COVID-19 – New FCA measures announced today to assist companies looking to raise capital

Increased disapplication of pre-emption rights

On 1 April, the Pre-Emption Group (PEG) published a statement recommending 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, that would normally apply.

This approach is welcomed by the FCA and is important for companies listed on the Official List which are considering making use of the prospectus exemption, allowing them to issue 20% of their share capital without preparing a prospectus; allowing companies to raise significant capital faster.

Soft pre-emption

The FCA has also highlighted PEG’s guidance that should be applied where companies are seeking increased disapplication of pre-emption rights:

• 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.

Soft pre-emption is where the bookrunner allocates shares to investors in a manner which, as far as possible, seeks to replicate the existing shareholder base. Issuers are encouraged to support this process by exercising their right to be consulted on and direct bookrunners’ allocation.

Where inside information is disclosed as a result of this process, market participants who comply with the MAR market sounding provisions will be protected from allegations of unlawful disclosure of inside information.

Shorter form prospectuses

In July 2019 a simplified prospectus process was introduced that is tailored for secondary issuances.

The regime is available for companies that have been listed for a minimum of 18 months and is made available on the basis that investors are familiar with the company, allowing disclosure to focus on changes that have occurred since the publication of the company’s last annual report and the rationale for the fundraise.

It should be noted that this route may not be available for offers outside the EU (i.e N.America) where disclosure requirements differ from the EU.

Change to Working Capital Statements

The working capital statement that will be included in a prospectus provides a forward-looking assessment of whether or not the issuer has sufficient financial headroom to cover the reasonable worst-case scenario over the next 12 months. This assessment will take into account a wide range of variables, sensitivities and information.

The working capital statement can take two forms, unqualified (or ‘clean’) or qualified, which highlights a working capital deficiency in the next 12 months and explains both why and the proposed action plan to remedy this shortfall.

According to relevant recommendations, disclosure of the assumptions in the financial models underpinning the statement places ‘the onus on investors to reach their own conclusion regarding adequacy of working capital and [is] therefore not normally acceptable’.

However the FCA has noted that current uncertainty and resulting economic impact makes financial modelling challenging, particularly in assessing a ‘reasonable worst-case scenario’ in the face of unprecedented challenges. The FCA acknowledges that this uncertainty creates a much higher likelihood that a working capital statement will be qualified (where it otherwise would not be) which may impact a fundraising. Consequently the FCA has issued new guidelines for the preparation of working capital statements that will apply for the duration of the coronavirus crisis. This change of approach is available in a separate technical note [here]. In summary:

• 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 Meetings for Class 1 transactions and Related party transactions

During the coronavirus crisis, issuers may be facing challenges in holding the general meetings which we have previously written about [here].

The FCA has recognised that the notice period for general meetings adds to transaction timetables and might also jeopardise an issuer’s ability to complete critical fundraising transactions quickly and is proposing a temporary modification of the Listing Rules on a case by case basis with regards to Class 1 transactions and Related party transactions.

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.

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 Market Abuse Regulation (MAR) continues to apply as normal

The FCA has reminded issuers and advisers that MAR continues to apply as normal and companies are still required to fulfil their obligations concerning the identification, handling, and disclosure of inside information.

Crucially, in the context of recapitalisation this will include sharing inside information in accordance with MAR and maintaining appropriate insider lists.