COVID-19 and the resulting "lockdown" led to significant volatility on international stock exchanges in spring 2020.
Technology has been one of the top five best performing sectors in the UK capital markets since 2020, with an average price performance drop of only 5.3% between January and May 2020[1]. Nonetheless, for many listed technology companies, the virus and the resulting legal restrictions have affected manufacturing and supply chains, workforce availability, access to market and market demand for products and services.
Over the coming months, many listed technology companies may wish to reinforce their balance sheets, or take advantage of improving capital markets for certain technology sectors. Here are a few considerations for technology issuers intending to conduct a fundraising or offering in the current UK capital markets:
Issuers considering an initial or secondary public offering should consider whether the contractual arrangements they put in place will allow contracts to be terminated in the event of a second wave of COVID-19. Equity capital markets transactions are often undertaken in real time, so it is important they can be terminated quickly in an emergency. Placing agreements typically give banks and brokers a wide discretion to terminate the agreement for force majeure reasons e.g. wars and acts of terrorism, but may not refer to the spread of viruses.
"Force majeure" is not a universal legal doctrine;. it depends on which law 'governs' the contract, as well as its express terms. English law has no definition of "force majeure", so in English contracts these clauses depend on drafting and interpretation. Careful drafting is needed to ensure they cover all events which could jeopardise a capital markets deal.
For any new placing, subscription or underwriting agreement, parties should consider referring to the spread of disease or infection, epidemic or pandemic, specifically mentioning a worsening in the spread of COVID-19, so that the agreement can be terminated if necessary.
The inter-play between the force majeure provisions of the contract and any "material adverse change" clause in the relevant agreement also needs careful consideration to ensure that the parties are clear on which events would trigger a right to terminate the contract.
At each AGM, a UK public company typically seeks a general authority to allot shares and a separate authority to dis-apply pre-emption rights in respect of a portion of that general authority. This enables the company to issue shares to investors for cash. For Main Market listed companies, the general allotment authority is normally one-third of current issued share capital and the disapplication sought is over 5% of current issued share capital. For AIM companies these tend to be larger, depending on the size of the company and its stage of development.
A UK public company which raised funds on the Market via a placing(s) since its last AGM may now be running low on disapplication authority. In normal circumstances, the company would simply publish a circular and seek specific shareholder authority for a raise to deal with any shortfall. However, in the current environment, companies are faced with the logistical difficulties of hosting a meeting, plus nervous brokers that want to avoid delaying fundraisings in volatile markets.
One possible solution is the cash box placing structure. This legal mechanism enables UK public companies with insufficient disapplication authority, to utilise their remaining general allotment authority for a new issue of shares for cash. More detail can be found here.
As of 10 June 2020, there have been at least 26 secondary issuances using the cash box placing structure since the UK government's imposition of the "lockdown" on 23 March 2020, with at least three such transactions involving technology companies (accesso Technology Group plc, Keywords Studios plc and Blue Prism Group plc).
On 8 April 2020, the Financial Conduct Authority announced measures to assist companies conducting fundraisings during COVID-19 whilst retaining sufficient investor protection. These measures include:
Our equity capital markets team in London has recently advised clients on these issues and we would be delighted to advise other clients and contacts who are considering COVID-19 in light of current circumstances on forthcoming deals. Please click here for a list of the representative deals completed by our global Equity Capital Markets Team during the first quarter of 2020.
[1] according to data provided by the London Stock Exchange.
