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Background and approach
This review looks at legal and regulatory developments in the sphere of equity capital markets (ECM) in 2019 and forms part of our annual trend report which aims to provide insight into the current dynamics of ECM activity in the UK.
The other parts of our 2019 trend report comprise:
• IPOs in 2019—Main Market and AIM
• Secondary Offers in 2019—Main Market and AIM
• Standard listings in 2019
• Risk factor disclosure in 2019 IPOs
The UK entered an implementation period on 31 January 2020 during which existing EU laws continue to apply to the UK.
The listing, prospectus and transparency regimes that apply in the UK (and are largely derived from EU law) continue to apply in the implementation period in the same way as before Brexit. However, UK representatives will no longer be permitted to participate in EU institutions and other bodies. The Financial Conduct Authority (FCA) is therefore no longer a member of any of the European Securities and Markets Authority (ESMA) regulatory bodies.
The raft of statutory instruments (SIs) adopted to deal with a no deal Brexit have been amended by paragraph 1 of Schedule 5 to the European Union (Withdrawal Agreement) Act 2020 to defer the implementation of their provisions from exit day until the end of the implementation period (IP completion day).
In summary, the main impact on the UK listing and prospectus regime at the end of the implementation period in the event of no future relationship agreement between the UK and the EU will be as follows:
• ‘Passporting’ of prospectuses: passporting between the UK and the EEA will no longer be possible. The UK has provided for transitional provisions (in Regulation 73 of The Official Listing of Securities, Prospectus and Transparency (Amendment etc) (EU Exit) Regulations 2019) so that prospectuses passported into the UK before IP completion day will be valid for use up to the end of their validity. ESMA has taken the opposite stance in its Q&A on prospectuses (question 104) stating that the validity of a UK approved prospectus passported into the EU will be cancelled if there is no withdrawal agreement in place
• Accounting standards for listed companies: UK listed companies will be required to use UK adopted international accounting standards (IAS) for their consolidated accounts for financial years commencing after IP completion day; EEA and other third country issuers will be able to use other accounting standards for which an equivalence decision has been made and for which the FCA has granted a exemption; an equivalence decision was made determining that EU adopted IFRS is equivalent to UK adopted accounting standards
• Historical financial information in prospectuses: in general, UK listed companies will be required to use UK adopted IAS for historical financial information in prospectuses. EEA and other third country issuers will be able to use either UK IAS or accounting standards of another country for which an equivalence decision has been made. Transitional provisions are in place for financial years straddling IP completion day
• Free float provisions: the Listing Rules will be amended so that holders of shares in any jurisdiction will count towards the free float requirement of 25% shares in public hands (and not only shares in public hands in the EEA) (see paragraph 3.73 of FCA Consultation Paper CP 18/36)
• DTR scope: the transparency rules in DTR 4 to 6 (which cover periodic financial reporting and notification requirements on issuers and holders of voting rights) will apply to issuers with securities admitted to trading on a UK regulated market (as oppose to those with securities admitted to trading on an EU regulated market for which the FCA is the home competent authority)
• Market abuse regime: the Market Abuse Regulation (EU) No 96/2014 will be onshored on IP completion day. The current scope of the regime will be maintained so that UK MAR will apply to financial instruments admitted to trading or traded on UK venues as well as EU trading venues pursuant to The Market Abuse (Amendment) (EU Exit) Regulations 2019
Prospectus Regulation fully in force—July 2019
The Prospectus Regulation (EU) 2017/1129 came fully into force in July 2019. Some of the changes from the old regime include widened exemptions from the requirement to produce a prospectus (in force from July 2017 and July 2018), more prescriptive requirements relating to the summary and risk factors section, the option to publish a ‘simplified’ prospectus for secondary issues and the introduction of an EU Growth prospectus which can be used by SMEs and certain other companies.
For further details see News Analysis: Content changes to prospectuses under the Prospectus Regulation (a subscription to LexisPSL is required).
ESMA guidelines on disclosure requirements under the Prospectus Regulation
ESMA is consulting on guidelines on disclosure requirements under the Prospectus Regulation (see ESMA Consultation Paper, 12 July 2019). When finalised, these will replace and update the recommendations published by the Committee of European Securities Regulators (CESR) (ESMA’s predecessor) on the disclosure requirements under the Prospectus Directive.
The draft guidelines largely follow the contents of the CESR recommendations (although some new guidelines have been added). Topics covered include financial information disclosures as well as non-financial information issues such as disclosure of directors’ remuneration, related party transactions and share capital history.
ESMA’s final version of the guidelines is expected to be published in Q2 2020.
ESMA risk factor guidelines
In October 2019 ESMA issued final guidelines (under its mandate in Article 16(4) of the Prospectus Regulation) to help competent authorities in their review of risk factor disclosure in prospectuses.
Risk factor disclosure is significantly more regulated under the Prospectus Regulation than under the old regime. Risk factors must be specific to the issuer and/or shares, material for investors to consider when making an informed investment decision and corroborated by the other content of the prospectus. They should be grouped into no more than ten categories with the most material in each category presented first.
Materiality should be based on the probability of their occurrence and the expected magnitude of their negative impact. The assessment of materiality may be disclosed using a qualitative scale of low, medium or high.
ESMA provides guidance on specificity, materiality, corroboration, categorisation, conciseness and risk factor disclosure in the summary.
An analysis of risk factor disclosure in 2019 IPO prospectuses can be found in our review: Risk factor disclosure in 2019 IPOs (a subscription to LexisPSL is required).
ESMA consultation on the Market Abuse Regulation
ESMA also issued a consultation paper on certain aspects of the Market Abuse Regulation in October 2019.
Relevant areas to ECM being consulted on are the definition of inside information and its effectiveness in preventing market abuse, the delayed disclosure of inside information, the usefulness of insider lists, market soundings and aspects of the notification requirements by persons discharging managerial responsibilities (PDMRs).
ESMA’s final review report was expected in Spring 2020.
SME Growth Markets Regulation
An EU regulation to promote the use of SME growth markets by reducing administrative and regulatory compliance costs on issuers came into force in December 2019. The SME Growth Markets Regulation (EU) 2019/2115 made amendments to the Prospectus Regulation (from 31 December 2019) and the Market Abuse Regulation (to come into effect on 1 January 2021).
The main change to the Prospectus Regulation is that an issuer wishing to transfer from an SME growth market (such as AIM) to a regulated market can use the simplified prospectus regime under Article 14 of the Prospectus Regulation provided its securities have been traded continuously on an SME growth market for at least two years. Previously, no concession was in place and a full prospectus would have been required.
Helpful amendments are being made to the Market Abuse Regulation. These provide that an issuer on an SME Growth Market will not need to automatically provide a written explanation to its competent authority when it delays the disclosure of inside information (but only on request). Such issuers will be required to keep a simplified insider list containing details of a more limited type of permanent insider. All issuers will benefit from an amendment giving them more time to publicly announce a dealing by a PDMR. The deadline will be two business days after the issuer itself is notified of the transaction by the PDMR.
The amendments to the Market Abuse Regulation are due to come into effect after IP completion day and will not automatically become part of UK law unless they are part of a future relationship agreement between the UK and the EU.
For more details see our News Analysis on Amendments to the Prospectus Regulation and the Market Abuse Regulation to help SME growth market issuers (a subscription to LexisPSL is required).
Update on use of registration documents
As at the date of publication of our 2018 ECM trend report, nine companies had listed under the rules which reformed the availability of information during the Main Market IPO process.
Since then an additional five companies have listed under these rules and published a registration document followed by a prospectus (Trainline, Airtel Africa, Helios Towers, Calisen Group Holdings and Ninety One). All left a minimum seven day gap between the publication of the registration document and the publication of the intention to float announcement (which is usually published at the same time as analysts release their research reports). This continues the trend which was noted in our 2018 ECM Trend Report and indicates that connected and unconnected analysts are being briefed separately.
In addition, five companies published a registration document but postponed their floats (ReAssure, Voyager AIR, JSC Kaspi.kz, The African Export-Import Bank, DNEG).
Into 2020 and coronavirus (COVID–19)
To assist companies during the coronavirus (COVID-19) pandemic, the government has eased requirements relating to company filing and shareholder meetings in the Corporate Insolvency and Governance Act 2020 and given companies the ability to apply for extensions to file their annual report and accounts (as well as introducing greater flexibility into the insolvency regime). For full details see Practice Notes: Coronavirus (COVID-19)—key issues for Corporate lawyers, Coronavirus (COVID–19)—impact on company filing and administrative procedures and Coronavirus (COVID-19)—impact on annual accounts and reports (a subscription to LexisPSL is required).
In addition, the FCA and London Stock Exchange (LSE) have relaxed certain of their regulatory provisions and provided guidance to help companies with the many significant challenges thrown up during the crisis including in the areas set out below.
Listed companies have an extra two months to publish their audited annual financial reports (temporarily extended from four to six months from the year end) and an extra one month to publish half-yearly financial reports (see FCA Statement of policy and Primary Market Bulletin No. 28). The London Stock Exchange has offered AIM companies the chance to apply for a three month extension to publish their annual accounts (temporarily extending the time limit from six to nine months) and an additional one month to notify half-yearly reports (from three to four months from the half-year end). See Inside AIM, 9 June 2020 and Inside AIM, 26 March 2020.
Working capital statements
The FCA has relaxed its approach to the disclosure of working capital statements in prospectuses and circulars during the coronavirus crisis. In certain circumstances, issuers will be permitted to disclose their key assumptions in relation to business disruption during the crisis underpinning the reasonable worst-case scenario in an unqualified (or ‘clean’) working capital statement. Normally, the disclosure of assumptions in an unqualified working capital statement is not acceptable. See Primary Market Bulletin No. 27 and FCA technical supplement—working capital statements and circulars during the coronavirus epidemic.
General meeting requirements under the Listing Rules
The FCA will temporarily modify the Listing Rules on a case by case basis for premium listed companies in relation to the holding of general meetings to approve class 1 transactions and related party transactions. Issuers may apply to the FCA for a dispensation from the requirement to hold a general meeting if they have obtained, or will obtain, written undertakings from the requisite number of shareholders (eligible to vote) that they approve the proposed transaction and would vote in favour of it. See Primary Market Bulletin No 27 and FCA technical supplement—working capital statements and circulars during the coronavirus epidemic.
Suspension of trading
The FCA has reminded issuers that it will continue to consider requests to suspend trading in securities to prevent a disorderly market (see Primary Market Bulletin No 27).
The LSE has also issued a series of temporary measures to support AIM companies and nominated advisers including the option to request a temporary suspension of trading in an AIM company’s securities where it requires more time to make a notification due to challenges arising under the coronavirus pandemic (see Inside AIM: Coronavirus—Temporary measures, 20 March 2020.
The Pre-Emption Group—relaxation of non pre-emptive issue thresholds
The Pre-Emption Group (PEG) has recommended that investors consider supporting non-pre-emptive issuances by listed companies of up to 20% of their issued share capital until 30 September 2020. This is subject to a number of provisos including that a representative sample of the company’s major shareholders are consulted ahead of the fundraising and that the principles of pre-emption should be observed in the allocation as far as possible. The FCA has urged issuers to consider PEG’s new guidance and the ways in which smaller shareholders can participate in a capital raising.
Many companies have taken advantage of the ability to make larger share issues on a non-pre-emptive basis and we have seen an increase in the use of cash box placing structures where companies issue shares for non-cash consideration without the need for shareholder authority to disapply statutory pre-emption rights. We have also seen an increasing number of companies using the PrimaryBid investment platform to make a small retail offer attached to a larger institutional placing in a bid to opening share offers to smaller investors.
To see the effect of the coronavirus crisis on secondary offers undertaken by Main Market and AIM companies in 2020 see our tracker: Coronavirus (COVID-19)—ECM secondary issue tracker and News Analysis looking at secondary offer trends in the period from 1 April to 20 May 2020: Coronavirus (COVID-19)—trends in secondary equity fundraisings (a subscription to LexisPSL is required).
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