Recognising the vital role of capital markets in mitigating the effects of COVID-19, on April 8, 2020, the UK’s Financial Conduct Authority (FCA) announced additional primary market measures intended to aid companies listed on a UK-regulated market (such as the London Stock Exchange) or SME Growth Market (such as AIM) during this turbulent time. These measures are intended to help listed companies seeking to raise new funding to increase their liquidity while ensuring that they retain sufficient investor protection. The measures apply with immediate effect and are intended to be temporary interventions, but as the situation is still evolving, their duration remains open-ended.
Relaxation of Rules on Share Issuances
A. Smaller Share Issuances
The FCA has referred to the relaxation of the Pre-emption Group (PEG) principles, published April 1, 2020. The statement recommends that investors consider, on a temporary and case-by-case basis, supporting increased issuances of companies for general corporate purposes, from 5 percent to 20 percent of their issued share capital, with an additional 5 percent for specified acquisitions or investments. This allows relevant companies to issue up to 20 percent of their share capital without the need to issue a prospectus, enabling capital to be raised more quickly in the face of volatile markets.
The PEG guidance sets out certain conditions for companies seeking to make use of this option.
B. Share Issues With a Prospectus
The FCA has directed issuers to the simplified prospectus regime available for secondary issuances, introduced in July 2019 under the Prospectus Regulation. This regime aims to allow secondary issuances to provide less detail on the basis that investors will be familiar with the company, and so will be primarily concerned with any changes since the latest annual report and the reason for the issuance itself. Companies making use of this regime will not be required to make disclosures on operating and financial review, organisational structure, capital resources, remuneration and benefits or board practices.
This option is available to companies which have been admitted to trading on a regulated market or SME Growth Market for at least 18 months and are seeking to raise more than 20 percent of their issued share capital (and thus not making use of the PEG principles outlined above). However, this option is not available where the offer has a non-EU component relating to a jurisdiction which has its own disclosure requirements (such as the U.S.).
Working Capital Statements
While the FCA has supported the approach taken by recommendations from the European Securities and Markets Authority (ESMA) regarding “clean” and “qualified” working capital statements, they also recognise that the financial modelling required to make such a statement, and in particular, the required “reasonable worst case scenario,” is extremely challenging in the wake of COVID-19. Without certain allowances, the result would be a large number of working capital statements being qualified but failing to provide investors with an accurate representation of the issuer’s financial condition. The intention is to provide sufficient information to allow investors to distinguish between companies experiencing short-term cash flow issues due to COVID-19, and those genuinely in distress which do not have sufficient working capital for the next 12 months.
In order to address these concerns and provide clarity, the FCA has announced a new approach to working capital statements. The approach involves including the following in an otherwise clean working capital statement:
- The key modelling assumptions which underpin the “reasonable worst case scenario.” These must be related to the coronavirus pandemic and expressed in a clear, concise and comprehensive way. These assumptions are permitted but not mandatory.
- A statement that the working capital statement has otherwise been prepared in accordance with the ESMA recommendations and the technical supplement to the FCA’s statement of policy on the coronavirus crisis. The inclusion of this statement is mandatory.
Listing Rules and General Meetings
Due to the social distancing and self-isolation measures currently in place, issuers are experiencing difficulties in holding general meetings in accordance with the FCA’s Listing Rules. This, teamed with the potential for general meeting notice periods to disrupt the issuer’s ability to raise finance quickly, prompted the FCA to change its policy to allow premium listed companies to apply to dispense with holding general meetings where shareholder approvals at general meetings are required for class 1 transactions and related party transactions under the Listing Rules.
Premium listed companies can now apply for a dispensation of the requirement to hold a general meeting. To apply, such companies will need to do the following:
- Obtain written undertakings (the “required 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 that effect if the general meeting was held prior to publishing a circular via (a) the relevant FCA-approved explanatory shareholder circular, or (b) an RNS; or
- Publish a circular which states that they have yet to obtain the required undertakings, but intend to apply for dispensation. Then, on receipt of the required undertakings, the issuer will be required to release an additional announcement confirming the required number has been reached.
The companies seeking to apply for dispensation will need to obtain the required undertakings from a sufficient number of shareholders to meet the threshold requirements set out in the Listing Rules for shareholder approval.
On receipt of an application, the FCA will consider the request for dispensation on a case-by-case basis.
It is worth noting that there will be no changes to the requirements under the EU Market Abuse Regulation, and the FCA has made it clear that companies are still required to fulfil their obligations concerning the identification, handling and disclosure of inside information.
For more information, or for advice on these measures, please contact the authors of this briefing or the McGuireWoods corporate team.
McGuireWoods has published additional thought leadership analyzing how companies across industries can address crucial business and legal issues related to COVID-19.