Proportionate disclosure regime (rights issues and SMEs)
12 July 2012
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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.
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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.