COVID-19: Secondary equity issue considerations for UK PLCs

The novel coronavirus (COVID-19) crisis is impacting public companies across all industries and sectors. Whilst companies are rightly focused on the health and wellbeing of their people and on ensuring business continuity so far as is possible, they are also having to closely monitor their financial position and contemplate taking action in the short to medium term to recapitalise and strengthen balance sheets. Such action may include a follow-on equity offering, such as a placing, placing and open offer or rights issue.

See here for a comparison of the different follow-on equity structures for issuers and their advisers considering these options.

This insight has been updated to reflect the removal of the pre-emption flexibility from 01 December 2020 and the FCA's Policy Statement, published on 5 November 2020, confirming that the package of measures aimed principally at companies seeking to raise additional capital will continue for the time being.

Pre-emption Group statement

On 20 November 2020, the Pre-Emption Group (PEG) issued a Statement confirming the end of the relaxation of the usual thresholds for non pre-emptive issuances

PEG’s temporary recommendation that, institutional investors should consider supporting non pre-emptive issuances (placings) by companies of up to 20% of their issued share capital on a case-by-case basis (as opposed to the current 5%+5% set out in their Statement of Principles) will come to an end on 30 November 2020. This temporary measure had been introduced to address the severe business implications of COVID-19.

From 1 December 2020, the standard limit of 10% of issued share capital (5% for general corporate purposes with an additional 5% for specified acquisitions or investments), as set out in PEG’s Statement of Principles, will apply.

FCA measures

On 8 April 2020, the Financial Conduct Authority (FCA) announced 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 measures, which take effect immediately, include a combination of temporary policy interventions and reminders of some existing options for companies and their current and prospective shareholders. The FCA has also welcomed the recent Pre-emption Group statement which balances ‘the pre-emption rights of existing shareholders with the need for these transactions to be done as efficiently as possible given the economic environment’. The new measures include:

• permitting key coronavirus-related modelling assumptions underpinning the reasonable worst-case scenario in working capital statements to be disclosed, without causing an otherwise “clean” working capital statement to be treated as a qualified working capital statement
• providing clarity on the FCA’s expectations about the due diligence supporting ‘working capital statements’ in share prospectuses given the significant economic uncertainties caused by coronavirus
• the ability to apply to the FCA for waivers to ensure that shareholder approval can be sought for certain transactions without the need to hold a general meeting given government guidelines on social distancing
• encouraging eligible companies to make use of the new simplified prospectus, introduced by the Prospectus Regulation last year. These prospectuses, recognising that the investor base has access to a range of information already relating to the issuer, remove the need to include information such as organisational structure, capital resources, remuneration and benefits and board practices. But, this 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.

The FCA reminds market participants and issuers that, whilst these temporary measures apply, they continue to be subject to the Market Abuse Regulation requirements which, among other things, require important disclosures to investors, sharing inside information in accordance with MAR and maintaining appropriate insider lists. 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.

Working capital statements

The FCA has relaxed the requirements for the modelling of the worst-case scenario that is required when making a working statement. Its approach is set out in a technical supplement. In summary, under this approach:

• key modelling assumptions underpinning the reasonable worst-case scenario can 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 this technical supplement.

This approach also applies to shareholder circulars published by premium listed companies where the Listing Rules require a working capital statement to be included

General meeting requirements under the Listing Rules

To address the challenges faced by issuers and to alleviate the time constraints imposed by the notice period for AGMS, premium listed companies undertaking a Class 1 transaction (LR 10.5.1R(2)) or a Related party transaction (LR 11.1.7R) can apply, on a case by case basis, to the FCA for a dispensation from the requirement to hold a general meeting. See technical supplement that provides:

• 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;
  • obtain a sufficient number of undertakings to meet the relevant threshold for obtaining shareholder approval; and
  • when the requisite number of written undertakings is obtained, inform the market. This could be by the relevant FCA-approved explanatory shareholder circular and announcement on a regulatory information service (RIS).

• Issuers can either :

  • obtain sufficient written undertakings from eligible shareholders before 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 sufficient written undertakings have then been obtained, the issuer must release an additional announcement confirming the number has been reached.

In either scenario, the circular should include a clear explanation of the issuer’s intentions around convening a general meeting and how it is applying the modification. Issuers who want to take advantage of this modification should apply to the FCA in writing using the procedure set out in LR 1.2.2R, providing confirmation in sufficient detail that they have obtained, or will seek to obtain, sufficient undertakings from shareholders.

FCA market updates

On 27 May 2020, the FCA published Primary Market Bulletin No 28 with some temporary measures and commentary. In this bulletin the FCA encourages companies to play their part in delivering 'soft pre-emption rights' by exercising their right to be consulted on, and to direct, bookrunners’ allocation policies. It also invites issuers with a large number of smaller shareholders to consider ways in which these shareholders could participate in a capital raising.

On the same date, it also published Market Watch 63 with commentary on market conduct and discipline in the context of COVID-19, including treatment of inside information, information on short selling and identifying and managing conflicts of interest by markets participants that may arise in capital raisings.

In its November Policy Statement (PS20/14), the FCA have confirmed that this series of measures will continue for the time being and that the temporary relief for delayed publication of financial statements will continue to be available to listed companies with financial periods ending before April 2021. And they will give companies notice when they decide to bring these measures to an end.

See COVID-19 - impact on UK financial reporting and dividends for more information.

See our Coronavirus (COVID-19) feature for more information generally on the possible legal implications of COVID-19.