COVID-19 has had a significant financial impact on many listed companies and, in recent months, there has been a marked increase in equity capital raises by listed companies. As at 22 July 2020, there have been over 100 secondary equity fundraisings in excess of £10 million on the Main Market and AIM since the COVID lockdown period began. Some have had to raise emergency capital, on short notice and often at significant discounts, whereas others have sought to shore up their balance sheets as the pandemic, and its implications, unfold. However, in some cases funds have been raised for M&A “war chests” or similar more positive reasons.
Unsurprisingly, several issuers in the pharmaceutical, biotech and healthcare sectors have needed to raise equity in the current climate. At the time of writing, 14 such issuers have come to market raising in aggregate almost £450 million. The trend started in early March with AIM-listed Diurnal Group plc (a specialty pharmaceutical company targeting patient needs in chronic endocrine (hormonal) diseases) raising £11.2 million at a discount of 4.5 percent to the market price in order to strengthen its balance sheet, continue its product development and progress early-stage pipeline into clinical trials. Whilst the majority of sector issuers have been raising around £15 million to £40 million, some deals have been more substantial (Cathay International Holdings Limited, the Main Market listed operator and investor in the healthcare sector in the People's Republic of China raised £66.8 million in April to invest in its businesses and reduce its borrowings; and in June, specialist veterinary pharmaceutical company Dechra Pharmaceuticals plc, raised £133.4 million to maintain a prudent balance sheet, whilst retaining the flexibility to capitalise on its key growth drivers).
The fundraising process has been helped by swift action from regulators and investor bodies. On 1 April 2020, the Pre-Emption Group (PEG) issued a statement setting out a temporary relaxation of its guidance in relation to disapplying pre-emption rights for listed companies. In light of COVID-19, the guidance states that PEG will relax its guidance to support approvals being sought by companies at a general meeting to disapply pre-emption rights for up to 20 percent of their issued share capital. Usually, the PEG guidance allows approvals of up to 5 percent for general corporate governance purposes, with an additional 5 percent for specified acquisitions or investments. PEG noted that in the event that the additional flexibility is being sought then the company should:
- Fully explain to its shareholders the particular circumstances of the company, including how the company is supporting its stakeholders;
- Undertake a proper consultation with a representative sample of the company’s major shareholders;
- Make the issue on a soft pre-emptive basis, as far as possible; and
- Involve its management in the allocation process.
Any companies issuing up to 20 percent of their issued share capital would be expected to disclose information about the consultation undertaken prior to the issuance and the efforts made to respect pre-emptive rights. In addition, company directors will be held accountable for their decisions to use additional flexibility at the AGM following its use.
Although the PEG statement has been welcomed by many, companies looking to take advantage of the temporary relaxation would most likely need to obtain approval from shareholders. Given the time and cost implications of convening a meeting, there has been a significant increase in the use of ‘cash box’ placings (around 40 percent of the deals to date have used a cash box). A ‘cash box’ structure may be used when a company has sufficient authority to allot but insufficient authority to disapply pre-emption rights. An issue of shares for non-cash consideration is exempt from the pre-emption requirements. In a ‘cash-box’ placing, the shares are issued in exchange for shares in a newly incorporated subsidiary (the sole asset of which is cash) and so there is no requirement to disapply pre-emption rights.
There is no doubt that the effects of the pandemic will be felt by issuers for months to come. Institutional shareholders have thus far been supportive of well-run pharma and biotech companies, as have debt providers (who have generally agreed to covenant waivers at least in the short term). It remains to be seen how long such support will last prior to a vaccine being developed and commercialised.