In light of the COVID-19 pandemic, there is a focus on keeping capital markets open as it is expected that the equity and debt capital markets will play an important role in the recovery of businesses. On 8 April 2020 the Financial Conduct Authority (FCA) announced a series of measures to assist listed companies raise funding quickly and effectively in response to the COVID-19 pandemic while still maintaining investor protection.
The package includes a combination of temporary policy interventions and reminders of some existing options for companies. The FCA policy interventions regarding working capital statements and general meeting requirements detailed below (and set out in greater detail in the two technical supplements) will apply until the FCA advises otherwise.
General meeting requirements under the Listing Rules
The holding of general meetings has been affected by the COVID-19 pandemic. The FCA has proposed to temporarily modify its 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 may apply to the FCA for an exemption from the requirement to hold a general meeting.
Issuers will be required to obtain a sufficient number of written undertakings from shareholders (who are eligible to vote under the Listing rules) to meet the relevant threshold for obtaining shareholder approval, stating 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. Once these undertakings are obtained, the issuer will be required to inform the market either by the relevant FCA-approved explanatory shareholder circular or a regulatory information service announcement. The written undertakings may be obtained after publishing the circular, however, the circular must state that the written undertakings are yet to be obtained and that the issuer will be applying for dispensation. The issuer will be required to release an additional announcement once the requisite number of undertakings have been obtained.
During the period in which these temporary measures apply, market participants and issuers continue to be subject to the requirements set out in the Market Abuse Regulation which, among other things, require important disclosures to investors.
Working capital statements
One of the key protections for investors is the working capital statement in a prospectus. In determining whether to approve a prospectus, the FCA has regard to the ESMA Recommendations on prospectuses, which includes ESMA's approach to the preparation of working capital statements.
The ESMA Recommendations require the working capital statement to either be in the unqualified (also known as 'clean') or qualified form. However, the due diligence work supporting the working capital statement is challenging as a result of the uncertainty due to the COVID-19 pandemic. For example, 'reasonable worst-case scenarios' may be impossible to model in light of the pandemic as companies are being faced with unprecedented challenges in their businesses. It is important that investors are provided with the necessary information to distinguish between companies that need to repair their balance sheet due to COVID-19 related disruption with those companies that do not have sufficient working capital to cover at least the next 12 months which is not a result of the COVID-19 pandemic.
As such, the FCA have set out the following approach to working capital statements:
- 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 and must be clear, concise and comprehensible
- 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.
Companies may use the new simplified prospectus introduced in July 2019 which is designed for secondary issues where the investor base already has access to a range of information relating to the issuer. 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. It is important to note that it may not be an option where the offer has a non-EU component in a jurisdiction with its own disclosure requirements. The FCA encourages listed companies issuing new equity to recapitalise the company to use this simplified disclosure regime where possible in response to the COVID-19 pandemic.
The pre-emption group (PEG) has relaxed its approach to the disapplication of pre-emption rights as a result of the COVID-19 pandemic. PEG recommends that, during this period, investors support 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.
The PEG's new guidance should be reviewed and considered carefully by market participants. Where companies are seeking additional flexibility, certain conditions should be applied, including:
- 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 (broadly representing the existing shareholder base)
- company management should be involved in the allocation process.
No change to requirements under the Market Abuse Regulation
Issuers and advisors are reminded that it is important to continue to manage and control inside information. The Market Abuse Regulation remains in force and companies are still required to fulfil their obligations concerning the identification, handling, and disclosure of inside information.