Equity fundraising considerations for AIM companies during COVID-19
COVID-19 and related business challenges have forced many companies to review their balance sheets and particularly their cash positions. Many AIM listed companies have recently come to the market to raise money.
The coronavirus 2019 (“COVID-19”) and related business challenges have forced many companies to review their balance sheets and particularly their cash positions. Many AIM listed companies have recently come to the market to raise money with £450 million of secondary raises having been announced from 18 March 2020 to the start of the Easter weekend on 9 April 2020.
The virus has also led to regulators and investor protection organisations temporarily relaxing or amending certain rules and guidelines and companies are finding they are subject to increased political and media scrutiny of board decisions regarding corporate actions.
This article looks at a typical AIM secondary fundraising structure, the latest investor guidelines and pre-emption considerations, where the media heat is falling and some alternative structures.
Summary of key points:
Institutional placings – the standard AIM secondary structure
AIM companies have traditionally used an institutional placing structure when undertaking secondary fundraisings. This involves a broker placing the new shares with selected financial institutions rather than the shares being offered to all the shareholders. This normally means a prospectus does not have to be produced (which is likely to involve a 2 -3 month timetable).1
Such a placing is likely to be the simplest and most cost effective option for a secondary fundraising. If shareholder approval is not required (see below), institutional placings can be achieved on a very short timescale, often in less than a week from commencement of work. Principal documentation is likely to be limited to a placing agreement between the issuer and its broker and a (verified) investor presentation.
A placing may be combined with an open offer (see below).
Shareholder authorities and investor protection body guidelines
The issuer must establish whether it needs shareholder approval for the new issue. This derives from the Companies Act provisions that mean, broadly, a plc will not be able to issue new shares without passing an ordinary shareholder resolution (a majority of votes cast in favour) to approve the issue and will not be able to issue new shares for cash other than on a pre-emptive basis without the sanction of a special resolution (75% of votes cast in favour).
AIM companies typically obtain limited approvals from their shareholders at each AGM in accordance with the Pre-Emption Group’s2 guidelines which allow them to allot two thirds of their existing share capital (with one third for pre-emptive rights issues only) and to disapply pre-emption rights in respect of 5% of their existing share capital (with an extra 5% for specified investments or acquisitions).3 Thus an AIM company that wishes to raise equity of up to 5% of its share capital would not need to convene a specific shareholder meeting to obtain approval to do so if it had passed the standard resolution at AGM. Companies that have delayed their AGMs due to the COVID-19 restrictions should check the date of expiry of the resolutions passed at the last AGM.
On 1 April 2020 the Pre-Emption Group stated that in the current COVID-19 circumstances it would temporarily support non pre-emptive issues of new shares of up to 20% of share capital to allow companies more flexibility in raising funds. Note that a shareholder meeting would need to be convened, on 14 clear days’ notice, to approve such an issue if the latest ongoing authorities taken at the previous AGM are based on the previous recommended limits as described above. The Pre-Emption Group set out some additional steps that a company seeking such flexibility should take:
- the particular circumstances should be fully explained, including how the company is supporting its stakeholders;
- the company should consult with a representative sample of its major shareholders;
- as far as possible the allocation policy for the placing should seek to replicate the existing shareholder base; and
- company management should be involved in the allocation process.
In addition, companies issuing up to 20% of their share capital should make disclosures in their next annual report in relation to the consultation undertaken prior to the issue and the efforts to respect pre-emptive rights given the time available.
The guidelines do not rule out disapplications above these levels which should be considered on a case-by-case basis. The Pre-Emption Group sets out a number of factors to consider in this regard.
Media interest in non pre-emptive issues
Although not a new point, the COVID-19 context has shone a spotlight on the common practice of companies raising secondary funds from their existing major shareholders to the exclusion of existing retail investors. This has particularly attracted attention where the placing price is at a discount to the prevailing market price, especially where directors participate. The AIM Rules do not restrict the level of discount to market price at which a company may set a placing price and, although premiums are sometimes seen, it is more common to see a discount in the current markets.4
Broadly, an AIM company would be required to publish a prospectus if it was offering its shares to more than 150 people (which is likely if it did a fully pre-emptive offering) unless the total amount raised is less than EUR8 million (or equivalent). The cost and time involved in producing a prospectus is often considered disproportionate. However, new platforms exist offering retail shareholders the ability to participate in such fundraisings. PrimaryBid Limited is one example: it recently supported an open letter signed by senior financial services sector figures to listed boards calling on them to respect the rights of retail shareholders. This received significant attention in the mainstream press. Companies considering equity raises, particularly if they are availing themselves of one of the Government COVID-19 support schemes, should be mindful of this and discuss with their advisers.
Alternatives – rights issues, open offers and cash box placings
An “open offer” is a pre-emptive offer but without the issue of nil-paid rights (see below re rights issues) and is more common on AIM. Shareholders who do not take up their open offer entitlements are diluted and receive no benefit.5 An open offer would normally require a prospectus, but if the AIM company is raising less than EUR8 million (or the equivalent) pursuant to the open offer, it should fall within an exemption. An open offer element of up to this amount is often undertaken in conjunction with a larger placing to provide some ability for smaller shareholders to participate. Again, the AIM Rules do not restrict the discount to market price at which an open offer price may be set.
There are additional mechanics for an open offer above a straight institutional placing, for example the offer terms must be sent to shareholders together with a form of acceptance to enable them to participate (or lose their rights), but they are not unduly onerous. An analysis of the shareholder register will need to be undertaken by the issuer with its advisers to establish who will be part of the placing and who will be entitled to participate in the open offer. An element may be “firm placed” to placees with the balance being placed subject to “clawback” by other shareholders who take up their entitlements under the open offer. Placees may be asked to undertake not to participate in the open offer so as to provide as much of the open offer element as possible to the minority shareholders. The proportion of the overall fundraise that is represented by the open offer and who is entitled to apply for it will be relevant to how far the fundraising is seen to have taken minority shareholders’ interests into account.
Cash box placing
A cash box placing involves incorporating a new corporate vehicle, the cash box, which issues preference shares to the listed company’s broker. The broker uses the subscription funds from the placees it procures to pay up the preference shares while the listed company issues its own shares to the placees in consideration for the transfer of the preference shares to the company, rather than for cash. This means that the issuer does not need to obtain shareholder approval for the disapplication of pre-emption rights as it is not issuing shares for cash (though shareholder approval for share allotment is still needed). The structure adds a layer of complexity, for example the newco is likely to be incorporated in Jersey, but it is a fairly well-worn path. Although cash box structures have attracted criticism in the past for bypassing pre-emption rights (particularly where not used to fund an acquisition), given the temporary Pre-Emption Group guidance it may be that more companies take advantage of them in the current circumstances for issues of up to 20% of their share capital.
The standard structure for a large pre-emptive issue of new shares is a rights issue. This is a pro-rata offer of new shares to existing shareholders including the issue of “nil-paid rights” which may be traded. Rights issues require shareholder approval at a general meeting and a prospectus, together with the extensive documentation for the issue of the rights and various ancilliary forms. During the 2008 financial crisis many large cap companies undertook deeply discounted rights issues. It is however very rare for AIM companies to undertake rights issues as the cost and complexity is likely to be disproportionate to the amount of funds they are raising.
The normal rules and market practice have been altered by the restrictions and complications resulting from COVID-19 as a matter of law, sector guidance and public opinion. Companies may find this a double-edged sword as on the one hand they have been granted greater flexibility, and it is generally understood that the need to “bridge the gap” is paramount, but on the other hand are subject to greater scrutiny. Issuers should give careful consideration to new opportunities for structuring fundraisings and to the possibility of greater media interest than usual, especially if they are making use of one of the Government funding schemes. The right approach will be depend on the company and the transaction.
1 The rules relating to prospectuses are beyond the scope of this note and specific advice should be taken as necessary.
2 A group of representatives from listed companies, investment institutions and corporate finance practitioners.
3 A limit of 7.5% of the existing share capital over a rolling three-year period is also recommended. Note that some AIM companies are more flexible when applying these guidelines than Main Market companies, for example sometimes taking an unrestricted 10% disapplication of pre-emption rights
4 There are various investor protection body guidelines around discount but the AIM market has traditionally been flexible in this regard and they are not discussed here.
5 “Compensatory open offers” which provide benefit to lazy shareholders are possible but rare in practice.