When the reforms following the HM Treasury Prospectus Review are implemented, a secondary fundraising will not automatically trigger an "admission to trading" prospectus and the FCA will have the flexibility to decide when this is required. The reforms will also enable the FCA to determine when prospectuses will require its review and approval prior to publication.
Raising the threshold for a prospectus being required
The Review states that an admission to trading prospectus should only be required where there has been a "material shift in what it means to be invested in an existing listed issuer". Accordingly, the threshold for prospectuses being published in connection with secondary offers should be raised from offers of 20% to 75% of a company's existing share capital. Such prospectuses would remain subject to FCA review and approval.
Removing the need for a sponsor
The Review recommends that a listed company should not be required to appoint a sponsor for a secondary offer, including even for large secondary offers of 75% or more of existing share capital where a prospectus (please see above) would be required. The future of the sponsor regime is being considered more widely by the FCA in the second phase of its Primary Markets Effectiveness Review.
Changes to the FCA's working capital approach
The FCA's approach to working capital statements in prospectuses should be reconsidered and revised to allow greater flexibility and allow for assumptions to be included. The Review notes that, based on the experience during the COVID-19 pandemic when COVID-related assumptions in working capital statements were allowed, this should not lead to disruption in the markets.
The Review states that the approach taken to prospectus working capital disclosure should better reflect the expectations of investors accustomed to annual report-style disclosure, and to give a fuller picture of a company's financial position.
The Review also recommends reducing the current overlap between working capital diligence exercises and annual report disclosures. It is noted that the upcoming BEIS audit reforms will incorporate going concern and viability requirements within the new resilience statement and this is already being discussed by an FCA and FRC working group.
The fact that a sponsor will no longer be required (please see above) also means there will be a reduction in the level of working capital due diligence, particularly where there is no prospectus.
Shortening the timetable
The Review notes that two of the factors which contribute to a prolonged timetable are the length of the offer period and the need to hold a general meeting. Accordingly, it recommends that:
- the minimum offer period for rights issues and open offers should be reduced from ten to seven business days; and
- companies should have flexibility to reduce the notice period where a general meeting (other than an AGM) is required from 14 days to seven days.
Although this would be a big improvement as regards timetable, the Review notes that the quicker turnaround periods involved would present challenges for investors holding through an intermediated shareholding chain.
Expanding scope of authority
The scope of the "two thirds" authority should be expanded so that the second third would apply to any pre-emptive offer, not just rights issues as is currently the case. This will give companies more flexibility as to the choice of their fundraising method as well as reducing the need for a general meeting in relation to a larger proportion of open offers.
Other changes to pre-emption rights and rights issue process
The Review recommends:
- aligning the pre-emption provisions in the Companies Act 2006 with the process that is usually followed on a rights issue, including the ability to exclude overseas shareholders where the cost and burden of extending the offer to them would be disproportionate, and flexibility to deal with fractional entitlements; and
- having excess application mechanics attached to rights issues, in contrast to the current position where a waiver from the Listing Rules is required.
Overseas investors: optional enhanced disclosure regime
It is often the case in UK secondary offers that shares or, in the case of rights issues, rights not taken up by existing shareholders need to be capable of being offered to institutional investors in other jurisdictions, particularly the United States. In order to extend an offer into the United States, investment banks involved in the offer will typically require the provision of the customary US comfort package from legal counsel and auditors in order to provide a defence against potential liability in the United States, which results in a prospectus or offer document being produced that conforms generally to US disclosure standards.
The above approach conflicts with the proposed elimination of a prospectus for most secondary offers and the stated goal of the Review to make secondary fundraisings more efficient and less costly for issuers. The Review, therefore, has recommended that an optional enhanced continuous disclosure regime be introduced that companies who are likely to want to include US or other international investors in future secondary offers could opt in to. Companies that adhere to this optional regime would be expected to include more detailed disclosures in their annual reports that would more closely adhere to US expectations in areas of disclosure such as risk factors, business description, operating and financial review, regulatory environment and material contracts. Such information could then be incorporated by reference into a shorter offer document for a secondary fundraise, which together with any necessary updates or amendments to the existing disclosure, would form a "disclosure package" that the requisite US comfort could be provided on without the need for producing a lengthy and duplicative prospectus or offer document.
While the inclusion of such enhanced disclosures would likely involve US securities lawyers in the drafting and review process and add some additional time and cost to the process of preparing an annual report, particularly in the first year of implementation, we believe that many listed companies would benefit from adopting this approach as it would allow them to take full advantage of the benefits of the proposed reforms and raise funds more cheaply and quickly than is currently the case.