Mix and match schemes – is a prospectus required? FCA clarification dropped
Background
There has been longstanding uncertainty as to whether schemes of arrangement which allow UK-based shareholders to choose alternative forms of cash or securities as consideration (“mix and match” facilities) constitute an offer to the public potentially requiring a prospectus. Following consultation with market participants, the UK Financial Conduct Authority (FCA) has now dropped proposed guidance it had intended to issue aimed at resolving this question. In the longer term, changes to the UK prospectus regime may settle this issue.
2020 FCA Consultation – intending to clear up the confusion...
In August 2020, the FCA began a consultation (see Primary Market Bulletin 30) on a new technical note (Primary Market/TN/606.1, “When a prospectus is required where securities are issued pursuant to Schemes of Arrangement”). The technical note intended to clarify whether the issue of new securities pursuant to a scheme of arrangement under Part 26 of the Companies Act 2006 (a “scheme”) constitutes an offer of transferable securities to the public (“public offer”). Absent an exemption, if made to persons in the UK, a public offer would trigger the requirement to publish an FCA-approved prospectus under section 85 of the Financial Services and Markets Act 2000 (FSMA).
The existing uncertainty for mix and match schemes
Practitioners have been comfortable for some time (backed up by informal regulatory commentary) that the issue of new securities pursuant to a scheme of arrangement (e.g. in connection with a takeover) should not fall within the definition of a public offer. This is on the basis that, unlike in the case of a contractual takeover offer, on a scheme there is no offer which enables investors to buy or subscribe for securities—only a court-approved procedure under which shareholders/creditors are asked to vote on, and approve, an arrangement which results in the allotment of securities.
This analysis has historically been less certain where a takeover scheme would allow target shareholders to choose between alternative forms of consideration, including securities—e.g. to elect to receive either cash or shares, or a combination thereof, commonly referred to as a “mix and match” facility. United Kingdom Listing Authority (UKLA) commentary from 2009 (LIST! Issue no. 23) indicated the then Financial Services Authority’s view that the element of choice afforded to shareholders in this situation meant that the individual shareholder “clearly makes an investment decision, and it would follow that a prospectus should be produced, absent an exemption”.
The FCA had intended that Primary Market/TN/606.1 would incorporate the 2009 UKLA commentary into its formal guidance.
Respondents’ view and FCA withdrawal
On 20 March 2023, the FCA reported in Primary Market Bulletin 44 that all respondents to its consultation were of the view that where securities are allotted under a scheme there is no “offer to the public” for the purposes of FSMA, and therefore no requirement for an FCA-approved prospectus arises. This is on the basis that, in the view of respondents, the reference in the definition of “offer to the public” (in section 102B(1) of FSMA) to a decision to “buy or subscribe for” securities envisages that there is an underlying contractual offer of securities which is capable of acceptance by the investor. Because a scheme does not involve acceptance of an offer, and therefore cannot result in a bilateral contract to buy or subscribe for securities, it is argued that there is therefore no offer to the public within the meaning of the UK Prospectus Regulation.
In light of the responses to the consultation, the FCA has decided not to proceed with the proposed Technical Note 606.1 at this time. The FCA has noted that while its own analysis remains unchanged, it recognises that the question of whether a prospectus is required is a question of law and ultimately is for the courts to decide. It also refers to the ongoing legislative process to reform the UK prospectus regime, and that the current draft Financial Services and Markets Act 2000 (Public Offers and Admissions to Trading) Regulations 2023 (the “Illustrative Statutory Instrument”) proposes to exclude securities allotted under a scheme from the definition of public offer. However, the Illustrative Statutory Instrument is still in draft and there can be no certainty that it will become law in this form.
Comment: UK Prospectus Regime Review
The Illustrative Statutory Instrument forms part of the UK government’s preparatory work to adapt the UK’s financial services framework following the UK’s exit from the European Union, and to carry out, among other reforms, changes following the March 2022 Prospectus Regime Review.1
The implementation of reforms to the UK prospectus regime is a welcome opportunity to resolve this issue which has historically caused uncertainty in the context of takeovers for issuers and other market participants. We will be following developments closely, in particular given the UK government’s December 2022 Policy Statement which indicates that significant progress is expected on financial services regulation in this area in 2023.
1See also the accompanying Policy Note to the Illustrative Statutory Instrument.
