Locations
Market reCap
- Proportionate disclosure regime (rights issues and SMEs)
- UK implementation of the Amending Directive
- US Congress amends securities laws to facilitate capital formation
- Proposed changes to the Takeover Code
- Withholding tax disclosure
- Executive remuneration – new votes and disclosures
- Consultations on the UK Corporate Governance Code, UK Stewardship Code and International Standards on Auditing
Issuing a prospectus under the Prospectus Directive (Directive 2003/71/EC) (the "PD") and the Prospectus Regulation (EC No. 809/2004) (the "Prospectus Regulation") can be a complicated, lengthy and costly process. The Amending Directive (Directive 2010/73/EU) seeks to reduce the administrative burden and costs for companies seeking to raise capital by introducing the proportionate disclosure regime ("PDR"), which took effect from 1 July 2012.
This article looks at the practical effects of the PDR and explains how your company or client can benefit from the proportionate (i.e. reduced) level of information now permitted in a prospectus prepared by a company undertaking a rights issue or a company of a certain size.
1. UK implementation of the PDR
The Prospectus Regulation has been amended with the insertion of new Articles 26a and 26b. These establish the proportionate disclosure schedules in Annexes XXIII and XXIV (which apply to issuers undertaking rights issues) and Annexes XXV to XXVIII (which apply to issuers of a certain size).
The Financial Services Authority implemented these EU-level amendments in the United Kingdom by inserting the proportionate schedules into the Annexes of the Prospectus Rules (the "PR Annexes"), the effect of which is explained below.
2. Rights issues
The PDR applies for rights issues where the issuer producing the prospectus has shares already admitted to trading on a regulated market or a multilateral trading facility (which includes the AIM Market of London Stock Exchange plc ("AIM")).
A rights issue is an issue of statutory pre-emption rights which allow for the subscription of new shares and are offered only to existing shareholders. Pre-emptive issues where pre-emption rights have been disapplied, such as rights issues and compensatory open offers, are also included provided that certain criteria set out in the Prospectus Regulation are met.
For issuers undertaking a rights issue, the proportionate schedules in PR Annexes XXIII (share registration document) and XXIV (share securities note) apply in place of the full schedules in PR Annexes I and III. The key disclosure differences for a prospectus produced under this limb of the PDR are:
- reduced disclosure on the audited historical financial information of the issuer (limited to the issuer's last financial year or such shorter period that the issuer has been in operation) and the audit report;
- no disclosure on the issuer's selected financial information, operating and financial review ("OFR") or capital resources;
- no disclosure on the issuer's business (including its incorporation, development, subsidiaries, property, plant and equipment, R&D, patents or licences, employees, squeeze/sell outs or takeover bids);
- no disclosure on the issuer's board practices (including service contracts, termination benefits or audit and remuneration committees); and
- reduced disclosure on the material contracts entered into by the issuer during the ordinary course of business (limited to the last year immediately preceding the prospectus).
A prospectus for a rights issue is still required to include certain key disclosures, including statements on the issuer's working capital, legal and arbitration proceedings, significant changes, risk factors and other financial information (i.e. interim and pro forma financial information, where applicable).
A prospectus for a rights issue must also state that it is addressed to shareholders of the issuer and the level of disclosure is proportionate to that required for a rights issue.
3. Small and medium-sized enterprises ("SMEs") and companies with a reduced market capitalisation
An issuer seeking to make an offer to the public or an application for the admission to trading on a regulated market of its equity or debt securities can also produce a prospectus containing a proportionate level of disclosure under the PDR, providing the issuer is:
a) a company with a "reduced market capitalisation", which is defined as a company listed on a regulated market with an average market capitalisation of less than €100 million over the past three years; or
b) an SME, which is defined as a company that meets two of the following three criteria (according to its last annual or consolidated accounts):
(i) an average number of employees of less than 250 employees;
(ii) a total balance sheet net asset value not exceeding €43 million; and
(iii) an annual net turnover not exceeding €50 million.
The key disclosure differences for a prospectus produced under this limb of the PDR are:
- reduced disclosure on the audited historical financial information of the issuer (limited to the issuer's latest two financial years or such shorter period that the issuer has been in operation) and the audit report;
- no disclosure on the issuer's quarterly or half yearly financial information (published since its last audited financial statements). This is unlike a prospectus for a rights issue which requires this information;
- no OFR disclosure if the issuer's annual reports (prepared in accordance with Article 46 of Directive 78/660/EEC and Article 36 of Directive 83/349/EEC) are included in the prospectus;
- reduced disclosure on the issuer's capital resources and selected financial information; and
- reduced disclosure on the issuer's business (including its operations, principal activities and markets, investments, R&D, patents and employees).
In addition to equity securities, there are proportionate schedules for prospectuses produced by SMEs and companies with reduced market capitalisation in relation to debt / derivative securities and depositary receipts (Annexes XXVI to XXVIII), and prospectuses produced by credit institutions (Annex XXIX).
4. The UK Listing Authority ("UKLA") approval process
Prospectuses produced under the PDR must be vetted and approved by a competent authority of the home member state of the issuer which, in the UK, is the UKLA.
The new PR Annex checklists can be found on the UKLA's website. Initial comments on the first draft of the prospectus by the UKLA can vary between five to ten working days.
5. Conclusion
A consequence of the prospectus regime under the PD has been that smaller companies, particularly those admitted to trading on AIM, have moved away from conducting rights issues and tended to raise capital through a placing to a limited number of investors to avoid having to produce a full prospectus.
The PDR potentially changes this by taking into account the amount of information on issuers already disclosed to the market. As a consequence, if your company or client is undertaking a rights issue (and is admitted to trading on a regulated market or AIM) or is of a certain size, it can now produce a prospectus with reduced disclosure on its business and financial information, which could reduce the administrative burdens and costs associated with raising capital.
Rashed Hasan is a Solicitor in the Corporate Group of Field Fisher Waterhouse LLP in London.