CATALYST // PRESSURE POINTS:
STRENGTHENING the balance sheet
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The Covid-19 global pandemic has resulted in economic production and consumption contracting rapidly. In this guide, we look at how businesses can rebuild their balance sheets and how their funding structures could adapt in order to ensure their long term ability to thrive.
While businesses have come under pressure from all sides – with reduction in supply and demand and in output and capacity, supply chains failing and payments being deferred and delayed – attention is now being turned to businesses’ longer term recovery and viability. Each of the options for repairing and rebuilding the balance sheet outlined below can be explored in greater detail in these pages. In each area we also suggest practical steps to consider. We would expect many companies to adopt various combinations of these options. In every instance, directors must take particular care to discharge their legal duties to the company, its shareholders, creditors and other stakeholders.
Summary
We explore each of these means of managing liquidity in greater detail and suggest steps that companies should consider in the short term and in the months ahead. We would expect various combinations of these options to be adopted by companies facing a cash crunch. In every instance, directors must take particular care to discharge their legal duties to the company and its shareholders and creditors. Click a above box to read more.
POLLING DATA AREA
Government support
Existing and new credit facilities
Preserving cash and improving working capital
A range of direct financial support measures have been made available as part of global government support packages. Governments may work with commercial lenders to guarantee all or part of a business’ debt, or directly underwrite it themselves. The introduction of conditions around the use of these schemes is encouraging those companies who are able to do so to look elsewhere to the debt markets, and to regard these government support schemes as a contingency.
Existing credit facilities provide the fastest and easiest route to additional cash, through facility extensions, accordion facilities and additional liquidity lines. The corporate loan markets, debt capital markets, US private placement, and high yield debt markets are all open and active, giving companies a range of options to explore in terms of new debt. Amendment processes may also be underway.
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Companies are turning to a range of options to preserve cash and improve their working capital position, including examining pension contributions and dividends, exploring additional working capital finance options and reviewing payment obligations to suppliers and counterparties.
Capital calls
Shareholders are proving willing to contribute new equity capital but companies will need to consider when the best time is to call on them, bearing in mind that shareholders may be unwilling to co-operate with multiple fund raising exercises. The issues that companies should consider when deciding whether, and when, to approach their shareholders will differ depending on whether they are public or private companies.
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April 2020
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Companies should review all discretionary spending and cut it out where possible. Some costs, such as travel and hospitality, will reduce by virtue of the restrictions put in place by governments around the world but companies should review all expenditure to identify where cost savings can be achieved both in the short term, while work patterns are disrupted, and looking ahead as normality resumes.
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Government and regulatory action
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Restructuring businesses
Where the effects of the responses to the pandemic prove too much for a business to manage, they may instead decide or be forced to restructure their business. Many governments have introduced new laws designed to avoid this as far as possible, and to assist companies in trading their way out of difficulty. However, where cashflow pressures remain, it may be almost impossible to avoid some sort of transformative action in the longer term.
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Other issues to consider
Directors’ duties – Directors will need to be mindful of their duties to the company, to shareholders, to wider stakeholders and, where relevant, to creditors. It is essential that the whole board is involved in discussions of matters concerning, or which could affect, the company’s future solvency. Price sensitive information and market disclosure – Companies with publicly traded securities will be under obligations to disclose price-sensitive information. Whilst delaying disclosure may be permissible in certain situations, a company may not be permitted to delay disclosure of financial difficulties, even if it is in negotiations which may help remedy its position. Companies will have to monitor for any disclosure obligation on an ongoing basis as the situation evolves.
Government SUPPORT
The most immediate action a business facing a collapse in revenues can take is to reduce its costs and expenditure.
A range of direct financial support measures has been made available as part of this government support, including business interruption loan schemes, immediate financial aid for small businesses, and the establishment of stabilisation funds for larger companies. Governments may work with commercial lenders to guarantee all or part of a business’s debt, or directly underwrite it themselves. The introduction of conditions around the use of these schemes is encouraging those companies who are able to do so to look elsewhere to the debt markets, and to regard these government support schemes as a contingency. In time, we may see government grants and equity injections feature more prominently in some markets. Certain governments have flagged their intention to use economic recovery packages to support and reinforce their international law commitments on environmental, social and governance (ESG) issues, most notably de-carbonisation and emissions reduction objectives.
Business financing support
Cutting costs
Government support packages
Debt finance
CAPITAL CALLS
Insurance
ASSET DISPOSALS
The measures introduced vary significantly from country to country, reflecting divergent means and political inclinations. The schemes vary, but they often involve directly funding businesses, freeing up cash for use in paying suppliers, easing the tax burden on companies or partially underwriting payroll costs.
Action points
ACTION POINTS
Assess what government support is available options and whether the company meets the criteria to access the support As government funding schemes are only temporary measures, consider what other steps should be taken in parallel or in the future to reduce refinancing risk Understand the impact of any changes to insolvency law which are proposed or have been enacted in relevant jurisdictions on both directors’ duties and on the operation of the business as a whole and consider strategies to mitigate exposure and risk where possible. Some insolvency law changes may also be temporary in nature so again, ensure the directors understand their limits.
LOOKING FURTHER AHEAD
As government funding schemes are only temporary measures, consider what other steps should be taken in parallel or in the future to reduce refinancing risk. Some insolvency law changes may also be temporary in nature, so again ensure that directors understand their limits.
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Many governments around the world put in place support schemes for businesses of all sizes as the first shocks of the pandemic and the response to it took effect.
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Many countries have introduced changes to their insolvency laws to encourage businesses to continue to trade where possible. These may have an effect on directors’ duties, or on the ability of trade creditors or financial creditors to take action to enforce their contractual rights. Some of these changes are temporary, but others are permanent, and are being introduced rapidly and without much time for wider industry consultation. There is a perennial conflict between on the one hand assisting companies to continue trading, by reducing the ability of trade creditors to take action against them and giving the directors the ability to continue to trade in confidence, and on the other maintaining supply chains by equipping suppliers with the means to enforce the terms of their contracts. In addition, a number of regulators and some governments have issued guidance effectively to encourage lenders and other contractual counterparties to have regard to the range of measures of support available to borrowers and companies generally, and to consider the circumstances in the round before enforcing their contractual terms.
Insolvency law relaxations and other support
The impact of the Covid-19 outbreak has presented exceptional challenges for both employers and employees. Governments have designed various support packages, aimed at both preserving businesses and minimising layoffs. Measures range from steps to make it easier for companies to reduce employees’ hours and pay, to effectively underwriting payroll costs.
Payroll and employment support
Governments are sympathetic to businesses wishing to use cash to pay suppliers and employees first. With that in mind, many have introduced a range of tax reliefs to support businesses of all sizes, including suspensions and deferrals of charges, as well as outright waivers. Specific measures have been introduced for businesses most affected by the pandemic, such as business rates holidays for the retail and hospitality sectors in some countries.
Business tax relief
EXISTING AND NEW CREDIT FACILITIES
Competition law issues
Not all lenders will opt to participate in facility extensions or incremental liquidity facilities but, even if they do not, they will generally approve the corporate entering into them with other lenders. Some refinancing processes are being postponed in favour of short term facility extensions (typically of 1 year) with the expectation that refinancings will be revisited later in the year. Some companies are also considering forward start facilities, something which was popular in the last downturn in 2008. Cost of capital and credit concerns and uncertainty in the current economic climate are driving higher pricing for new financings and incremental liquidity facilities, as well as more conservative lending terms, for example shorter tenors (although there was some evidence of this before Covid-19), and the desire for greater controls over borrowers' businesses. Understandably, bank credit processes are taking significantly longer than before because of the volume of requests for additional liquidity. The continued effects of the global response to Covid-19 have led to a number of corporates and sponsors seeking to amend their existing financing documents. These amendments include suspending financial covenants; seeking to expressly exclude the impact of Covid-19 from Material Adverse Effect provisions and waiving any suspension or change of business defaults and any defaults arising from audit qualifications and the inability to deliver audited financial statements. Some banks may require waiver fees to be paid. Greater concerns have been expressed as to whether US private placement consents will be obtained on the same basis and/or whether those processes will be much more time consuming and expensive. In any case, for a number of corporates and sponsors the additional ‘cost ’ of these types of waivers and amendments is increased financial reporting and periodic projections as well as removing or suspending certain activities such as acquisitions, distributions and incremental debt without bank consent, often together with reduced permitted basket sizes and new compliance requirements (such as minimum liquidity/maximum loss covenants). Some sponsors may also be seeking to manage their cash reserves to meet clean-down requirements, and also reduce their exposure to other lenders by implementing debt buy-back mechanisms.
Existing facilities
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Consider to what extent funds remain available and undrawn under existing facilities Consider if any amendments or waivers may be required under existing facilities in the medium or longer term Assess whether balance of uncommitted vs committed lines remains appropriate and carry out some contingency planning if uncommitted lines ceased to be available eg refinancing/cash collateral for letters of credit Consider what longer term source of debt funding, or combination thereof, is most suitable Consider ESG impacts on debt funding Consider how any new funding will be affected by the replacement of LIBOR with the RFRs
Consider what longer term source of debt funding, or combination thereof, is most suitable. Consider ESG impacts on debt funding. Consider how any new funding will be affected by the replacement of LIBOR with the RFRs.
United Kingdom
Germany
Spain
Russia
Asia
South Africa
US
Australia
France
EU
Italy
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Regional insights
China
Hong Kong
Indonesia
Existing credit facilities provide the fastest and easiest route to additional cash, through facility extensions, accordion facilities and additional liquidity lines.
Corporate loan markets remain active, and lenders remain broadly supportive (depending on the sector and business).
Environmental, social and governance concerns continue to feature. While these might have been side-lined in the initial rush for liquidity, the continued legislative, regulatory and social pressure on investors and lenders has pushed this back to close to the forefront of the longer-term agenda for new financings. We look at this in more detail in our ESG guide.
ESG
Finally, concerns around replacing LIBOR with near risk-free-rates (RFRs) before it is discontinued at the end of 2021 have, understandably, also been overtaken by immediate events. However, while regulators remain sympathetic to the fact that corporates have other calls on their time at present, they are continuing to maintain pressure on lenders to offer loan products based on RFRs this year. Trade bodies continue to gather thoughts and to use novel structures, such as that used by British American Tobacco [insert link to press release] in their recent USD 6 billion revolving credit facility which includes a switch to RFRs.
LIBOR
The debt capital markets remain open for investment grade corporates in certain sectors with a number (for example utilities companies) taking advantage of the current availability of longer term cheap fixed rate funding in this market. Many companies who are able to do so may be choosing to access the debt capital markets rather than using shorter term government support schemes, even if they have approval to utilise those. The US private placement market is open and active for investment grade corporates but covenants and other key monetary terms are less issuer-friendly at the moment. Waiver and consent processes are active: USPPs tend to be long-dated and any prepayments subject to make wholes. Consent solicitation, in parallel with any RCF amendment process, is the customary method for obtaining the approval of holders for waivers and amendments to the terms of their notes, and, to maximize holder participation, consent fees are commonly seen. In the high yield markets, some corporates with cash on their balance sheet have been repurchasing debt to reduce their leverage as part of their treasury management. The policies announced by some central banks to grandfather previous investment grade bonds for collateral purposes have taken pressure off the sell-off in the high yield markets, so there are fewer opportunities in this area of treasury management; however, this means that there are green shoots in the high yield market where repeat issuers are ones that have the best access to liquidity in the market, as well as pricings.
Debt capital markets
Companies should review the headroom under their existing debt facilities and any weaknesses in the capital structure. Whether or not facing an immediate liquidity crisis, they should consider whether to draw down on existing facilities and whether they may need increased committed borrowing facilities.
There has been significant interest in both recourse and especially non-recourse receivables financing arrangements as a way of improving working capital. Companies considering these need to ensure that these arrangements would be permitted under their existing financings and that the terms are sufficiently robust that they do not represent a material cross-default risk to a corporate’s principal financings.
Receivables
Companies looking to preserve cash should conduct a wide ranging spending review and consider other options.
Consider additional sources of working capital, and how these will interact with main financing options Consider if measures to preserve cash are required, and to what extent they need detailed thought Many of these measures may be of more use in the medium term, and so thought should be given to the longer term options Consider whether agreeing to long term liquidity solutions with some counterparties now eg guarantees/security might impact on future financings and refinancings
Many of these measures may be of more use in the medium term, and so thought should be given to the longer term options. Consider whether agreeing to long term liquidity solutions with some counterparties now eg guarantees/security might impact on future financings and refinancings.
UAE
Netherlands
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Companies are using a variety of means of preserving cash and improving their working capital position.
Many corporates are still considering the deferral or adjustment of payments to suppliers and counterparties, including real estate rents, in order to preserve cash. As with any discussions of this nature, they need to be careful to ensure that the way in which this is approached does not constitute an event of default in their principal financings. The types of steps identified in this section are often proscribed to some degree by the terms of a corporate’s principal financings and care must be taken to ensure that they are implemented without breaching the terms of those financings. It is important to consider less obvious consequences of certain actions, for example agreeing an extension to payment terms with suppliers might trigger an event of default or re-characterise those arrangements as debt for the purposes of financial covenants and restrictions on the incurrence of financial indebtedness. Current expectations of continued depressed interest rates to stimulate economic activity means interest rate swap markets remain at pre-crisis levels; however, volatility in foreign exchange markets has seen significant demand for hedging foreign exchange risk. Large fluctuations in equity and debt markets have seen renewed focus on strategic equity and credit transactions for clients looking to monetise or hedge significant equity and debt positions, and the turmoil in the commodities markets (particularly oil) means the benefits of existing hedges are increasingly apparent.
Payments to suppliers/counterparties
For many companies, a significant overhead will be its payroll costs. Employers may look to reduce employees’ working hours or pay, or reduce headcount, but they should take into account legal protections, any commitments the company may have made to its employees under international standards and the potential for industrial relations issues and adverse publicity when deciding what approach to take.
Payroll
Companies should consider whether it is appropriate to make any dividend payments, even if the company can satisfy the technical financial or accounting requirements that must be met for payment of a dividend. Many companies have paused or cancelled anticipated dividends in order to preserve cash in their business. Prudentially regulated entities (especially banks) should be mindful of any regulatory guidance or expectations regarding payment of dividends in the current environment and companies that have drawn on government or other support may be subject to restrictions on the payment of dividends.
Dividends
Pensions are also a focus of consideration: for example, in the UK, corporates with defined benefit (DB) pension schemes have been seeking agreement with their schemes’ trustees to defer deficit reduction contributions (DRCs) and other payments (such as those to cover scheme expenses) to the scheme. Trustees have been amenable to this, provided that the scheme is treated fairly and appropriate safeguards are put in place. Before agreeing, trustees will want to know what other steps the company is taking to cut costs and preserve cash. Legal advice should be sought before any approach is made to the scheme’s trustees to avoid triggering banking covenants or other unintended consequences. Whilst recognising the need for sponsors to be given time and space to recover once the Covid-19 storm recedes, the Regulator expects the interests of DB scheme members to be protected and for DRCs to increase as corporate performance and cash flows improve.
Pension schemes
Companies may choose to look to their shareholders for additional funding.
The issues that companies should consider when deciding whether to and when to approach their shareholders will differ depending on whether they are public or private companies. We may also see governments stepping in and taking stakes in businesses in key strategic sectors, as happened with the banking industry at the time of the global financial crisis. Another potential source of funds that we are seeing discussed is a company’s key suppliers or customers. A company’s key trading partners may be willing to take an equity stake to ensure the company’s financial viability. Financial buyers may also be willing to take a strategic stake in a company, rather than buying the whole company.
Public companies
For public companies, equity capital raisings can take several forms and which one is appropriate is likely to depend in part on how much money the company is seeking to raise. Shareholders are likely to only want to participate in one fund raising in the current environment. Liability issues could also arise in due course if shareholders are called upon a second time in circumstances where the disclosure associated with the first raising suggested that the first raising would address the company’s liquidity needs. In deciding which fund raising method to use, the factors to be considered will include:
For private companies, review equity documentation to identify funding provisions and engage with investors and update financial model, business plans and budgets For listed companies, consider what level of funding is required and how best to access it
For listed companies, start preparing any requisite offering documentation, such as a prospectus or other required disclosure document, to facilitate a larger issuance when the markets are right.
For private companies, including joint ventures, there will be a range of issues to consider including the pre-emption rights that apply on new issuance, the timing and other procedural requirements for a new issuance and, where parties are unable or unwilling to participate pre-emptively, any dilution of control and impact on the governance and regulatory position.
Private companies
UK
Belgium
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Shareholders are proving willing to contribute new equity capital but companies will need to consider when the best time is to call on them, bearing in mind that they should aim to call on their shareholders only once.
Offering documentation – In the EU a listed company wishing to issue shares representing more than 20% of its issued share capital must publish a prospectus. The preparation of a prospectus will take some time and may present particular challenges, for example because of the requirement for a prospectus to contain a statement confirming that the company has sufficient working capital for the next 12 months. In Australia, a public company wishing to issue shares will also generally need to publish a prospectus, although exceptions are available for certain types of rights issues, offerings to sophisticated investors, professional investors and senior managers, and small-scale offerings. Shareholder approval – For larger issuances, companies may need shareholder approval. Convening a shareholder meeting will impact the capital raise timetable. Investor guidelines – Proxy advisers and institutional investors may have guidelines on which method is most suitable and what they are willing to support – the latest position should be checked.
Many governments have introduced new laws designed to avoid this as far as possible, and to assist companies in trading their way out of difficulty, which we discuss in Government Support. However, where cashflow pressures remain, it may be almost impossible to avoid some sort of transformative action in the longer term.
Arrangements or comprises with creditors
Many of these actions require shareholder and creditor action and may require court sanction. They can take the form of a compromise between a company, its creditors and its shareholders, as is seen in schemes of arrangement, which are widely used in cross-border restructurings because of flexibility and effectiveness. Schemes of arrangement are UK statutory procedures which may be used by solvent companies as well as insolvent ones, so may be an attractive option. Recent changes in UK insolvency law introduce the ability of the court to impose a compromise on creditors and shareholders.
Immediate Steps
Ensure that directors’ duties are considered carefully if any of these structures are in prospect.
Consider the options available in the long term, if the business requires transformative action.
Click through for more country-specific overviews of the available avenues for relief, or have a look at our new publication COVID-19: Force majeure: A global perspective which provides a high-level overview, set out in table format, of the approach taken to force majeure clauses in: Australia; China; France; England & Wales; Germany; Hong Kong; Indonesia; Italy; Japan; Russia; Saudi Arabia; South Africa; Spain; Thailand; and United States (California, New York & Texas).
Where the effects of the responses to the pandemic prove too much for a business to manage, they may instead decide or be forced to restructure their business.
Companies may decide to raise cash in other ways, such as by selling non-core assets. They will need to ensure that any such sale is permitted under the terms of any other arrangements, such as financing documents. A distressed or stressed M&A transaction has a number of features not seen on other M&A including a need for speed, limited due diligence and limited (or no) recourse against the seller. These will be reflected in the price that a buyer is willing to offer. It will also be important to assess any likely regulatory obstacles to a transaction. Anti-trust regimes will have to be navigated carefully given the fast pace of change – market shares may have changed as companies face collapse. However, where the alternative to a transaction is insolvency, it may be easier for certain buyers to make use of the “failing firm” argument in a merger control process, which if successful would result in a lighter touch and quicker competition review. Sellers should also be mindful of any governmental restrictions that may apply. Many jurisdictions have the power to intervene in transactions on the grounds of national security. This concept is being interpreted very broadly, and extended in many jurisdictions, to include transactions with a potential impact on public safety, public order or public health.
Disposal of non-core assets
Other companies may need to seek creditor protection though formal insolvency proceedings while restructuring. For example asset sales by companies in certain court-controlled insolvency proceedings may be agreed as a mechanism for disposing of businesses or assets, and generating cash without directors facing risk.
Insolvency proceedings
Ensure that directors’ duties are considered carefully if any of these structures are in prospect Consider the options available in the long term, if the business requires transformative action
Government SUPPORT: UK
Covid Corporate Financing Facility (CCFF) The CCFF is operated by the Bank of England (BoE) to provide funding to businesses by purchasing commercial paper that meets certain minimum ratings criteria of up to one-year maturity from issuers who “make a material contribution to economic activity in the UK”. The aim of the CCFF is to assist corporates during a time when they are likely to experience severe disruption to cashflows. The CCFF was initially intended to operate for 12 months and the BoE will provide 6 months' notice of withdrawal. Companies who do not currently issue commercial paper but who are capable of doing so are able to access the CCFF (provided they meet the eligibility criteria); to do so they will need to set up a commercial paper programme, which can be done relatively quickly. The CCFF purchases new commercial paper (at a minimum spread over reference rates) in the primary market via dealers and, after issuance, from eligible counterparties in the secondary market. All businesses that wish to draw from the CCFF for a term extending beyond 19 May 2021 will be expected to provide a letter addressed to HM Treasury that commits to suspending the payment of dividends and other capital distributions, including share buybacks, and showing restraint on senior pay during the period in which their commercial paper is outstanding. More details on the UK CCFF are available here. Coronavirus Large Business Interruption Loan Scheme (CLBILS) Under this temporary scheme, the UK Government provides a guarantee of up to 80% of loans, overdrafts or invoice or asset financing facilities of up to £25 million, £50 million or £200 million (depending on turnover) made available by accredited commercial lenders. The facilities will be offered at a commercial rate of interest and with tenors of up to three years. The intention is that this will give banks the confidence to support businesses that were viable before the CoVid-19 outbreak but are facing significant cash flow difficulties that would otherwise make their business unviable in the short term. Companies borrowing more than £50 million through CLBILS will be subject to restrictions on dividend payments, senior pay and share buy-backs during the period of the loan, including a ban on dividend payments and cash bonuses, except where they were previously declared or agreed. More details on the UK CLBILS are available here. Coronavirus Business Interruption Loan Scheme (CBILS) This scheme provides financial support to smaller businesses. It is currently available to businesses with turnover of up to £45 million. Lending is through accredited commercial banks for amounts up to £5 million with the Government providing a guarantee of 80% of the facility amount and meeting fee and interest costs for the first 12 months. Finance terms are from three months up to six years for term loans and asset finance, and up to three years for revolving credit facilities and invoice finance. It has been confirmed that private equity backed companies are also eligible for CBILS. When assessing the £45 million turnover eligibility threshold, the business will be considered separately from its private equity investors, and its other investments. If the business’s turnover is below that threshold, they can be eligible for the CBILS, provided they meet the other eligibility criteria. However it has been reported that many private equity-backed companies have been unable to access Government support facilities because of EU State Aid rules. Under those rules, companies are only eligible for State Aid under the temporary relaxations that have been introduced for CoVid-19 where they were not already a “firm in difficulty” before January 2020. As many private equity investments are highly leveraged, and so have high interest payments and lower levels of share capital, many of them could fall into the definition of a firm “in difficulty” and so could be blocked from accessing the financial support schemes. More details on the UK CBILS are available here. Bounce Back Loan for Small and Medium-Sized Businesses (BBLS) The scheme will help SMEs borrow between £2,000 to £50,000 through accredited lenders, with the Government guaranteeing 100% of the loan. There will be no fees, interest or repayments needed for the first 12 months and the term will be up to 6 years. The Government has announced that the interest rate will be a flat rate of 2.5%. Businesses claiming under CBILS, state funded schools, public sector bodies, banks, insurers and reinsurers (except insurance brokers) cannot apply for the scheme. The scheme is focused on providing quick cash to SMEs. Proposed changes to insolvency law The UK Government on 20 May 2020 published the Corporate Insolvency and Governance Bill, which contains the most far-reaching reforms to UK insolvency law in over 30 years. New company moratorium: A novel, free-standing moratorium (unconnected to any other insolvency process) giving up to 40 business days of protection even without court or creditor approval during which a payment holiday will apply to all pre-moratorium debts except certain limited categories (principally for liabilities to employees and financiers). The moratorium prevents legal processes against the company, including commencing a claim, commencing insolvency proceedings, crystallising a floating charge and forfeiture. Directors retain management control. An insolvency practitioner will be appointed as moratorium monitor, responsible for ensuring that the moratorium is at all times likely to result in rescue of the company as a going concern. The monitor’s consent will be required for many company payments. Certain liabilities incurred during the moratorium will remain payable, and therefore will be effectively prioritised. Fixed and floating charge assets will be capable of disposal subject to certain limitations. Winding up petitions: Winding up petitions cannot be presented if based on statutory demands dated 1 March 2020 to 30 June 2020. Creditors will also be prevented from winding up a company unless the creditor has reasonable grounds to believe that coronavirus has not had a financial effect on the company or that the company would have become insolvent even absent coronavirus’ effect, which will be a significant hurdle for most creditors. Winding up will now commence from the date of the order, meaning that transactions entered into between the petition and the order will no longer be void unless validated by the court. Ipso facto (termination) clauses: Contractual clauses permitting a supplier of most goods or services to terminate supply as a result of the customer’s entry into an insolvency procedure will cease to have effect. The supplier will not be able to exercise any pre-existing right to terminate either. Suppliers will also not be able to withhold supply to the company in insolvency until pre-insolvency debts are paid, preventing ransom payments being sought. Suspension of wrongful trading: When determining what contribution, if any, a director should make to a company's assets following a finding of wrongful trading, the Court must assume that a director is not responsible for any worsening of the financial position between 1 March and 30 June 2020. While otherwise directors may feel compelled to cease trading so as to take every step to minimise loss to creditors once they believe that there is no reasonable prospect of avoiding insolvency, directors can now take some comfort that they will not be liable for any deterioration since 1 March 2020. This reform may allow directors to continue trading though other duties of directors will continue to apply, including the common law duty to have regard to creditors’ interests when a company is likely to become insolvent. Given the purpose behind the reforms is to ensure that companies continue to trade even when they are insolvent or in financial distress, the need for directors to consider these common law duties become ever more important to avoid personal liability. Further information available in our briefing here.
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Government SUPPORT: FRANCE
Following France’s decision to declare a “state of health emergency", the French Government has been empowered to take emergency measures to support the economy. The four main features of the resulting stimulus package are: Solidarity fund A financial aid fund for small businesses hit by Covid-19 has been created. It will be used to compensate businesses closed due to the outbreak in France, including very small businesses (such as independent professions). This solidarity fund is set up by the State and the Regions to prevent the cessation of activity of very small enterprises (VSEs), micro-entrepreneurs, self-employed persons and independent professions, who have 10 employees or more, an annual turnover of less than EUR 1 million and an annual taxable profit of less than EUR 1 million. These are of companies that have been banned from receiving the public (even if the business retains an activity such as take-away and order withdrawals) or which have suffered a loss of sales of at least 50% in March 2020 compared to March 2019 to receive March assistance. In order to receive of the aid for the month of April and for the month of May 2020, the loss of turnover is calculated either in relation to the turnover for the same period in 2019 or, if the company so wishes, by to the average monthly turnover in 2019. Farmers who are members of a joint farming group (GAEC), artists and companies in receivership and safeguard proceedings will be able to benefit from the solidarity fund for losses in March, April and May. State guaranteed loan A EUR 300 billion State guarantee scheme for new loans granted by financial institutions to French businesses (only) between 16 March 2020 and 31 December 2020 has been created. This scheme was notified as a State aid scheme by the French Government to the European Commission and approved by the latter on 21 March 2020 (confirmed on 20 April and 20 May). This loan may represent up to 3 months of 2019 turnover, or two years of payroll for innovative companies or companies created since 1 January 2019. No repayment will be required in the first year; the company may choose to amortize the loan over a maximum period of time of five years. The loan benefits from a state guarantee of 70 to 90%, depending on the size of the company. Numerous eligibility criteria for companies and characteristics of the loan are defined by a complex legal framework. Many State guaranteed loans have been put in place since its creation. Standstill arrangement Corporates (and individuals) benefit from a statutory standstill that applies to all (legal or contractual) undertakings (including payment obligations) that must be complied with by a deadline that have expired or expire between 12 March 2020 and 23 June 2020 inclusive (the “standstill period”). All such sanctions are suspended, such as those arising under penalty clauses and acceleration clauses. For instance, during this standstill period, lenders will as a result be prevented from accelerating the loans despite any payment default of the borrowers. Insolvency reform French insolvency law has also been “temporarily” modified. In particular, cash flow insolvency (cessation of payments) is postponed on 12 March until 23 August 2020 inclusive. A complex and temporarily framework has been put in place by the French Government. This includes among others:
Extension of the time limit for the submission of claims; Constraint of creditors refusing to suspend the enforceability of their claim in conciliation proceedings. The debtor may ask the judge to (i) interrupt or prohibit any legal action; (ii) stop or prohibit any enforcement proceedings on movable or immovable property and/or (iii) postpone or stagger any sum due. Extension of the legal duration of the legal safeguard and recovery plans. The plans are automatically extended by three months. However, by decision of the president of the court to which the case was referred no later than 23 August 2020 inclusive, they may be extended for a period of five months (at the request of the commissioner in charge of plan implementation) or one year (at the request of the public prosecutor's office). Finally, by decision of the court seized from 24 August 2020 until 23 February 2021 (six months) by the Commissioner for the execution of the plan or the Public Prosecutor's Office, they may be extended for a maximum period of one year. In addition, at the request of the public prosecutor or the commissioner for the execution of the plan, the court may extend the duration of the plan decided [...] for a maximum of two years, in addition to the above-mentioned extension(s), if any (i.e. a maximum period of four years and three months). Finally, in the event of a substantial modification of the plan, the maximum duration of the plan decided by the court may be extended to twelve years. Creation of a "post-money" privilege. Introduced for the benefit of providers of assistance who have made a new cash contribution to the debtor during the observation period and/or who undertake, for the execution of the safeguard or recovery plan, to make such a contribution, a privilege allowing them to be paid in priority and even before, those benefiting from the "new money" privilege. This provision is applicable to proceedings opened as from 22 May 2020 and until the entry into force of the future order transposing the European Insolvency Directive and, at the latest, until 17 July 2021 inclusive.
Government SUPPORT: GERMANY
The German government adopted various measures to support businesses. Small businesses There will be immediate aid for small businesses, self-employed workers and freelancers affected by the Covid-19 outbreak - businesses with up to 5 employees can apply for a non-repayable payment of up to EUR 9,000. Companies with up to 10 employees can apply for funding of up to EUR 15,000. The sums are paid in both cases to bridge the three-month period. The application process can be found here. Loans for small, medium and large businesses The existing liquidity assistance programs have been expanded to make it easier for companies to access cheap funding. For loans executed by the German promotional bank:
it will grant liability waiver to large companies with annual sales of up to EUR 2 billion; for companies on the market for longer than 5 years, the liability waivers are for up to 90% for the on-lending financing partners (usually the regular banks) for working capital loans with a volume of lending of up to EUR 200 million; and for companies on the market for less than 5 years, the liability waivers for large companies are of up to 90% for the on-lending financing partners for working capital loans up to EUR 200 million.
Applications have to be filed through the applicant’s regular bank or financing partner. Economic Stabilisation Fund Act (ESF Act) The focus of this EUR 600 billion program is to support larger companies, for instance airlines, the automotive industry and the tourism sector. Measures include:
state guarantees of up to EUR 400 billion for debt instruments issued from the date the ESF Act comes into force; recapitalization of companies up to a total amount of EUR 100 billion if and to the extent necessary for the stabilisation of the company. The recapitalisation element includes, for example, the acquisition of subordinated debt, hybrid bonds, profit participation rights, silent partnerships and convertible bonds; companies must meet at least two of the following criteria: They must have a total balance sheet exceeding EUR 43 million, sales revenue exceeding EUR 50 million; or more than 249 employees on a yearly average; the fund will terminate on December 31, 2021.
Applications can be submitted via the Federal Ministry of Economy. For further information, see our briefing here.
Government SUPPORT: SPAIN
The Spanish Government has put forward a number of measures, including:
a guarantee scheme for a maximum of EUR 100 billion to pay wages, invoices, working capital requirements or other liquidity needs, including repayment of financial or tax obligations. The guarantees will cover a maximum of 80% of the amount of the financing granted, with a maximum of five years, and may be requested until 30 September 2020. This period may be extended; public guarantees for exporters through the Spanish Export Insurance Credit Company for up to EUR 2 billion; guarantees for loan maturity extensions to farmers using the special 2017 drought credit lines; credit line for the tourism sector through the ICO worth EUR 400 million; automatic suspension of interest and repayment of loans granted by the Secretariat of State for Tourism for one year; and financing for research, development and innovation activities for small and medium-sized businesses
For further information, see here.
Government SUPPORT: ITALY
Moratorium on credit facilities All financial intermediaries including banks and other lenders have been required to apply a moratorium (the Moratorium) until 30 September 2020 on the following credit facilities:
overdraft facilities and bank advances not yet drawn, existing as of 29 February 2020. For these facilities, the amounts granted must be maintained until 30 September 2020 (the Overdraft Facilities); bullet loans due before 30 September 2020 must be extended to 30 September 2020 without amending any change to the contractual terms; payment of instalments due on existing loans, mortgages or financial leases has been suspended until 30 September 2020. Any adjustment of the amortisation plan cannot lead to higher or additional costs for the borrower.
All SMEs who do not have non-performing credit exposures with banks on 17 March 2020 are eligible. In order to benefit from the Moratorium, eligible SMEs must provide a declaration certifying that they have suffered a partial or total reduction in their business activity as a result of the Covid-19 outbreak. State Guarantee Fund To supplement the Moratorium, the measures provide for the use of a State Guarantee Fund (the Guarantee) on the following exposures covered by the Moratorium:
any additional use of an Overdraft Facility after 30 September 2020; principal and interest on loans which have been extended until the end of the Moratorium; and instalments on existing loans, mortgages or leasing exposures due by 30 September 2020 as postponed under the Moratorium.
The Guarantee covers losses stemming from a Credit Event up to 33% of the Moratorium exposure. Financial intermediaries are entitled to enforce the Guarantee if the following conditions are met:
partial or full default of one of the credit facilities above (the Credit Event); enforcement proceedings commenced with regard to the Moratorium exposure by no later than 18 months as of 31 March 2022; the financial intermediary provides the Guarantee Fund with an estimate of the final losses on the Moratorium exposure.
Cassa Depositi e Prestiti SpA (CDP) guarantee scheme The Government will guarantee 80% of funding by CDP to banks and other authorized lenders, who provide loans and other types of credit to medium and large enterprises. This is aimed at enterprises which do not qualify for support under the Guarantee. It is expected that this scheme will allow the CDP to expand funding to banks and other authorized lenders, who in turn will be able to increase their lending capacity to medium and large enterprises. Integrated Promotion Fund This is set up to promote exports by Italian companies. The Ministry of Foreign Affairs will co-finance activities targeting foreign markets under non-repayable arrangements that could cover up to 50% of the costs incurred by the company.
Government SUPPORT: AUSTRALIA
Asset write-off incentive For businesses with an annual aggregated turnover between AUD $10 million and AUD $500 million, an instant write off may be available for acquisitions of depreciating assets (or improvements to existing depreciating assets) under AUD $150,000. Accelerated depreciation package Businesses with an annual aggregated turnover of up to AUD $500 million may receive an immediate deduction of 50% of the cost of new depreciating assets (no limit to cost), first used, installed, or improvement effected, between 12 March 2020 and 30 June 2021. Temporary relief for financially distressed businesses The government has temporarily increased the threshold in respect of which creditors can issue a statutory demand (increased to AUD $20,000 from AUD $2,000) on a company and the time companies have to respond to statutory demands they receive (increased to 6 months from 21 days). The government has also introduced temporary relief for directors from any personal liability for trading while insolvent, and temporary flexibility in the Corporations Act 2001 to provide temporary and targeted relief from provisions of the Act to deal with unforeseen events that arise as a result of the Covid-19 health crisis. The ATO will tailor solutions for owners or directors of business that are currently struggling due to Covid-19, including temporary reduction of payments or deferrals, or withholding enforcement actions including Director Penalty Notices and wind-ups. These measures are designed to ensure that when the crisis has passed, businesses can resume normal operations.
Government SUPPORT: RUSSIA
Direct financial support Direct financial support currently has very limited scope. This type of support has been granted to outbound tour operators who have probably suffered the greatest losses due to the border shut down. In 2020 RUB 3,5 billion will be provided to them as subsidies to recover losses incurred: (i) under agreements for the sale of tourist services and (ii) as a result of assistance provided in transporting the tourists from countries experiencing an outbreak of the virus. Grace periods and reduction of payments under loans and facilities Under recently enacted law certain small and medium enterprises (SME) which borrowed funds from financial institutions will be entitled to grace periods or reduction of payments under facility and loan agreements entered into with financial organisations if a request for the grace period is made before 30 September 2020. During the grace period no penalties accrue and the creditor may not claim acceleration or enforcement of security. Interest on the principal of the loan accrues during the grace period but may be paid by the borrower once the grace period expires. Note that this measure is only applicable to businesses (i) which are SMEs and (ii) which operate in the most affected economic sectors as determined by the Russian Government, including: air transportation, airport activities, transportation; culture and leisure, sports, tourism, catering, additional education; organization of conferences and exhibitions, household services (repair, washing, dry cleaning, beauty salons). This measure has quite a limited scope and will not be available to larger businesses and the majority of foreign investors. Indirect financial support offered by CBR and the Russian Government The Russian Central Bank (CBR) acting jointly with the Russian Government has devised certain measures to encourage banks to provide loans and facilities to the businesses most severely affected by CoVid-19. For example, CBR will provide credit institutions with financing at a rate of 4% per annum, which, combined with budget subsidies, will ensure the issuance of loans to SMEs for the purposes of paying remuneration at 0% per annum for up to 6 months. It follows from public sources that the major Russian banks have already started to provide such financial support to SMEs. Apart from that CBR allowed the banks temporarily not to take into account the worsening of the borrowers’ financial position caused by the pandemic for the purposes of forming mandatory reserve funds. Loosening regulatory requirements
Audits: Tax and customs field inspections have been suspended until the end of May 2020 and the initiation of new currency control inspections by tax authorities has been postponed until that date as well. The Russian Government has also suspended the initiation of certain other business audits subject to limited exceptions. All this can potentially reduce the administrative burden on businesses in the current environment. Licences: The Russian Government has frozen the obligation to renew certain licences. For instance all subsoil licenses expiring in the period from 15 March to 31 December 2020 are automatically extended. Also, the government imposed restrictions on the termination of subsoil licenses until the end of 2020.
Insolvency reform Following joint political efforts aimed at preventing numerous bankruptcies, certain amendments to the Bankruptcy Law were introduced and came into force on 1 April 2020. According to the amendments, the Government of Russia is now authorized, in exceptional circumstances (natural and technological emergencies, significant changes in the rouble exchange rate, etc.), to impose a moratorium on the initiation of bankruptcy proceedings by creditors against certain affected debtors. On 3 April, the Government issued a decree which determined the groups of debtors to which this moratorium is available. They include entities/entrepreneurs from “significantly affected areas of business” (air and auto transportation, travel, the hotel industry, catering, hairdressing salons); systemically important enterprises (as per the list approved by the Commission for Sustainable Development of Russian Economy); and strategically important companies and organizations. The moratorium is imposed for 6 months starting from 6 April, 2020. As a main consequence, the moratorium prohibits creditors of the debtors from the abovementioned sectors from filing bankruptcy applications. In addition, the creditors are not allowed to:
levy execution upon the debtors’ pledged property; charge penalties for non-performance or improper performance of debtors’ monetary obligations during the moratorium period; and set off debtors’ monetary liabilities (against the creditors’ liabilities)
At the same time, during the moratorium, certain restrictions are imposed on the activities of the debtors themselves. In particular, debtors are not allowed to repurchase their own shares and a debtor’s economic participants are not allowed to exercise their right to exit. Debtors cannot distribute dividends. They are, effectively, restricted from entering into any transaction involving a transfer of property or assumption of liabilities (save for transactions entered in the ordinary course of business with the amount not exceeding 1% of the debtor’s assets) as any such transaction will be deemed void if bankruptcy proceedings against the debtors are initiated within 3 months after termination of the moratorium.
Government SUPPORT: UAE
reduced the reserves that banks are required to keep for demand deposits from 14% to 7%, which can be withdrawn by clients at any time. This is intended to inject about Dh61 billion into the banking system, to support lenders and their liquidity management; extended the duration of a previously announced deferral of loan principal and interest payments for customers until the end of 2020, and said banks participating in the scheme can benefit from a capital buffer relief until December 2021. The value of the capital buffer relief is Dh50 billion; and instructed that banks are allowed a “zero-cost funding facility” against collateral until the end of 2020. This programme is worth Dh50 billion.
Support from the Dubai International Financial Centre and other freezones In addition to the UAE Government’s efforts to deliver relief to businesses and various UAE economies during the Covid-19 pandemic, a number of freezones have announced major relief packages including fee waivers, rent holidays and waiver of penalties. The Federal Authority for Identity an Citizenship’s has also made an announcement that UAE visas and nationals’ identification cards which expired in early March or are due to expire later will receive an extension until the end of December 2020, this applies to all individuals in freezones as well. DIFC The Dubai International Financial Centre (“DIFC”) has put in place a stimulus package to help with registration and licensing, lease payments and immigration matters. The DIFC has introduced a full waiver from annual licensing fees for new entities that submit an application for incorporation from 1 April 2020 up to 30 June 2020 and has reduced all license renewal fees by 10% for a period from 1 April 2020 up to 30 June 2020. The reduction in license renewal fees does not apply to data protection and the Dubai Financial Services Authority’s fees, if they were to be applicable. For leases signed in a number of buildings in the DIFC (where DIFC Investments Ltd is the landlord), there will be a postponement of rent for three months. For all properties in the DIFC, there will be a reduction on freehold transfer fee from 5% to 4% for any sale or purchase of property (or any part thereof) that takes place within the three month period (1 April 2020 – 30 June 2020) and that is registered with the DIFC Registrar of Properties, at the latest, within 30 days after the expiry of the said three month period. The DIFC Fintech Hive is providing additional support to existing tech & start-up companies with fee reductions on licences, deferment of lease agreements and support for new entries with licence fee waivers. The Dubai Financial Services Authority is also offering reductions on application fees, waiver of registration fees, flexible premises requirements and temporary relief from capital requirements. The DIFC, on 26 April, introduced Presidential Directive No. 4 of 2020 which allows DIFC based employers to enact several emergency employment-related measures including imposing reduced working hours, imposing paid or unpaid leave, reducing pay, restricting workplace access and putting in place remote working conditions without the consent of their employees for the duration of the Emergency Period (21 April 2020 until 31 July 2020). ADGM The Abu Dhabi Global Market (“ADGM”) has put in place a stimulus package whereby it has waived all registration and license renewal fees and deferred a number of rental and service charge payments. The ADGM has recently bolstered its stimulus package in light of Covid-19 such that the following support measures, which apply to all operational ADGM registered entities, are now in place: for new ADGM entities:
UAE governmental stimulus package The UAE Cabinet introduced a stimulus package of DH126 billion which it has subsequently doubled to Dh256 billion (approximately $70 billion). This applies to banks and consists of Dh50 billion in capital buffer relief, Dh50 billion in zero-cost funding support, Dh95 billion in liquidity buffer relief and a Dh61 billion reduction of cash reserve requirements. The stimulus package aims to reduce the cost of doing business, support small businesses and accelerate the implementation of major governmental infrastructure projects. In the new measures, the UAE Central Bank has:
100% waiver on continuation fee for business continuing into ADGM from a foreign jurisdiction until 31 December 2020; and 50% reduction on the incorporation fee for new ADGM companies and limited liability partnerships until 31 December 2020,
DMCC The Dubai Multi Commodities Centre (“DMCC”) is another freezone which has offered a support package by reducing registration fees by 50% (for a period from 1 April 2020 to 31 July 2020), reducing license renewal fees by 30% (for a period from 1 April 2020 to 30 June 2020), granting a 3 month rent holiday for flexi-desks and DMCC Business Centre tenants, granting a full waiver of license reinstatement fees and granting a full waiver of late license renewals and flexi-desk and DMCC Business Centre penalties. DAFZA Dubai Airport Free Zone Authority (“DAFZA”) has launched a set of economic incentive packages to aid companies based in the free zone and to mitigate the economic impact caused by Covid-19. DAFZA have introduced a full waiver of registration and licensing fees for new companies, a three month postponement of lease payments and a facilitation of financial payments into easier monthly instalments. Retailers in DAFZA can benefit from being exempted from lease payments for a period of up to three months. DAFZA will also refund security deposits on leased spaces and labour guarantees to companies. Fines issued to companies will also be cancelled. Other Freezones Various other freezones have also introduced incentive packages, such as Dubai Development Authority (DDA) which has introduced a full waiver on registration fees and paid up share capital and Jebel Ali Free Zone Authority which has introduced discounts on registration/license fees and a deferment of lease payments.
100% waiver on commercial licences renewal fees for operational ADGM registered entities until 25 March 2021; 100% waiver on business activities renewal fees for operational ADGM registered entities until 25 March 2021; 100% waiver on data protection renewal fees for operational ADGM registered entities until 25 March 2021; 50% refund of supervision fees already paid by existing FSRA authorised entities for the year 2020; 50% waiver on any new FSRA supervision fees to be collected until 31 December 2020; 100% refund on annual funds fees already paid by existing FSRA authorised entities for 2020; 100% waiver on annual fund fees until 31 December 2020; and 100% waiver on new temporary work permits issuance, renewal and late application fees until 25 March 2021.
for existing ADGM entities:
Government SUPPORT: US
BUSINESS FINANCING SUPPORT Paycheck Protection Program – Partially forgivable loans for small businesses The Paycheck Protection Program (PPP) is a loan program for small businesses – small businesses are defined as businesses with 500 or fewer employees. The loan program offers forgivable low-interest loans – up to 2.5 times the employer’s average monthly payroll costs, up to a maximum of $10 million – if employers retain employees and do not decrease salaries and wages. Originally, for the loans to be forgiven, employers were required to spend these funds on payroll, mortgage interest, rent and utilities in the eight weeks after receipt of the loan, and at least 75% of the funds were required to be used for payroll. For portions of the loan not forgiven, the loan had a maturity rate of two years and an interest rate of 1%. On June 5, 2020, President Trump signed the Paycheck Protection Program Flexibility Act (PPPFA). The PPPFA addresses a number of concerns raised by the original terms of the PPP and makes it easier for recipients to qualify for loan forgiveness. Specifically, the PPPFA (i) reduces the amount of the loan that needs to be spent on payroll from 75% to 60%; (ii) extends the time period to use the funds from 8 to 24 weeks; (iii) allows employers until December 31, 2020 to rehire employees in order for their salaries to count towards forgiveness; and (iv) adds additional exceptions for employers who unable to retain all employees. More details are available here and here. Main Street Lending Program – Loans for medium to large businesses Employers with 500 to 15,000 employees will soon be eligible to apply for loans through the Main Street Lending Program. These loans are comprised of two credit facilities – one which allows lenders to originate new loans to eligible borrowers, and the other which allows lenders to increase the size of existing loans. While the Program was announced in April, it has had trouble getting off the ground, and new updated terms were announced on June 8, 2020. Loans are expected to become available in the coming weeks. These loans have a five-year maturity and are not forgivable – although interest and principal payments are deferred for specified periods. To obtain the funds, an employer must use commercially reasonable efforts to maintain its payroll and comply with restrictions on increasing executive compensation (for executives earning over $425,000), as well as limitations on equity repurchases and capital distributions. More details are available here. Industry-Specific Relief The federal government has also provided $25 billion in financial assistance to passenger air carriers, $4 billion to passenger air carriers, and $3 billion to contractors that provide functions on airport property. These funds must be used exclusively to continue paying employee wages, salaries, and benefits.
Government SUPPORT: SOUTH AFRICA
Small and Medium Size Businesses Small and medium sized businesses (companies with an annual turnover of less than ZAR 50 million) may claim relief in the form of funding from The Debt Relief Finance Scheme, provided they are 100% South African owned and at least 70% of their employees are South African nationals (other qualifying criteria apply). In addition, the Business Growth / Resilience Fund has been established for small and medium businesses to take advantage of supply opportunities arising from the pandemic and where there are deficits in the supply of essential goods in the local market. The same qualification criteria apply as indicated for the debt relief scheme above. The State-owned Industrial Development Corporation has created the Covid-19 Essential Supplies intervention that has earmarked several billion Rand for the purposes of supporting suppliers of essential goods and services needed to combat the pandemic. These funds may be made available as loans, revolving credit facilities or bank guarantees.
CAPITAL CALLS: UK
For fuller details on issues to consider on equity fund raisings in the UK, see here. Capital raises to date in 2020 There have already been a number of smaller capital raises in the UK market in 2020 by companies across all sectors responding to short term cash flow challenges as a result of the Covid-19 pandemic (so less than 20% of an company's existing issued share capital – see below in relation to the PEG guidance). Banks extending or issuing new debt facilities will mandate that companies also look to shareholders for additional capital. Most have been by way of a placing of new shares with large institutions (therefore involving no underwriting), although some have also involved a small retail element through an intermediary structure. These have been competitively priced at a small discount to trading values. Placings of this size are relatively quick and straightforward to implement, needing no new shareholder approvals or complex offering documentation, allowing a number of companies to maintain liquidity for the short term. Capital raises to come in 2020 The first couple of rights issues for companies looking for larger injections of cash from shareholders to rebuild their balance sheets as a result of the fallout of the Covid-19 are now getting underway in the UK market. More are expected. Capital raises of this size/type are more expensive and take longer to execute, but for companies with more fundamental strategic and balance sheet challenges as a result of the pandemic, they may have few other options. Rights issues will typically require shareholder approval, and therefore the preparation of a shareholder circular, and the preparation of a prospectus, both requiring working capital projections and a statement in relation to working capital expectations going forward. Given current market uncertainty, working capital projections are an area of regulator and investor focus (and see below in relation to the temporary regulatory change on working capital statements – a welcome adjustment to minimise the number of qualified working capital statements). Since July 2019 there has been a simplified prospectus regime available for secondary issues across the EU and this has now been used for the first time in the UK market. Disclosures that are not required under the simplified regime include an operating and financial review, disclosure on organisational structure, on capital resources, on remuneration and benefits and board practices. Looking forward to later in 2020, a second wave of smaller capital raises is likely as companies look for the opportunities presented by the recovery post-Covid-19. There may be opportunities for acquisitions or new strategic partnerships, and new equity may be an efficient way to fund these projects. The UK Government has also revealed early stage plans – 'Project Birch' – for it to take strategic stakes in individual “viable companies which have exhausted all options”, including government loan schemes, saying it would act to save those whose failure would “disproportionately harm the economy”. Updated investor and regulatory guidance FCA statements: The UK’s Financial Conduct Authority (FCA) has issued a Statement of Policy on listed company recapitalisations. The statement highlights the “simplified prospectus” regime tailored for secondary issuances. It also outlines a temporary revision to the FCA's approach to working capital statements. In summary, under the new approach, key Covid-19 (only) assumptions underpinning a company's reasonable worst-case capital scenario will be permitted to be disclosed in an otherwise clean working capital statement (as an alternative to issuing a qualified working capital statement). The statement also confirming the FCA's support for the PEG recommendations (below). The FCA has also said in a separate statement that it has had reports that banks may have used their lending relationship with corporate clients to secure roles on equity mandates. In some cases, these roles may be ‘in name only’, with few or no additional services being provided in exchange for a share of the fee pool. The FCA says that it will be looking into this further and notes that such conduct could be a breach of FCA rules and Principles. Investor guidelines: The Pre-Emption Group (PEG) revised its recommendations in relation to non-pre-emptive share issues and now recommends that investors consider supporting issuances by companies of up to 20% of their issued share capital without seeking shareholder approval to disapply pre-emption rights. The PEG recommendation for investors to apply this additional flexibility is in place on a temporary basis and is subject to certain conditions. The announcement is significant because PEG has generally opposed non pre-emptive placings above 5% of issued share capital for general corporate purposes or 10% for specified acquisitions or investments. For further information, see here. .
CAPITAL CALLS: Australia
Prospectus requirements Australian companies do not need to publish a prospectus, and can instead use a ‘cleansing notice’, updating the market with any new material information, to issue shares in a pro rata offer or institutional placement, unless their shares have been suspended from trading for more than 10 days in the past year (recently increased from 5 days) and provided other requirements are met. Shareholder approval Capital raisings above an ASX-imposed per annum ‘placement limit’ require shareholder approval unless an exception applies – with the most important exception being for pro rata offers. ASX has recently increased the per annum placement limit to 25% (from 15%) on a ‘one-off’ basis, as well as providing other relief, to assist with raisings during the current difficulties.
CAPITAL CALLS: FRANCE
Private placement To avoid publishing a prospectus, French public companies can use the private placement procedure. Article L. 225-136 of the French Commercial Code authorises issuers to carry out capital increases without pre-emption rights if the shares or securities are offered in the context of a private placement. The pre-emption right may be cancelled by the general meeting of the shareholders, for all or part of the capital increase, in favour of qualified investors or a limited circle of investors. A capital increase without pre-emption rights carried out by private placement may concern 20% of the share capital per year, and is subject to a legal minimum price when it relates to more than 10% of the share capital of the issuer. French listed companies may pass a single special resolution at their annual general meeting to delegate the authority to the board of directors to decide to issue shares (and/or securities giving access to the issuer’s share capital) by private placement. However in that situation, the agenda of the meeting and the resolution must clearly specify that the shareholders' pre-emption rights are being cancelled. This delegation cannot last for more than 26 months. Proxy advisors’ policy on private placements On 8 April 2020, ISS provided new guidance in light of the Covid-19 pandemic. For private placement issuances, their analysis is made on a case-by-case basis. They also consider whether there are such exceptional circumstances as the company being expected to go out of business or file for bankruptcy protection if the transaction is not approved or the company's auditor/management has indicated that the company has going concern issues. In their update of 26 March 2020, with regards to capital raisings and placements, Glass Lewis also adopted a pragmatic, flexible and non-standardised position so as not to penalise companies and thus ultimately shareholders.
CAPITAL CALLS: RUSSIA
Private companies The concept of capital calls in the conventional private equity sense is unknown in Russian law. All kinds of capital injections are subject to voluntary shareholders’ resolution. As a general rule, shareholders in Russian companies can opt to contribute to assets (where the charter capital is not increased, and therefore shareholders' stakes are not affected) or capital contributions (where capital is increased through the issuance of new shares in joint-stock companies (JSCs), or by an increase in the charter capital of limited liability companies (LLCs)). Unlike capital contributions, contributions to assets are subject to fewer formalities and, in particular, are not, as a general rule, subject to state registration requirements. Capital contributions are structured differently for LLCs and JSCs. As the LLCs do not issue shares, capital contributions are formalised through a resolution by the LLC in general meeting and the resulting increase in the interests of the participants (or some of them) is reflected on the state register of legal entities. Public companies JSCs do issue equity securities, with the resulting need to comply with the formalities set out in the laws on securities market. All JSCs (both public and non-public) are entitled to conduct private placement of their shares (closed subscription). Only public JSCs are authorised to offer their shares to the general public by way of a so called “open subscription”. The issue documents of all equity securities are subject to state registration. As a general rule (to which there are a number of exceptions), a JSC would need to prepare and register a prospectus for its equity securities if it wishes to offer its equity securities to the public.
CAPITAL CALLS: ITALY
Offering documentation On April 10, 2020 Consob (the Italian Financial Authority) issued a statement providing further guidelines on the information to be provided in the prospectuses. Notably, in order to allow the investors to fully assess the investment risks, prospectuses will have to include information regarding the impact of Covid-19 on the specific company business. Shareholder approvals Law Decree of 17 March 2020 has temporary simplified the shareholder meetings and approval process.
RESTRUCTURING BUSINESS: UK
Restructuring plan introduced by the Corporate Insolvency and Governance Bill: This is effectively an enhanced version of the existing scheme of arrangement with similar broad scope. The reform allows the court to impose a compromise on a company's creditors and shareholders, including a cross-class cram-down, where it is just and equitable to do so. The compromise would need approval by the court and 75% of the creditors in each class (although the court can override rejection by one or more class).
