Maximising the chances of a successful fundraising during the Coronavirus crisis

Our team: Nigel Gordon, Paul Airley

On 8 April 2020 the 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.  Many quoted companies will be seeking to raise finance for their business during the coronavirus crisis and so will be considering if this is possible in the current uncertain financial situation and how this can be achieved most efficiently.

Being aware of the FCA’s views on these matters will put a company in a position where it should be able to navigate successfully the requirements of its regulators and brokers. This note highlights the key points that should be borne in mind and (in summary) relate to:

  • making a working capital statement that includes, if necessary, key modelling assumptions that relate to the coronavirus crisis (and nothing else) underpinning the “reasonable worst-case scenario”;
  • using a company’s ability to prepare a shorter-form prospectus for secondary issues if a prospectus is required for the fundraising;
  • proceeding without a general meeting which would otherwise be required if the company can obtain written undertakings from shareholders (who are eligible to vote) 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;
  • if a general meeting of the company is required in order to give the directors authority to issue shares in a fundraising, institutional shareholders may (following the statement by the Pre-emption Group on 1 April 2020) be prepared to support a wider disapplication of pre-emption rights if certain safeguards are put in place.

Working capital statements

Depending on the size and nature of the fundraising and the market on which a company’s shares are traded there may well be a formal requirement under law or regulation for a company to publish a document containing a working capital statement. Even if there is no formal requirement for a working capital statement, a broker seeking to raise money on behalf of a company will inevitably want a warranty in similar terms to a formal working capital statement.

The working capital statement is a key protection for investors. It tells investors whether or not, in a company’s opinion, the company and its group have sufficient working capital for their present requirements, that is for at least 12 months from the date of the statement. In other words, it provides a forward-looking assessment of whether or not the company 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 by the company and its advisers.

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 company “has sufficient working capital for its present requirements, [that is for at least twelve months]”. If 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 qualified, further disclosure is allowed and required. A qualified statement must begin with a confirmation that the company “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. A qualified working capital statement in a prospectus (or other document) is a relatively rare event in the UK because such a statement places the onus on investors to reach their own conclusion regarding adequacy of working capital and is therefore not normally acceptable.

When preparing a working capital statement companies are required to 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.  It is therefore likely that many companies will currently be unable to model a reasonable worst-case scenario, which would result in a significant number of working capital statements published as part of a recapitalisation exercise being qualified.

The FCA has recognised that if numerous companies were to give qualified statements, which, if it were not for the current unprecedented level of uncertainty relating to coronavirus assumptions, would be clean statements, this may not help to ensure that investors are being fully informed. The FCA takes the view that 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, the FCA has set out a different approach to working capital statements. This new approach will apply for the duration of the coronavirus crisis only. In summary, under this new 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. Such assumptions might, for example, relate to the length of time the company expects its business to be disrupted or the expected speed of recovery, or details of the main sensitivities that have been applied to the key assumptions, for example, the impact on revenue. 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 normal requirements relating to working capital statements.

The FCA has made it clear that the coronavirus working capital approach can only be used where, without the coronavirus uncertainties in the modelling of the reasonable worst-case scenario, a company can provide a clean working capital statement. There are therefore various disclosures that the FCA would not expect to see in connection with the clean working capital statement, including: a description of the base case; references to liquidity shortfalls; a description of mitigating actions or factors that are not included in the modelling for the reasonable worst-case scenarios; uncertainties or qualifications regarding the reliability of underwriting commitments, or commitments in relation to existing funding facilities; a discussion of alternative worst-case scenarios that have not been considered as the reasonable worst-case scenario; or any other language appearing to qualify the working capital statement that does not relate to the uncertainty around coronavirus assumptions in the reasonable worst-case scenario.

It should also be noted that the whole of any document must be consistent with the working capital statement. A company and its advisers should keep the working capital position under review so that if any underlying changes to that position occur between the date of publication date of the document and the date of admission of its shares a supplementary document can be published by the company if necessary.

We expect that brokers will adopt the same or a similar stance in relation to working capital statements even where working capital statements are not formally required by law or regulation. A company which will be expected to produce a working capital statement during the coronavirus crisis would therefore be well-advised to build its working capital model on this basis and is likely to have its working capital statement approved more quickly than a company which builds its working capital model on a different basis.

Shorter-form prospectus

If a fundraising is likely to require a company to issue a prospectus, that company should consider if it can use 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 issues of shares where the company’s shares have been admitted to trading on a regulated market (such as the Official List) or an SME growth market (such as AIM) continuously for at least the last 18 months. The rationale behind the regime is that if the company has been quoted for at least 18 months 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 issue of shares.

General meeting requirements

During the coronavirus crisis, companies may be facing challenges in holding the general meetings which are required in a number of instances under the Listing Rules or the AIM Rules. In addition, the notice period for general meetings adds to transaction timetables and might also jeopardise a company’s ability to complete critical fundraising transactions quickly.

To address the challenges faced by companies and to alleviate the time constraints imposed by the notice period during this difficult period, the FCA is proposing temporarily to modify the Listing Rules on a case by case basis with regards to Class 1 transactions and related party transactions. 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, a company will need to have obtained, or will need to obtain, written undertakings from shareholders (who are eligible to vote) 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. The company 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 company will be required to inform the market. This could be via the relevant FCA-approved explanatory shareholder circular and announcement on the RNS.

Again, this policy is intended to be temporary during the extreme disruption of the coronavirus. Where companies have provisions in place to provide for holding virtual general meetings, the FCA continue to support this as a means for gaining shareholder approval.  The FCA will keep the application of this approach under review.

The FCA’s proposals only relate to premium-listed companies. The nominated adviser of an AIM company decides how the AIM Rules apply to that AIM company. We would expect that nominated advisers would be sympathetic to a request by an AIM company that the requirement under the AIM Rules for a general meeting be treated the same way as the FCA is proposing to treat the requirement for general meetings under the Listing Rules.

Loosening of pre-emption restrictions

On 1 April 2020, 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 share issues 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”.  This recommendation will apply until 30 September 2020.

The PEG statement also explains the conditions that should be applied where a company is 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 (i.e. where the broker conducting the placing 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); and
  • Company management should be involved in the allocation process.

The PEG statement is also relevant to “cash-box” placings. A cash-box placing enables a company to issue new shares under an exemption in the Companies Act 2006 (because the pre-emption requirements only apply to issues for cash). The issue of shares in a cash-box placing is not an issue of shares for cash as the shares are issued in exchange for the acquisition of shares in a special purpose company (i.e. the “cash box”). PEG has previously discouraged companies from using a cash-box placing to circumvent its recommendations, but it is to be expected that, until 30 September 2020, PEG will also support a cash-box placing where a company satisfies the above conditions.

It is possible that companies, particularly those on AIM, may already have a disapplication of pre-emption rights that is greater than 5%. Even if that is the case, we consider that the PEG statement is indicative of the fact that, if a general meeting of the company is required in order to give the directors authority to issue shares in a fundraising,  institutional shareholders of a company may well be sympathetic to a fundraising which goes beyond the existing disapplication of pre-emption rights if they are consulted and the particular circumstances of the company are explained to them (especially if the fundraising is on a soft pre-emptive basis).


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