prospectus regime. This was introduced in July 2019, when the new Prospectus Regulation came into force. The simplified regime is tailored for secondary issues and is available to issuers who have been listed on a regulated market or SME Growth Market for at least 18 months. The FCA believes that this will include the considerable majority of listed companies.

The reasoning for the simplified regime is that investors are already familiar with the company and its previous disclosures. Under the simplified regime, issuers are required to disclose information that was not set out in the latest annual report. This will mean that issuers will need to focus predominately on disclosures relating to:

1. changes since the publication of the latest annual report regarding the business and its financial position; and
2. reasons behind the secondary issuance and its impact on the issuer, including the overall capital structure and use of proceeds.

Disclosures which are not required under the simplified regime will include an operating and financial review and disclosures on organisational structures and board practices, all of which can be found in the latest annual report.

Although the FCA has noted that the shorter prospectus regime may not be available if there is a non-EU component in a jurisdiction that has its own disclosure standards such as the US, the FCA is encouraging companies during the COVID-19 pandemic to use the simplified disclosure regime where possible.

Working capital statements

Issuers and advisers working on transactions involving the publication of a prospectus or a class 1 circular will be conscious of the difficulty in providing a clean working capital statement in the current environment.

The working capital statement provides a forward-looking assessment of whether or not the issuer has sufficient financial headroom to cover a reasonable worst-case scenario over the next 12 months. The statement is supported by extensive due diligence which takes the form of detailed financial modelling undertaken by the issuer and its advisers.

The uncertainty of the COVID-19 pandemic and the economic impact of the public policy response makes the financial modelling underpinning the working capital statement uniquely challenging. A clean working capital statement is not normally allowed to have any qualifications or assumptions; and a qualified working capital statement is a relatively rare event in the UK, which creates a conundrum for issuers and advisers.

The FCA has helpfully announced that it has decided to amend its approach to the disclosure of working capital statements in prospectuses and circulars approved by the FCA during the COVID-19 pandemic:

1. key modelling assumptions underpinning the reasonable worst-case scenario will be permitted to be disclosed in an otherwise clean working capital statement;
2. these assumptions may only be coronavirus-related. They must be clear, concise and comprehensible. Non-coronavirus assumptions may not be included;
3. the disclosure should focus on the considerable uncertainty in relation to the assumptions and may include details of the main sensitivities applied to the key assumptions; and
4. 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.

Further detail is set out in the policy statement. In particular, the FCA notes that:

1. coronavirus-related assumptions may not be relevant to all issuers;
2. a qualified working capital statement may still be appropriate for some issuers; and
3. in the current rapidly changing environment, issuers may find that the assumptions to the working capital statement are no longer up to date in the period between the prospectus publication and admission. If material changes are required to these assumptions as a result of new information coming to light after publication of the prospectus, a supplementary prospectus may be required. Similar considerations apply in relation to a supplementary circular under the Listing Rules.

General meeting requirements under the Listing Rules

The FCA has recognised that issuers may face challenges in holding general meetings which are required in a number of instances under the Listing Rules. In addition, the notice period for general meetings adds to transaction timetables and might also jeopardise an issuer’s ability to complete critical fundraising transactions quickly.

The FCA is temporarily modifying the Listing Rules on a case by case basis with regard to class 1 transactions and related party transactions. Premium listed companies undertaking a transaction may apply to the FCA for a dispensation from the requirement to hold a general meeting.

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:

Method A - obtain sufficient written undertakings from eligible shareholders prior to publishing a circular and announcing the transaction; or

Method B - 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.

In respect of Method A, although no general meeting is being convened, the resolution which would have been put to shareholders at a general meeting must be included in the shareholder circular.

In respect of Method B, where the issuer has not yet obtained the requisite number of shareholder undertakings when the circular is sent to shareholders, the FCA still expects the explanatory circular to be accompanied by a notice of general meeting. Where further shareholder undertakings are received before the date of the general meeting and the relevant threshold is met, issuers may decide not to proceed with holding the meeting.

With regard to both Method A and Method B, the circular should include a clear explanation of the issuer’s intentions around convening the general meeting and how it is applying the modification.

The FCA has stated that issuers may only take into account written undertakings from shareholders who would be eligible to vote on the resolution to approve the transaction. This would not include shareholders who are restricted on voting under the Listing Rules for related party transactions. The written undertakings should also be clear and unequivocal and not subject to caveats.

The FCA does not expect to receive copies of the written undertakings and does not intend to inspect them unless necessary.

Issuers, or their sponsors, are encouraged to consult with the FCA at the earliest possible time if they want to take advantage of the modification of general meeting requirements.

No change to requirements under the Market Abuse Regulation

The FCA has confirmed that there will be no changes to MAR, and that the FCA will continue to monitor, investigate and enforce in respect of breaches of MAR. It is important that during the COVID-19 pandemic, issuers and advisers continue to identify, manage and control the disclosure of inside information. Issuers looking to recapitalise should pay special attention to their sharing of inside information and maintaining appropriate insider lists.

Companies and their advisers will need to continue to monitor and evaluate what information constitutes inside information, understanding that the COVID-19 pandemic and the subsequent government responses to it may impact on what is determined to be information material to a business’s prospects, and in relation to market recapitalisations.

The full statement of policy can be found here.