Author: Paul Airley
International companies continue to treat London as a key destination for raising institutional finance. Furthermore, of the firm offers announced in 2012 for companies subject to the UK Takeover Code (being, principally, UK corporations listed on the United Kingdom Listing Authority’s Official List and traded on the London Stock Exchange Main Market or listed on the AIM market of the London Stock Exchange), over half were made by non-UK bidders (including nine US and four Canadian bidders). More recently, on 1 March 2013 AIM and TSX-listed Ithaca Energy announced a $309 million cash and shares offer for Valiant Petroleum plc. Other corporate transactions may involve UK securities law considerations, such as a rights issue where an issuer has UK shareholders on its register.
Hence, there are a number of scenarios where an understanding of applicable UK securities laws will be important to an overseas issuer and its investment bankers or other brokers. This note is a high-level review of the common English law points to be considered.
UK prospectus requirements
A UK prospectus, which must be vetted and approved by the UK Financial Conduct Authority (FCA), is required for an “offer of transferable securities to the public” in the UK. Exemptions are available for an offer of securities to “qualified investors”, which covers most institutional investors, and/or an offer to fewer than 150 persons (excluding qualified investors) in the UK (which would include the underlying clients individually if a fund manager or stockbroker is not acting on a fully discretionary basis). Marketing a placing to institutional investors in the UK would therefore typically not require a UK prospectus.
Other transactions with a UK element may require a prospectus. A takeover offer by way of a securities offer or a mix and match cash/shares offer would require a prospectus. Similarly, a rights issue or open offer is likely to require a prospectus. Certain other prospectus exemptions (such as, offers with a minimum consideration per investor or a minimum denomination) may be available.
Other UK regulations on the communication of investment opportunities
In addition to the prospectus regime, which is a function of European law, the UK has an additional “financial promotion” regime which regulates the communication in, or into, the UK, in the course of business, of any invitation or inducement to engage in “investment activity”.
Such communications are prohibited unless a person authorised by the FCA, such as a UK-based investment bank or broker, makes the communication or approves its contents, or unless an exemption is available. Included within the financial promotion ambit would be presentations and materials, investor calls, preliminary prospectuses and the like filed in non-UK jurisdictions that are used on a financing roadshow, plus placing or subscription letters; other transactional documents (such as takeover offer documents and related public announcements) are also likely to comprise financial promotions.
In the context of an institutional placing, exemptions similar to the prospectus exemptions exist. Issuers and banks commonly approach only “investment professionals” and “high net worth companies, unincorporated associations, etc”. Communication with individual “high net worth” or “sophisticated” investors is possible but is more cumbersome as there is a greater burden of paperwork which must be exchanged and checked before the individual can be contacted. Accordingly, an institutional private placement in the UK can typically be done without the documentation requiring formal approval by a UK bank or broker.
Certain alternative exemptions are available for other types of transaction. Communication between an issuer and its shareholders or creditors in relation to the issuer’s securities is exempt, which allows, for example, an issuer to communicate a rights issue to its shareholders without the circular requiring approval by an FCA-authorised person (although the circular may also comprise a prospectus or require approval under listing rules).
Communications in relation to the sale of certain bodies corporate are exempt; this exemption is often relied upon in connection with public takeovers (again, the offer document may also be a prospectus if securities are offered). Communications included in a prospectus are exempt, but this exemption does not cover ancillary communications, such as press releases, which may need to be approved by an FCA-authorised person.
Conduct of regulated activities in the UK
The commentary above relates to an offer of securities and the communication of that offer. Additional regulations cover the conduct of investment activities in the UK. Under the “general prohibition” set out in the UK Financial Services and Markets Act 2000, no person may carry on, or purport to carry on, a “regulated activity”, by way of business, in the UK unless it is an authorised person or an exemption applies. Regulated activities include dealing (buying, selling, subscribing for or underwriting) in securities, as principal or agent, and arranging deals in securities. If a regulated activity is being carried on in the UK, and no exemption is available, an FCA-authorised person must be engaged.
The first step is to establish whether a regulated activity is carried on “by way of business” (by considering factors such as whether the transaction is a one-off or more continuous in nature, and the scale of the activity relative to the rest of the party’s business) and in the UK (by considering factors relating to the mechanics of the transaction such as where communication of the acceptance is made). These threshold matters will need to be considered on a case by case basis, and the analysis would need to be undertaken for the activities of the issuer and the investment bank or broker separately. Whilst an issuer may consider that it is not conducting a transaction “by way of business”, on the basis that a placing or takeover offer is a one-off event, it may be difficult to establish definitively whether the investment activity will fall outside the UK regulations, so it is necessary to consider the exemptions.
Issuers commonly benefit from exemptions relating to dealing in their own securities or making arrangements to which the issuer will be a party. The position of overseas investment banks or brokers is more complicated, but certain exemptions are available. In the context of a placing, a prerequisite is that the bank is an “overseas person”; that is, the bank does not carry on investment activities, or offer to do so, from a permanent place of business maintained by it in the UK. An overseas bank will not require FCA authorisation to effect transactions with investment professionals or other persons within the scope of the exemption from the UK’s financial promotion regime (see previous section).
Advising on a UK takeover or a transaction where a UK prospectus must be produced will generally require the engagement of a UK bank or broker. Whilst exemptions are available in respect of regulated activities carried on in connection with the sale of a body corporate, and under the UK Takeover Code a bidder is not obliged to retain a financial adviser, a bidder would typically appoint a UK financial adviser. A target is obliged under the UK Takeover Code to appoint a UK financial adviser, whose advice is made public.
Breach of UK regulations
Breach of the UK regimes on financial promotion, prospectuses and the conduct of financial services business carry both civil and criminal sanctions. Additionally, it should be noted that any agreement made pursuant to an unlawful financial promotion or by a person lacking the necessary FCA authorisation may be unenforceable.
It can be seen that overseas issuers and financial advisers may be able to raise institutional finance in the UK in compliance with UK securities laws without needing to navigate onerous UK regulations or incur significant cost. Placing securities with UK high net worth or sophisticated individuals is similarly possible, but requires more careful planning. In all cases, the marketing materials and investment documentation must be drawn up to the highest standards of accuracy (in compliance with general English law), and should be reviewed to ensure that appropriate disclaimers and representations are included and that proper procedures are established to ensure the UK roadshow excludes ineligible persons.
It is likely that UK advisers will need to be engaged on other corporate transactions which have a UK element.
Paul Airley, Partner, Fladgate LLP (firstname.lastname@example.org)