Listed companies: FCA equity fundraising measures

One of the key prospectus content requirements for investors is the working capital statement, which is a statement to investors as to whether or not, in the company's opinion, the company and its group has sufficient working capital for their present requirements, that is for at least 12 months from the date of the prospectus. This statement is based on a financial assessment of whether a company has sufficient headroom to cover a reasonable worst-case scenario.

The current and future consequences of the COVID-19 crisis create a number of challenges for companies trying to model for a worst-case scenario. Ordinarily, the disclosure of any underlying assumptions or sensitivities in the working capital statement would result in the prospectus containing (i) a "qualified" working capital statement (i.e. a statement that the company does not have sufficient working capital for the next 12 months) and (ii) an explanation from the company as to the quantum and timing of the shortfall together with its proposed action plan to remedy the shortfall in working capital.

The FCA recognises that in the current climate this would result in a large number of working capital statements published as part of a recapitalisation process being qualified. As ordinarily a qualified working capital statement would be relatively rare (not least as it serves as an immediate red flag from a risk perspective), the FCA acknowledges that this outcome may not help to ensure investors are provided with sufficient information to distinguish between otherwise financially sound companies that need to repair their balance sheet due to COVID-19 disruption and those with more profound financial problems.

To address these issues the FCA has adopted a different approach which will apply to prospectuses and shareholder circulars published by premium listed companies which are required by the Listing Rules to contain a working capital statement. Under this approach:

• the 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 COVID-19 related and they must be clear, concise and comprehensible; and
  
  
• there must be a statement that the working capital statement has otherwise been prepared in accordance with the ESMA Recommendations, and the FCA's technical supplement.

The FCA recognises that there are a number of challenges for companies in convening a general meeting during the COVID-19 lockdown and that the notice requirements to do so may jeopardise a company's ability to complete a critical fundraising quickly. To help address those challenges the FCA has modified the application of the Listing Rules so that a premium listed company can apply to the FCA for dispensation from the requirement to hold a general meeting where shareholder approval is required for a Class 1 transaction (which could include the sale of a material asset) or a Related Party transaction (which could involve a substantial shareholder participating in a cash placing). It is important to note that these general meeting changes do not apply to shareholder meetings which are required by a company to obtain shareholder approval to:

• issue its shares on a non pre-emptive basis at a discount of more than 10% to market value; or
  
  
• make allotments in excess of the existing shareholder allotment and disapplication of the pre-emptive rights authorities.

This dispensation will only be granted by the FCA if:

• a company has obtained or will obtain written undertakings from a sufficient number of shareholders who are eligible to vote on the resolutions that they approve the proposed transaction and would vote in favour of the resolution(s) to approve the transaction if a general meeting were convened – sufficient in this context means the requisite majority to pass the relevant resolution(s) if a general meeting were convened; and
  
  
• the company provides written confirmation to the market that it has obtained sufficient written undertakings to meet the relevant threshold to pass the resolution(s) and, subject to the dispensation being granted, is not proceeding with a general meeting.

A company may either obtain sufficient written undertakings before publishing a circular and announcing the transaction or publish a circular that states that it is yet to obtain such a written undertaking from a sufficient number of shareholders, and will be applying for dispensation¹.

On 1 April (i) the Pre-Emption Group ("PEG") issued guidance stating that during the current crisis it would relax its Statement of Principles to support approvals being sought by companies at a general meeting to disapply pre-emption rights for up to 20% of their existing share capital. The PEG Statement of Principles generally limits such approvals to 5% for general corporate purposes, with an additional 5% for specified acquisitions or investments. The FCA has urged market participants to review and consider PEG's relaxed guidelines. The FCA encourages companies to contribute to delivering "soft pre-emption"³ by exercising their right to be consulted on, and to direct, bookrunners' allocation policies.

PEG has announced that this recommendation, originally intended to apply until 30 September, will be extended to 30 November. It has stated that if a company looks to use the additional flexibility between now and 30^th November:

• it should only do so if it is experiencing extreme circumstances, and issuance is required to fund an immediate concern;
  
  
• the particular circumstances of the company should be fully explained, including how the company is supporting its stakeholders;
  
  
• effective consultation with a representative sample of the company’s major shareholders should be undertaken, and companies would be expected to disclose information about the consultation undertaken prior to the issuance;
  
  
• consideration should be given to the effect of the issuance on retail shareholders, and how they may be able to take part in some aspect of the issuance;
  
  
• the date at which the status of shareholding is assessed for the purposes of pre-emption should be clearly disclosed and, as far as possible, the issue should be made on a soft pre-emptive basis;
  
  
• company management should be involved in the allocation process; and
  
  
• existing share awards should not be normalised to negate the dilutive effect of the issuance.

PEG has underlined that the Statement of Principles applies to all issues of equity securities that are undertaken to raise cash, irrespective of the legal form of the transaction and that, for example, cash box transactions should be regarded, for this purpose, as being an issue of equity securities for cash.

A prospectus (which has significant cost and timing implications) will generally be required if an:

• Official List company offers more than 20% of its existing share capital (over a rolling 12 month period); or
  
  
• Official List or AIM company offers its shares to more than 150 non-institutional investors in the UK or any EU member state (unless the total amount raised is less than €8 million).

Where a prospectus is required the FCA has encouraged issuers to prepare a simplified prospectus, which is a shorter form prospectus tailored for secondary issuances. This facility is not new but has rarely been used in the UK capital markets. It is important to note that this option is only available to companies that have been admitted to trading on a regulated market or SME Growth Market (which includes AIM) for at least 18 months. It is also unlikely to be an available or practical option for issuers in transactions where an offer to US investors is contemplated given the heightened disclosure requirements associated with securities offerings in the United States.

Whereas a normal prospectus must include the "necessary information which is material to an investor for making an informed assessment" of their investment in a company, a simplified prospectus is held to a different disclosure standard in that it must contain "the relevant reduced information which is necessary to enable investors to understand" that investment. Importantly, notwithstanding this different standard, a simplified prospectus must still include a similar summary and risk factors to a normal prospectus. However, it is assumed that investors will already have access to a significant amount of publicly available information on the issuer and, therefore, much of the substantive disclosure requirements are focused primarily on significant changes to the issuer's business and financial condition since the previous financial year end. Set out below are some of the other key disclosure requirements that differ from the standard prospectus requirements:

• less information is required with respect to the business description of the issuer with the focus on providing a brief description of the issuer's principal activities, as well as a description of the significant changes impacting its operations and any material investments made since the end of the previous financial year;
  
  
• trend information is required to be disclosed covering the most significant trends in the issuer's business and financial performance since the end of the previous financial year and any known trends or events reasonably likely to have a material impact on the issuer in the near term;
  
  
• a summary of the issuer's MAR disclosures over the previous 12 months must be included;
  
  
• financial information is only required to be included covering the previous 12 months prior to publication of the prospectus;
  
  
• an operating and financial review (OFR) section is not required; and
  
  
• there is no requirement to include information on the issuer's corporate and funding structure, share capital history, corporate governance details, articles of association, directors' remuneration or regulatory environment.

Please do consult your advisers regularly to check whether changes in regulation or guidance have been announced.