Government moves to reduce cost of raising equity capital
Whenever a company is looking to raise additional equity capital there are always two questions to consider: Firstly, is a Prospectus required? Secondly, if the answer to question 1 is 'no', does the fund-raising document the company is proposing to issue to potential investors require approval by an authorised person as a Financial Promotion, or can an exemption or exemptions be found that will allow it to be sent to its intended recipients without such approval?
Requirement for Prospectus
Following a review by the European Commission in 2010, certain changes were made to the Prospectus Directive and the Government has taken rapid steps to introduce two of the changes into UK law. These changes, which came into effect on 31 July 2011 – nearly a year ahead of the timetable required by the amending Directive – alter two of the triggers which require a Prospectus to be prepared:
- the number of investors to whom an offer of securities may be made before a Prospectus is required has been increased from 100 to 150; and
- the amount of money that a company can seek to raise in an offer of securities in any period of 12 months without a Prospectus being required has been increased from €2.5 million to €5 million.
These two exemptions are separate and can potentially both be used.
The first exemption (up to 150 people) can be used to raise any amount (the €5 million limit does not apply) and will allow the net to be spread wider where a company is seeking to raise money from a restricted number of investors.
The second exemption (up to €5 million) allows a company to seek to raise that amount from any number of people (the 150 person limit does not apply).
As the Government has introduced these changes ahead of the date required by the Directive, certain other EU countries have not yet adopted the higher limits. So companies seeking to raise funds in other countries in the EU will need to bear in mind the possibility that the previous limits (€2.5 million and 100 people) may still apply.
The Quoted Companies Alliance lobbied hard for the early introduction of these changes, which increase the potential for companies to raise additional equity funding without preparing a Prospectus. The changes should also result in significant cost savings. According to the Explanatory Memorandum issued by the Treasury, UK businesses have been spending some £12 million a year by way of costs in preparing Prospectuses required under the previous rules. Some companies that decided not to seek equity funding because of the costs involved in preparing a Prospectus may now find that they can revisit this possibility.
Market conditions for raising additional capital are still not easy, with incoming investors and incumbent shareholders or directors often finding it hard to reach agreement on valuation, but if that hurdle can be jumped evidence shows that money is available for companies which have a good story to tell. These changes should therefore be welcome, particularly to smaller companies.
Financial Promotion
As mentioned above, assuming that a method of raising capital without a Prospectus can be found, a company will still need to consider whether its fund-raising document must be approved as a Financial Promotion or whether it can find available exemptions under the Financial Promotion regime and avoid that requirement. The most commonly used exemptions – for communications with existing shareholders, exempt persons, sophisticated investors and high net worth individuals – offer considerable assistance here, but there are traps for the unwary and advice should always be sought.
The Bribery Act 2010 (the Act)
The Bribery Act 2010 (the Act) came into force on 1 July this year. Whilst the Act largely consolidates the UK's existing bribery regime, it also extends that regime in a number of ways – most notably with the addition of the new corporate offence of failing to prevent bribery. This strict liability offence has caused much controversy and, arguably, led to the delay in the Act's implementation.
Already the first prosecution under the Act is due to be brought next month. This case is against an individual, a court clerk accused of accepting a bribe to perform his functions improperly. The willingness of the DPP to use the Act so swiftly after implementation in order to prosecute the receipt of a relatively small sum (£500) suggests that businesses would do well to review their commercial arrangements in order to avoid prosecution under the Act.
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You may recall that the Act introduces:
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Companies should note that the two general offences and the offence relating to the bribery of foreign public officials do not just apply to individuals – certain corporate entities can also be guilty of the general offences and the specified offence of the bribery of a foreign public official, if a 'senior officer' of that organisation commits one of those offences.
In respect of the corporate offence of failing to prevent bribery (which is a separate offence to the two general offences and the specific offence of bribing a foreign public official), businesses can benefit from a defence under the Act if they can show that they had 'adequate procedures' in place to prevent bribery.
In considering their adequate procedures, businesses must do more than go through the motions. Government guidance makes clear that the steps a company puts in place are not just generic but must be appropriate in respect of the risks that have been identified in that particular business. Separate guidance issued by the SFO makes clear that where a potential offence has been discovered it will expect a company seeking to avoid prosecution to be able to show it has a genuinely pro-active and effective corporate compliance program. Each business will therefore have to develop its own policies with the range and emphasis tailored for the risks inherent in the nature of its business and the geographic area in which it works.
In some countries it is known already that there is a culture of expectation on the part of public officials that foreign companies should give facilitation payments if they want a smooth passage and in others the receipt of a gift is considered normal at a level that would be seen as excessive elsewhere. If you have any concerns about the range of the risk assessment that you should carry out or as to the procedures you should put in place having identified any risks, then we would be happy to advise you on these matters.
Survival of the less than fittest
Bruce Jones considers some of the risks for directors of distressed companies which are surviving against the odds. (This article was originally written for the July/August 2011 edition of M&A magazine)
On 26 January 2010, The Telegraph reported Bank of England Governor, Mervyn King, as saying that the UK economy had shrunk by five percent in 2009, the largest fall in output since 1931.
Fast forward to the present day and things scarcely seem any better. According to a report in The Guardian on 20th June 2011, household finances in Britain are deteriorating at their fastest rate since the depths of the recession in 2009. Yet according to recent statistics produced by the Insolvency Service, the liquidation rate amongst UK companies remains low both compared to the peak in 1993 and to the average over the last 25 years. The figures would seem to be borne out by experience: on the high street for instance, there have been a handful of high profile casualties – Woolworths and more recently Habitat spring to mind in particular – but large scale failures of smaller businesses have not occurred in the way one might have expected in such a difficult trading environment.
Why is this?
Small businesses in particular will not be slow to tell you about the difficulties they have in raising bank finance at the moment. However, for struggling businesses with loan facilities already in place, anecdotally, the banks appear more reluctant than historically to force businesses into administration or liquidation.
For lawyers and other professionals this means that the restructuring work which normally comes to the fore in a recession is rather different this time round. There is still work to be done around administration, and pre-packs in particular remain popular, but one seems to spend much more effort advising directors of companies being fed an unexpected life-line by bank creditors about the nature and scope of their duties.
The difficulty, of course, for directors of companies teetering on the brink is the ever present risk of wrongful trading allegations. Wrongful trading under section 214 of the Insolvency Act 1986 occurs where a company has gone into insolvent liquidation and at some point before the commencement of the winding up, a director of the company knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation.
The fact that a bank is continuing to offer support to a failing company is not sufficient for the directors to conclude without more that the company will necessarily be able to trade its way out of difficulty. The best one can say is that the court would not make an order for wrongful trading against a director of a company that ended up in liquidation if the director, knowing that there was no reasonable prospect that the company would avoid going into insolvent liquidation, nonetheless took every available step that he ought to have taken to minimise the potential loss to the company's creditors (Section 214 (3) of the Insolvency Act 1986). This is to be assessed by the standards of a reasonable diligent person having both the general knowledge, skill and experience that it is reasonable to expect of someone carrying out the functions carried out by the director in question, and the general knowledge, skill and experience which that director actually has. In other words, it is both a subjective and an objective test.
The upshot is that directors need to tread a fine line if they wish to continue to trade in circumstances where the outlook for the company would otherwise seem bleak, notwithstanding the apparent support of its bank. Regular (often daily) board meetings and careful and thoughtful minuting of decisions made are essential.
Trading in such circumstances is a challenge, but distressed businesses seem to be surviving for the time being at least. Don't say it too loudly, but perhaps a social conscience is resting somewhere in the banking system after all.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
