2020: A new PIPE-line?

Private investments in public equity (or "PIPEs" as they are more commonly known) typically involve the issue of preference or ordinary shares, or convertible unsecured loan stock ("CULS"), by a publicly traded company, often to a private equity, venture, growth or other fund. The issue is usually done at a discount to the prevailing market value.

Given the continuing economic crisis arising out of the COVID-19 pandemic, and the onset of a second national lockdown, listed companies in the UK will again be looking at fundraising options. Many listed companies were able to raise cash in the public equity market in the first wave, but the second wave may push issuers to look at more creative fundraising solutions to meet their cashflow requirements, and PIPE transactions may fit the bill, although they are not without their issues.

The principal complexities for UK public companies undertaking PIPEs can be found in company law and in the Listing Rules (which apply to all companies whose shares are admitted to the Official List). The investor protection committee guidelines issued on behalf of UK institutional investors by bodies such as the Investment Association ("IPC Guidelines"), which apply to all companies on the Official List, can also create issues. Although compliance with IPC Guidelines is not mandatory, non-compliance may result in any shareholder approval required for the PIPE not being obtained.

The AIM Rules create fewer hurdles for PIPEs and therefore in practice it will be a lot easier to effect a PIPE in relation to an AIM company than it will be for one listed on the Official List. The IPC Guidelines do not strictly apply to AIM companies, although the proxy agencies do increasingly apply the same principles to their voting recommendations.

The matters to consider when looking at a PIPE are as follows:

• Shareholder Approval: UK public companies (Official List and AIM) must obtain prior shareholder approval (a 75% majority of those shareholders voting) to make non pre-emptive issues for cash. In order to comply with IPC Guidelines, most UK public companies (Official List and AIM) at their AGM each year will typically only seek authority to allow them to issue shares for cash on a non-pre-emptive basis for no more than 5% of their issued share capital (with the ability to increase this by a further 5% for acquisitions or specified capital investments). The Pre-emption Group has recommended that, in the current climate and until 30 November 2020, shareholders consider supporting disapplication authorities of up to 20%, but has confirmed that it does not intent to extend this relaxation beyond that date. 
  
  
• Limit on the discount: the Listing Rules prevent a UK public company which is listed on the Official List from issuing its shares on a non pre-emptive basis at a discount of more than 10% to market value unless either (i) the terms of the issue (including the amount of the discount) have been specifically approved by the company's shareholders (a 50+% majority of those voting); or (ii) it is an issue for cash within an existing disapplication of pre-emption rights. There are no similar restrictions for AIM companies.
  
  The IPC Guidelines are even more stringent than the Listing Rules and require a company not to issue its shares (or convertible loan stock) on a non pre-emptive basis at a discount of more than 5% to the market value although it is likely that if the choice for shareholders were one of survival for the listed company, shareholders would be less concerned with ensuring compliance with these guidelines.
  
  In practice, as a 5% shareholding acquired at a discount of 5% or less to market value is not normally enough to generate any interest for private equity or other investors, a UK PIPE will typically require prior shareholder approval (necessitating the production of a shareholder circular and the convening of a general meeting of the company's shareholders, which in the current COVID-19 lockdown is not straightforward). It may be that companies will, in order to ensure their survival, be prepared to structure a PIPE investment as a "cashbox" placing (which is a structure sometimes used to avoid the need for a shareholder vote) although this creates potential fiduciary duty issues for the directors of the company. Moreover, this structure will not overcome any restrictions imposed by the Listing Rules or the IPC Guidelines relating to the discount to market value at which the PIPE can be effected.
  
  
• Prospectus requirement: a company listed on the Official List must produce a prospectus (which will have significant cost and timing implications as it will need to be vetted by the FCA) when it proposes to issue in any 12 month period more than 20% of a listed class of shares. The FCA is being asked to engage with Europe to see if this percentage can also be relaxed in the current crisis.  There is no prospectus requirement for AIM companies for a PIPE.
  
  
• Mandatory takeover offer: the Takeover Code requires a person who acquires 30% or more of the voting rights in a UK public company to make a mandatory cash offer for all the remaining shares unless the prior approval of the independent shareholders has been obtained (a "whitewash").
  
  
• Market abuse: the scope of due diligence that a PIPE investor is able to undertake will be limited by the willingness of a listed company to disclose confidential information and by the restrictions in the market abuse regime. These restrictions effectively prohibit the PIPE investor from acquiring securities if it is in possession of unpublished price sensitive information in relation to the listed company, unless that information is made public at the time of the investment. The market abuse regime also operates to limit the amount and type of information that a listed company can pass to the PIPE investor once it has made its investment.
  
  
• Limited control rights: as a result of the more stringent corporate governance requirements that listed companies must observe, the control rights that a PIPE investor can hope to obtain will be significantly less extensive than on a private company transaction. A company listed on the Official List which has a "controlling shareholder" (i.e. a shareholder with 30% or more of the voting rights attached to the company's shares) must put in place a "relationship agreement" with that shareholder limiting its ability to compromise the company's independence. More control rights are likely to be available if the PIPE is structured using CULS.
  
  
• Uncertainty as to exit: a PIPE investor will need to consider how it will exit the investment and, the larger the stake, the more difficult this will be. The overhang caused by an anticipated exit may also affect the company's share price.
  
  
• Investment restrictions: most private funds will have restrictions on their investment strategy and, often, these restrictions will prevent the fund making substantial investments into listed securities.  For example, a fund may be restricted to investing no more than 10% of the commitments to the fund in listed securities, or only allowed to invest in such securities as part of a 'toe-hold' investment for a take-private.  Therefore, if the PIPE investor is a private fund, it will need to review its fund documents to understand the level of investment it may make and any other restrictions.
  
  

The 2008/2009 financial crisis showed shareholders increasingly willing to support an investment by a "cornerstone investor" (particularly if combined with a placing in which they were able to participate).  Therefore, the requirement for shareholder approval became less of an impediment to completing a PIPE in the UK.

In the current climate, agile and creative fundraising solutions will be key to businesses mitigating against the effects of COVID-19. PIPE transactions may therefore provide a much-needed lifeline.

For further information on PIPE transactions, or if you would like to arrange a workshop to discuss PIPEs, please get in touch below.