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MARKETS CAPITAL RAISING & COVID  A capital time to tap

In part one of thits twho-peart smeries, Baakerr MkcKenzite lsawyers outline how capital markets have come to the rescue of listed struggling with the ongoing liquidity crisis

ver the past few months, global markets have experienced high levels of MINUTE and general uncertainty in light of READ the economic disruptions caused by Covid- 19. The unprecedented nature of the cOoronavirus pandemic and its impact on global economies Against the backdrop of the makes it difficult to predict with any certainty how human tragedy the ongoing Covid-19 will continue to meaningfully affect financial pandemic has brought, markets. This provides challenges for many listed companies many companies are facing that need to raise capital in the to medium term, their own battle for survival. particularly those that require funding on an urgent basis to The mandatory closures, meet upcoming or other contractual commitments, or sheltering and reduced to simply satisfy ongoing working capital requirements with consumer demand from the insufficient other sources of liquidity. As the United States Covid-19 pandemic poses Federal Reserve chair Jerome Powell recently cautioned: challenges to corporate “The recovery may take some time to gather , revenues and even and the passage of time can turn liquidity problems into viability, triggering the solvency problems.” Notwithstanding volatility, furlough or redundancy of the equity capital markets provide a number of options that tens of millions of people many companies will be eager to explore, including private while others work under in public equity (PIPE) and follow-on equity radically altered offerings. circumstances. In this first of a two-part series covering Private investment both equity and debt As liquidity concerns have crystallised and come under markets, Baker McKenzie additional scrutiny, are finding it more difficult lawyers consider how equity to secure conventional sources of funding in a timely manner. capital markets have been One possible solution for listed companies seeking to raise coming to the rescue of capital and boost balance sheets may be a PIPE transaction. listed companies struggling Such transactions, in which common or preferred shares or with the pandemic-driven convertible debt, in some cases with warrants, are issued at liquidity crisis. a set price to , allows the issuer to raise capital not otherwise available in the public markets. It can do this more quickly and cost effectively than other more heavily regulated means of equity capital raises, such as public offerings.

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and, for foreign investors, notification and The equity capital markets provide a approval considerations under the Committee on Foreign Investment in the number of options that many companies United States (CFIUS) regulations. See our article PIPEs unblocked, finally? , will be eager to explore previously published in IFLR, for further discussion on PIPEs.

In some jurisdictions, PIPE the structuring of PIPEs. In those Existing asked are often coupled with pre-emptive offers to jurisdictions, PIPEs have historically only to dig deep existing shareholders to give such investors been used by troubled small-cap companies While shareholders typically hope to enjoy the opportunity to provide some of the with limited options to raise capital through the benefits that owning a stake in a required funding and avoid significant traditional financing options (such as can bring, the flipside is that, dilution of their shareholdings. PIPE deals underwritten public equity offers, debt and during times of financial stress, they may be may present a number of advantages to convertible securities offerings, and called upon to support the business by issuers such as the speed in raising capital finance). injecting further capital to help ensure a (possibly one to two weeks depending upon One particular challenge that a company company remains viable and able to continue jurisdiction), lower transaction expenses may need to address when structuring a trading. We are now beginning to see a wide than public offerings, streamlined pre- PIPE relates to any hedging element. When range of companies making calls on existing transaction disclosure materials (or stock markets began their precipitous fall in shareholders via a variety of follow-on equity potentially no such disclosure materials, March, several countries, including Austria, offerings (also sometimes referred to as depending on jurisdiction) and failed Belgium, France, Italy, and Spain imposed secondary capital raisings, although these transactions not impacting the market, as temporary short selling bans. Although such usually involve the resale by a of transactions are disclosed only after bans were lifted as markets stabilised, they its existing securities). These include rights definitive investment commitments. could potentially be reimposed in the future. offers, open offers and placings, although the PIPE deals are commonly used in a If the structure of the PIPE has a hedging exact terminology and options available will rescue situation or when market prices do element (for instance, as a convertible bond vary between jurisdictions. not fully value a company. They often or warrant) then consideration will need to Globally, the number of follow-on involve relatively short-term investors who be given as to whether there is a ban on offerings increased 20% from 1,805 in the will look for a clear exit route. short selling of the issuer’s stock, and what first quarter of 2019 to 2,174 in the first investors often seek, and in some cases will exceptions may be available. quarter of 2020, with the proceeds raised require, influence over (such as In other jurisdictions, PIPEs have been rising 34% to $172.88 billion. During Q1 by obtaining board representation and a longstanding feature of the markets – for 2020, there was a steady rise in the number possibly seeking anti-dilution or negative example, in the US, the size, diversity and of offerings and the proceeds raised. control rights). In some cases, companies volume of PIPEs increased dramatically As time has passed and the scale of the have used a PIPE as a defensive tool with during the global financial crisis of 2008- health crisis and its economic impact have the addition of a substantial with 2009 and we are again witnessing a become clearer, companies have been in rights to board representation aligned with significant spike in the wake of Covid-19. greater need of capital and liquidity. The result existing management creating additional In the US, there is a relative lack of of this is that global issuance volume rose to confidence in the company’s leadership. For restrictive regulation for PIPEs, particularly 1,028 in May 2020, with total proceeds rising some issuers, PIPEs may be seen as a last resort given the pricing discount often entailed and because they may provide We are now beginning to see a wide range governance rights for the investor that a company does not want to relinquish. of companies making calls on existing The regulation, and thus the use, of PIPEs varies between jurisdictions. In what shareholders will be one of the first UK PIPEs in more than a decade and a possible sign of things to come, it has been announced that the private for companies whose charters authorise so- significantly, to $129.54 billion. This investment firm Clayton Dubilier & Rice is called blank check . The represents an increase in proceeds of 44% investing in the London - primary considerations include certain from $90 billion from 835 issues for the listed building products supplier SIG. stock-exchange mandated shareholder previous month, with total proceeds more In some jurisdictions, including much of approval for issuances at or above 20% of the than doubling from the $59.45 billion from Europe, investor sentiment is traditionally outstanding voting stock or certain insider 736 issues recorded in May 2019. opposed to non-pre-emptive offers that participation, a notification requirement In the UK, the most common structure dilute existing investors, and there may be under the Hart-Scott-Rodino Antitrust adopted by companies with premium significant legal hurdles and institutional Improvements Act of 1976, for issues above listings which have undertaken pre-emptive investor guidelines issues that complicate a certain level (approximately $94 million) secondary capital raisings in recent years

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Follow-on offerings 1,200 150,000 1,000

120,000 800

90,000 600

60,000 400

30,000 200

0 0 r r y y v t c c r r g p b b n l a a a a n n c o e e p p u e e e u u a a F M A M J N D M J J A S F M A O J D

2018 2019 2020

Proceeds ($M) Number of issues Source: Refinitiv

Nil paid rights entitle the holder to than would be the case for a rights issue. An As time has passed subscribe for the new shares being offered open offer is again made to shareholders on by the issuer at an offer price, which will be the register of members at the record date and the scale of the set at a – usually significant – discount to the but, in contrast to the nil paid rights issued market price to encourage takeup. Rights are in a rights issue, an open offer entitlement health crisis and its also separately tradable securities, so even cannot be traded. Except in very rare cases, shareholders who do not participate can shareholders who do not subscribe for new economic impact extract some value by selling the rights on shares in an open offer do not receive market during the offer period and so be compensation and are also diluted. have become compensated for the dilution of their Open offers are less popular with many shareholding when the additional shares are shareholders due to this inability to the clearer, companies issued. right. One advantage to open offers, though, have been in For shareholders who take no action, also is that where shareholder approval is known as lazy shareholders, underwriters required, the notice period for the general greater need of will endeavour to build a book of demand, meeting may run concurrently with the then place in the market the shares open offer period. If the shareholders vote capital and liquidity represented by the rights that were not taken down the open offer, then the new shares are up, known as the rump. If the rump placing simply not issued. Underwriters will seek to is successful, attaining a price per place any shares representing allocations not have been rights issues that involve an offer above the issue price, any excess above the taken up by existing shareholders with third of new shares, for , made to existing issue price (less expenses) is distributed to party investors. shareholders on a pre-emptive basis. Pre- the lazy shareholders. If the rump placing is As an alternative to a pre-emptive issue emption means that the rights to subscribe not successful, underwriters take any shares structure, a placing allows for a non-pre- the shares are first offered to the existing unable to be placed (the stick) at the issue emptive issue of new shares (or sale of shareholders in proportion to their existing price. Issuers like rights issues because, either treasury shares) for cash to selected or holding in order to prevent a dilution of the way, they get the same proceeds as if all preferred subscribers. In many jurisdictions, shareholding when the number of shares shareholders had taken up their rights. company law provides shareholders with increases. Shareholders on the register of A less common form of pre-emptive pre-emption rights, and so a waiver of such members at a designated record date are issue is an open offer. This allows for a pro rights may first be required. Shareholders issued with a pro rata entitlement to so- rata offer of new shares, for cash, to be made typically consider pre-emption rights a called nil paid rights for no consideration. at a narrower discount to the market price fundamental anti-dilutive protection

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measure for shareholders. In a sign of the bought deal or various forms of upside and commentators will feel as strongly impact of the Covid-19 crisis on company sharing. Although in the UK, these have during turbulent times such as we are balance sheets and the urgent need to raise rarely been sized greater than 10% of issued currently experiencing. capital to maintain solvency, the UK’s Pre- share capital (to comply with guidance) they Emption Group issued a statement on April can now go to 19.9% without publishing a Recovery and renewal 1 recommending that investors, “on a case- prospectus (based on the EU Prospectus With the onset of the pandemic in 2020 and by-case basis, consider supporting issuances Regulation). the initial shock to markets, both companies by companies of up to 20% of their issued In some jurisdictions, it is common to see and individuals have become more resilient share capital on a temporary basis, rather a placing combined with an open offer in as they adapt to the changing landscape. than the 5% for general corporate purposes what is known as a placing subject to While government intervention schemes with an additional 5% for specified . Under this structure, the new have put the global economy on life support acquisitions or investments, as set out in the shares are placed with institutional investors as we move into the next phases of recovery Statement of Principles”. If a company who effectively underwrite the issue. The and renewal, alternative transactions in the requires this additional flexibility, then it placing is subject to an open offer being capital markets will still present should consult with major shareholders and made to existing shareholders to take up opportunities for both companies and fully explain the circumstances their pro rata entitlements. This, therefore, investors to seize capital raising and underpinning the decision. The provides an opportunity for existing investment opportunities. As during the recommendation for investors to apply shareholders to clawback shares from placees. global financial crisis, listed entities have additional flexibility is currently in place on The price paid for the new shares is usually turned to such capital markets transactions a temporary basis until September 30 2020. at a discount to the current market price of as an efficient and viable solution to mitigate In Australia, the ASX has also the existing shares. Placees will buy shares the uncertainties and pave a way forward, announced temporary emergency capital not taken up by the existing shareholders, and are expected to continue to do so. raising relief, which will expire on July 31 thus ensuring the success of the offering. Please stay up to date with further 2020, unless the ASX decides to remove or In the UK, all of the follow-on offerings developments at Baker McKenzie’s Beyond extend such relief. Key to the ASX’s relief described above can also be combined with Covid-19 Resource Center . measure is that it will temporarily allow an a cashbox structure. No difference is uplift from the standard 15% placement apparent to subscribing investors, as they capacity to 25%, provided that any still pay cash for new shares, but technically Lisa Fontenot placement is made in conjunction with a the issue of the new shares is for non-cash Partner follow-on accelerated entitlement offer or consideration (being the shares in the Baker McKenzie, Palo Alto share purchase plan, in each case, at the same cashbox company into which the cash lisa.fontenot@bakermckenzie. or lower price than that offered under the proceeds from the subscribing investors will placement. have been channelled). The advantages of Kenny Kwan A placing typically involves a launch this structure are that it permits an issue of Partner announcement, limited marketing (if any), new shares without necessarily requiring a Baker McKenzie, Singapore and then a bookbuild undertaken by an disapplication of statutory pre-emption [email protected] investment bank, with the results of the rights, which can be useful for timing Roel Meers placing being announced ideally prior to reasons, for convenience (investors in Partner market open the next day. It is popular with problematic jurisdictions can be excluded) Baker McKenzie, Brussels issuers because they can be undertaken on a or in order to generate distributable reserves. [email protected] relatively tight timetable, as neither a Employing a cashbox structure to a cash prospectus nor a shareholder meeting is placing as a means of avoiding compliance Mark Bell usually required. Several underwriting with statutory pre-emption rights has Lead Knowledge Lawyer options are available, including best recently fallen out of favour, although it Baker McKenzie, Singapore efforts/reasonable endeavours, backstop, remains to be seen whether investor bodies [email protected]

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