The FCA announces a series of measures aimed at assisting companies to raise new share capital in response to the coronavirus crisis while retaining an appropriate degree of investor protection.
The events surrounding the Coronavirus (Covid-19) pandemic are unprecedented and the impact on health and economic activity is significant. Any rebound of economic activity may be sharp as emergency public health measures are lifted.
Governments and regulators around the world have remained focused on keeping capital markets open and orderly. With capital markets open, we expect equity and debt capital markets to play a vital role in providing the finance to businesses that will aid the recovery.
In response to the situation, the FCA today announces a series of measures aimed at assisting companies to raise new share capital in response to the coronavirus crisis while retaining an appropriate degree of investor protection.
Our rules and market practices are differentiated by the size of the share issue being made. Therefore, we have divided this note into matters relevant to smaller share issues and matters relevant for larger share issues.
Smaller share issues
On 1 April, the Pre-Emption Group (PEG), an industry body comprised of listed companies, investors and intermediaries which exists to promote best practice in the observation of investors’ pre-emption rights, published a statement about its expectations for issuances(link is external) during the coronavirus crisis.
The statement explains that PEG ‘recommends 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, as set out in the Statement of Principles that would normally apply.’ The investment banking industry trade body, the Association for Financial Markets in Europe (AFME), which asked PEG to look at its guidelines, has subsequently welcomed this move(link is external).
This agreement is important for companies considering making use of the ability in the Prospectus Regulation to issue up to 20% of share capital without a prospectus. Such transactions offer the opportunity for companies to raise relatively significant amounts of new capital quickly, a facility which could prove invaluable for companies seeking to repair balance sheets damaged by coronavirus-based disruption.
We welcome industry bodies coming together and communicating clearly what changes to market practices are appropriate at this time, particularly one such as this that considers how investor protections can, as far as possible, be maintained whilst facilitating capital raising.
We urge market participants to review and consider PEG’s new guidance carefully. The PEG statement also explains the conditions that should be applied where companies are seeking this additional flexibility:
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.
So-called ‘soft pre-emption’ (in relation to a placing of shares) is where the bookrunner allocates shares to investors in accordance with an allocation policy that seeks, to the extent possible within the constraints of the exercise, to replicate the existing shareholder base. The limitations of the exercise mean, however, that it is likely not all shareholders will be able to participate.
Issuers can play an important role in delivering ‘soft pre-emption’ in the placings. We encourage issuers to contribute to delivering ‘soft pre-emption rights’ by exercising their right to be consulted on, and to direct, bookrunners’ allocation policies (MIFID delegated regulation (EU) 2017/565, Art 40(5)(link is external)).
Where the disclosure of inside information is made during the consultation process, market participants who comply with the MAR Market Sounding provisions (Set out in Article 11 of MAR and in technical standards [ITS(link is external)] and [RTS(link is external)] will be protected from allegations of unlawful disclosure of the inside information.
We will be monitoring how these new practices are applied and whether any risks to market integrity or consumer protection arise.
Share issues with a prospectus
Shorter form prospectuses
Issuers and their advisors may wish to consider using the new simplified prospectus which was introduced in July 2019, when the new Prospectus Regulation came into force. This form of the prospectus is tailored for secondary issuances.
The rationale behind the regime is that investors are already familiar with the company and will be focused on changes that have occurred since the publication of the company’s previous annual report, as well as the reason the company is carrying out the secondary issuance. Disclosures which are not required under the simplified regime include an operating and financial review, disclosures on organisational structure, on capital resources, on remuneration and benefits and board practices. All of these will already have been disclosed.
Under the Prospectus Regulation, the regime is available to companies that have been admitted to trading on a regulated market or SME Growth Market for at least 18 months (See Art 14 of the Prospectus Regulation(link is external) for full details). This will include the considerable majority of listed companies.
However, it may not be an option where the offer has a non-EU component in a jurisdiction with its own disclosure requirements, for example if the offer has a US element.
We encourage listed companies issuing new equity to recapitalise the company in response to the coronavirus crisis to use this simplified disclosure regime where possible.
Working capital statements
The working capital statement in a prospectus is a key protection for investors. It tells investors whether or not, in the issuer’s opinion, the issuer and its group have sufficient working capital for their present requirements, that is for at least 12 months from the date of the prospectus. It provides a forward-looking assessment of whether or not the issuer has sufficient financial headroom to cover the reasonable worst-case scenario. This assessment will take into account a wide range of variables, sensitivities and information.
Working capital statements are supported by extensive due diligence which takes the form of detailed financial modelling undertaken on the company and its advisors.
When deciding whether to approve a prospectus we apply the approach for the preparation for working capital statements set out in CESR’s recommendations for the consistent implementation of the European Commission’s Regulation on Prospectuses, as latterly adopted by ESMA (the ESMA Recommendations(link is external)).
Under the ESMA Recommendations, a working capital statement can only take two forms: it can be unqualified (also known as ‘clean’) or it can be qualified:
An unqualified statement confirms that the issuer ‘has sufficient working capital for its present requirements, [that is for at least twelve months]’. If it is unqualified, it is not normally acceptable for the working capital statement to have any caveats, qualifications, assumptions, sensitivities or cross-references to risk factors.
If it is qualified, the ESMA Recommendations allows and requires further disclosure. A qualified statement must begin with a confirmation that the issuer ‘does not have sufficient working capital for its present requirements, [that is for at least twelve months]’. It must then explain why, and set out the proposed action plan to remedy the current shortfall in working capital.
According to the ESMA 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’.
The FCA supports this approach and, in particular, the position that a clean working capital statement should not normally include assumptions. A qualified working capital statement in a prospectus is a relatively rare event in the UK. The clarity of the disclosure assists investors in identifying companies whose working capital position suggests that any investment will be relatively high risk.
However, the uncertainty created by the coronavirus pandemic and the economic impact of the public policy response makes the financial modelling underpinning the working capital statement uniquely challenging.
A particular challenge arises from the ESMA Recommendations requirement that issuers model a ‘reasonable worst-case scenario’. Constructing such a scenario is extremely difficult in the current circumstances. Companies are experiencing unprecedented interruptions and disruptions in their business as a result of government restrictions such as social distancing measures necessary to contain the virus, as well as from the impacts of the coronavirus itself and the consequent fall in demand. There is significant and unprecedented uncertainty as to the future impact and duration of the disruption.
Many firms are currently unable to model a reasonable worst-case scenario. Without modification, the approach set out in the ESMA Recommendations would result in a significant number of working capital statements published as part of a recapitalisation exercises being qualified. Therefore, the disclosure on working capital would need to state that the issuer ‘does not have sufficient working capital for its present requirements, that is for at least twelve months’.
We doubt this is useful to existing and potential investors. We want to ensure that prospectus disclosure gives investors an accurate picture of the financial condition of the issuer. Where numerous companies are giving qualified statements, that, absent the current unprecedented level of uncertainty relating to coronavirus assumptions, would be clean, this may not help to ensure that investors are being fully informed. Investors should be provided with the necessary information to distinguish, for example, otherwise financially sound companies that need to repair their balance sheet due to coronavirus-related disruption and those companies with more profound problems, who do not have sufficient working capital to cover at least the next 12 months.
For this reason, we are setting out a different approach to working capital statements. This will apply for the duration of the coronavirus crisis only. The approach will also apply to shareholder circulars published by premium listed companies where the Listing Rules require a working capital statement to be included.
The approach is set out in a technical supplement to this policy statement. However, in summary, under this approach:
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.
Further detail is supplied in the technical supplement to this policy statement.
We are taking this action at this speed because we recognise the urgent need for clarity in the UK market. We will also continue to work with ESMA and relevant national competent authorities in Europe to agree a consistent approach where this will benefit market participants.
General meeting requirements under the Listing Rules
During the coronavirus crisis, issuers may be facing challenges in holding the general meetings which are required in a number of instances under the Listing Rules. In addition, the notice period for general meetings adds to transaction timetables and might also jeopardise an issuer’s ability to complete critical fundraising transactions quickly.
To address the challenges faced by issuers and to alleviate the time constraints imposed by the notice period during this difficult period, we are proposing temporarily to modify our Listing Rules on a case by case basis with regards to Class 1 transactions (LR 10.5.1R(2)) and Related party transactions (LR 11.1.7R). Premium listed companies undertaking a transaction within the scope of this policy may apply to the FCA for a dispensation from the requirement to hold a general meeting.
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. This could be via the relevant FCA-approved explanatory shareholder circular and announcement via a regulatory information service (RIS).
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.
This policy is intended to be temporary during the extreme disruption of the coronavirus. Where issuers have provisions in place to provide for holding virtual general meetings, we continue to support this as a means for gaining shareholder approval. We will keep the application of this approach under review.
Further detail is supplied in the technical supplement to this policy statement.
No change to requirements under the Market Abuse Regulation
During this period, it is as important as ever that issuers and advisors continue to manage and control inside information. The Market Abuse Regulation (MAR) remains in force 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. We will continue to monitor, investigate and enforce against abusive behaviours.
Companies, advisors, and other persons who have access to inside information must continue to assess carefully what information constitutes inside information at this time, recognising that the global pandemic and policy responses to it may alter the nature of information that is material to a business’s prospects, and in relation to market recapitalisations.
Duration of this policy
The FCA policy interventions regarding working capital statements and general meeting requirements detailed above (and set out in the greater detail in the two technical supplements) will apply until we advise otherwise.
The FCA response to the coronavirus crisis will continue to evolve as the situation develops. We are not conducting a formal consultation in this instance. This guidance is in application from today, 8 April. However, we would welcome feedback from stakeholders on the measures we have taken and views on any future actions or clarifications which would address arising risks and help to ensure the market works well.