Coronavirus: supporting UK listed company recapitalisation

The FCA’s policy statement on ‘recapitalisation’ share issuances is in keeping with various measures introduced recently to keep the financial markets open and functioning. The various relaxations of regulatory requirements apply from 8 April 2020 until further notice.

The regulator has also reminded participants that the Market Abuse Regime (MAR) remains in full force regardless of any temporary relaxations in the procedural rules. Companies are still required to fulfil obligations concerning the identification, handling and disclosure of inside information, particularly when it comes to sharing inside information and maintaining appropriate insider lists.

Relaxation of pre-emption rights

As a general rule, existing investors have pre-emption rights, or the right of first refusal, over the issue of new shares in the capital of a company.

On 1 April the Pre-Emption Group (PEG), a representative body which issues best practice documents on pre-emption rights and their application, relaxed its statement of principles (2-page / 123KB PDF) to recommend that investors consider supporting issuances by companies of up to 20% of their issued share capital on a temporary basis. The PEG usually recommends investors support for up to 5% for general corporate purposes, and an additional 5% for specified acquisitions or investments.

The FCA has welcomed this relaxation, which will stay in place until at least 30 September. It has urged market participants to review and carefully consider the new guidance, which includes four conditions that should be applied where companies are seeking additional flexibility. The FCA focused in particular on the PEG’s recommendation that issues should where possible be made on a ‘soft pre-emptive’ basis - where the bookrunner, in allocating shares to investors, does so in line with an allocation policy that seeks to replicate the existing shareholder base. It is encouraging issuers to exercise their right to be consulted on, and to direct, bookrunners’ allocation policies to encourage the delivery of a ‘soft pre-emption’.

The flexibility demonstrated by the PEG and FCA around pre-emption rights is commendable. Where there has been an immediate need for a slightly larger equity raising, we have seen issuers using ‘cash box’ structures as a means of navigating pre-emption restrictions. While this is likely to continue, issuers that are yet to finalise their AGM notices also have the option to take advantage of this relaxation, albeit only in these exceptional circumstances. To date, we are not aware of any companies which have opted to do this. Where the need for cash is not so urgent, companies looking to complete a large fundraising will still most likely to pursue a rights issue or open offer, notwithstanding the additional documentary requirements/costs.

Shorter form prospectuses

Although not a new measure, the FCA has reminded issuers and their advisers of the new simplified prospectus regime which was introduced in July 2019. It is encouraging listed companies which are looking to recapitalise by issuing new shares in response to the coronavirus crisis to use this simplified disclosure regime where possible.

The simplified regime is available to companies that have been admitted to trading on a regulated market or the SME Growth Market for at least 18 months. Issuers that qualify will not have to include an operating and financial review, or disclosures around organisational structure, capital resources, remuneration and benefits and board practices in the prospectus. All these disclosures will have already been made to the market in one form or another, so the focus is on any changes that have occurred since publication of the issuer’s previous annual report and accounts and the reasons for undertaking the issuances.

There has not been much take-up of this new regime since its introduction, and the FCA acknowledged in its policy statement that it may not be an option where the offer has a non-EU component requiring satisfaction of separate disclosure requirements - particularly where the issuance may have a US element. We think it is unlikely that issuers will use this as a ‘short cut’ when raising funds.

Working capital

The FCA appreciates that the working capital statement in a prospectus is a significant investor protection measure, as it provides a forward-looking assessment of whether or not the issuer has sufficient financial headroom to cover a reasonable worst case scenario. Generally, the FCA applies the approach to preparation of working capital statements set out in guidance from the European Securities and Markets Authority (ESMA) (50-page / 553KB PDF): that a working capital statement must be either ‘clean’ and unqualified, or qualified.

Given the uncertainty caused by the coronavirus pandemic, the FCA is proposing to take a different approach on a temporary basis, which is set out in more detail in a technical supplement to the policy statement (6-page / 400KB). In summary:

• the FCA will permit the disclosure of key modelling assumptions underpinning the ‘reasonable worst-case scenario’ alongside an otherwise clean working capital statement;
• these assumptions must be coronavirus-related only, and must be clear, concise and comprehensible; and
• the working capital statement must otherwise be prepared in accordance with the ESMA guidelines and the FCA technical supplement.

Issuers can continue to disclosure the basis on which the working capital statement is made - for example, “taking into account the existing bank facilities”, or “taking into account the proceeds of the issue. However, the FCA has reminded them that this type of disclosure is consistent with a ‘clean’ working capital statement only to the extent that the proceeds are fully underwritten or the bank facilities contractually committed for the period covered by the working capital statement.

The temporary approach will also apply to shareholder circulars published by premium listed companies which require the inclusion of a working capital statement.

The FCA is aware that the financial modelling underpinning the working capital statement and, in particular, trying to determine the ‘reasonable worst-case scenario’, is uniquely challenging given the uncertainty caused by the coronavirus pandemic. It is concerned that, without this temporary approach, a significant number of working capital statements published as part of a recapitalisation exercise would need to be qualified. This is unlikely to be useful to existing and potential investors, and will make it difficult to distinguish between otherwise financially sound companies needing to repair their balance sheets as a result of the current disruption and those with more profound problems.

Sponsors will also need to be aware of the revised approach given the detailed involvement they have in the working capital process, and the work they will need to undertake in order to provide the FCA with the required working capital confirmations in their sponsor declaration form.

No doubt practice will develop around this as issuers and sponsors learn ‘on the job’ what the FCA’s technical guidance means in reality, but we expect detailed conversations around the working capital exercise and greater scrutiny by sponsors.

General meeting requirements under the Listing Rules

Conscious that the notice period for general meetings adds to transaction timetables and may jeopardise an issuer’s ability to complete critical fundraising transactions quickly, the FCA has temporarily modified the Listing Rules on a case-by-case basis in respect of Class 1 transactions (LR 10.5.1R(2)) and related party transactions (LR 11.1.7R).

Premium listed companies undertaking these transactions may apply to the FCA for a dispensation from the requirement to hold a general meeting in circumstances where they have obtained, or will need to obtain, written undertakings from shareholders 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 was held.

Issuers may either:

• obtain sufficient written undertakings from eligible shareholders before publishing a circular and announcing the transaction. In these circumstances, the circular need not include a notice of meeting, but is required to include the form of the resolution that would otherwise have been put to the meeting; or
• publish a circular, including a notice of general meeting, that states that the issuer is yet to obtain written undertakings from a sufficient number of shareholders and will be applying for dispensation from the FCA. Where the issuer then receives a sufficient number of written undertakings, it will be required to release an additional announcement confirming that the number has been reached and may then treat the requirement to obtain shareholder approval as satisfied.

The FCA has published a technical supplement to the policy statement (4-page / 446KB PDF) containing further guidance. The technical supplement emphasises that adopting this approach requires a dispensation from the FCA, and therefore a formal application under LR1.2.2R; and that the undertakings obtained from shareholders must be clear, unequivocal and not subject to caveats. Written undertakings must be provided by shareholders of record and not by their proxies, nominees or brokers, and proxy forms completed and returned by shareholders for the purpose of the general meeting will not be sufficient in establishing whether the threshold for approval via written undertakings has been met.

While issuers will no doubt find this temporary dispensation helpful, boards of directors should expect to have detailed conversations with their shareholders to garner the sufficient level of support.