More share for share M&A?

In the current economic climate, companies may seek to protect their viability by merging. As cash becomes less available it is likely that there will be an increase in M&A transactions using equity securities as the consideration. Clearly hurdles such as valuation will need to be overcome.

A new exemption document may make this easier. Companies can issue equity securities as consideration in connection with a takeover, merger or division without a full prospectus if they publish an exemption document instead. This document has reduced content requirements and, in the UK, does not need to be vetted or approved by the FCA before publication in certain circumstances. Nor is a supplementary prospectus required. This will be attractive to companies as it should make the process more cost effective and easier as it will give them greater control of the transaction timetable. But it remains to be seen whether the reduced content proposals go far enough or whether companies will still opt for a full prospectus.

What is the exemption document?

The Prospectus Regulation allows companies to offer or admit securities connected with a takeover, merger or division without publishing a prospectus, provided that a document is made available to investors describing the transaction and its impact on the company (exemption document).

In the case of a takeover, the exemption applies to equity securities and only if:

• the equity securities offered are fungible with existing securities
  that are already admitted to trading on a regulated market before the
  takeover (and its related transaction); and

• the takeover is not considered a reverse acquisition transaction
  (as defined); or

• the supervisory authority that reviews the offer document under the
  Takeovers Directive (if applicable) has approved the exemption
  document in advance.

In the UK the FCA has been given the power¹ to approve exemption documents.

The exemption document must comply with certain minimum content requirements which are set out in the Draft Delegated Regulation (and Annex) published for consultation by the European Commission on 16 June 2020. This follows the publication of ESMA’s Final Report on Technical advice on Minimum Information Content for Prospectus Exemption on 29 March 2019. See below for more details.

How is this different from the pre-Prospectus Regulation regime?

Under the Prospectus Directive regime (pre-21 July 2019), an acquiring company did not have to issue a prospectus provided it produced an equivalent document. In the UK, this document had to contain information regarded by the FCA as being equivalent to that set out in a prospectus and the FCA carried out a full vetting process of that equivalent document. In practice the contents of a prospectus and an equivalent document were virtually identical. So, there was in effect no exemption.

The new exemption document is intended to be a shorter, simpler document and (as noted above) does not need to be pre-vetted or approved by the FCA in certain circumstances. But the proposal for its contents does not have as many dispensations as had been hoped. ESMA concluded that offers of securities to the public or admissions to trading on a regulated market connected to takeovers, mergers or divisions are transactions that are usually very complex and are likely to have a significant impact on issuers’ financial conditions and corporate governance. ESMA’s view is that there is limited room for alleviations compared to the general prospectus regime without adversely impacting investor protection.

And a prospectus will still be needed if the document has to be passported as an exemption document cannot be passported.

What is the minimum content?

There is an overarching materiality test. An exemption document must contain the relevant information which is necessary to enable investors to understand:

• the prospects of the acquiring company and, depending on the type of
  transaction, of the offeree company, target company or company being
  divided, and any significant changes in the business and financial
  position of each of those companies that have occurred since the end
  of the previous financial year;

• the rights attaching to the equity securities; and

• the description of the transaction and its impact on the acquiring
  company.

And it must include the information set out in the Annex to the draft delegated regulation.

No summary is required. And there is no requirement to publish a supplement if there is a significant new factor, material mistake or material inaccuracy after publication of the exemption document.

The information must be written and presented in an easily analysable, concise and comprehensible form and must enable investors to make an informed investment decision.

Reduced content for smaller issues

Less information is needed where the equity securities offered in connection with a transaction will be admitted to trading on a regulated market and are fungible with, and represent no more than, 10% of equity securities already admitted to trading on the same regulated market.

Then the exemption document only needs to include the information in the following sections of the Annex:

• section 1 - persons responsible;

• section 3 - description of transaction; and

• section 5 - impact of transaction on the acquiring company.

The following information will not be needed: section 2 - information on the acquiring company, offeree company or target; section 4 - equity securities being offered and section 6 – documents available.

Incorporation by reference

As there is some overlap between these content requirements and those in the Takeover Bids and Merger and Division Directives, to avoid duplication of information, companies can incorporate certain information by reference.

Any information incorporated by reference must:

• be easily accessible; and

• include a cross-reference list that allows investors to easily
  identify specific items of information and has hyperlinks to all
  documents with information that is incorporated by reference.

Complex financial history and significant financial commitment

Where the company issuing the equity securities has a complex financial history or has made a significant financial commitment (in each case as referred to in the Prospectus Regulation), that company will have to include information about the offeree company or target as if the offeree company or target was the issuer of the equity securities, to the extent that investors need that information to make an informed investment decision as referred to above.

Timing

Comments had to be submitted by 14 July 2020 and waiting for the European Commission’s response. The delegated regulation becomes effective on the twentieth day after its publication in the Official Journal.

^{1) Regulation 2A of the Financial Services and Markets (Prospectus Regulation ) 2019 (inserted by the Financial Services and Markets Act 2000 (Central Counterparties , Investment Exchanges , Prospectus and Benchmarks ) (Amendment ) Regulations 2020)}