Supplementary Prospectus Flashcards
When does the need for a supplementary prospectus arise?
- PRR 3.4.1EU/Art. 23(1), Prospectus Regulation provides that every:
a) significant new factor; or
b) material mistake; or
c) material inaccuracy,
relating to the information included in a prospectus which may affect the assessment of the relevant securities and which arises or is noted between (i) the time when the prospectus is approved; and (ii) the closing of the offer period or the time when trading on a regulated market begins, whichever later occurs, requires supplementary prospectus without undue delay.
• PRR 3.4.2EU/Art. 18(1), Prospectus RTS Regulation: sets out number of minimum circumstances in which SP definitely required e.g. where issuer publishes new annual audited financial statements/change in profits forecast/subject to new takeover bid/undertakes significant financial commitment.
Timing – is it within the relevant time period?
i) Before approval of the prospectus
Where new factor/mistake/inaccuracy comes to light before approval of the prospectus - even if this is after the publication of the standalone registration document - the company should amend the draft prospectus that is being reviewed by the FCA if the information needs to be disclosed under PRR 2.1.1EU/Art. 6(1), Prospectus Regulation and/or the Annexes, PR Regulation.
The version of the final prospectus approved by the FCA will in this way reflect the most up to date position in relation to the issuer.
ii) After approval of the prospectus and prior to admission
The requirement to produce a supplementary prospectus under PRR 3.4.1EU/Art. 23(1), Prospectus Regulation applies only if the significant new factor, material mistake or material inaccuracy relating to the prospectus “arises or is noted” within the period of time running from the approval of the prospectus to the later of the close of any public offer and the admission of the relevant securities.
In IPO, this period will therefore always be from approval of prospectus to admission of the shares, as any offer will always close before admission.
Therefore, if new significant factor etc. is noted after prospectus approved but before admission, a supplementary prospectus must be submitted to the FCA for its approval, containing details of the new factor, mistake or inaccuracy.
iii) After admission
Once admission occurred, no longer any obligation to publish a supplement to the prospectus.
IMPORTANT NOTE: However, the issuer should at that point consider whether the significant new factor etc. constitutes “inside information” that would require disclosure to investors and the market in accordance with the Market Abuse Regulation 2014.
Next steps if SP required/if within the relevant time period
1) Obligation to notify issuer: s. 87G(5) FSMA
- s. 87G(5) FSMA - Any person responsible for a prospectus who is aware of any new factor/mistake/inaccuracy that may require SP must give notice of it to:
i) the issuer; and
ii) the person on whose application the prospectus was approved (i.e. the sponsor)
• In practice, a director who becomes aware of such a matter would call a full board meeting as soon as possible in order to consider the issue.
2) Submission to FCA - PRR 3.4.1EU/Art. 23(1)
- SP must be approved by the FCA in the same way as a prospectus in a maximum of five working days.
- It must then be published in accordance with at least the same arrangements as were applied when the original prospectus was published: PRR 3.4.1EU/Art. 23(1), Prospectus Regulation.
Consequences that arise due to supplementary prospectus
a) Effect on the issue
Companies reluctant to publish SP unless absolutely necessary, due to
i) Additional work required in a time-pressured situation
ii) Negative perception in the market, may have negative effect on demand for shares
iii) Withdrawal rights
This may mean that the issuer and sponsor take the decision to pull the issue, at least in the medium term, so no SP will be needed.
Withdrawal rightd
a) Withdrawal Rights.
PRR 3.4.1EU/Art. 23(2), Prospectus Regulation: person who has accepted public offer of shares may withdraw their acceptance within period of two working days after publication of SP.
Note: As these provisions provide that withdrawal rights apply only where the prospectus relates to an offer of transferable securities to the public, this means that withdrawal rights will not arise in the context of an institutional only offer where a prospectus is produced only for the purposes of admission.
Liability
a) Liability
Persons responsible for the original prospectus have the same range of potential liabilities in relation to any supplementary prospectus, for which they will also have to take responsibility.
• In addition, any person who fails to comply with requirement to produce a SP when required is liable under s. 90(4) FSMA to compensate any person who acquires the shares and suffers a loss as a result of the failure to publish a supplementary prospectus.
However, the publication of a supplementary prospectus can also act as a defence
against liability under s. 90 FSMA for the original prospectus. This is because the
directors may be able to rely on one of the exemptions in Schedule 10 FSMA.
• In particular, Paragraph 1(2) of Schedule 10 FSMA, a director may be exempt from liability if he or she held a reasonable belief that the prospectus was correct at the time it was published and, once he/she became aware of the error, he/she took all reasonable steps to secure that a correction was brought to the attention of prospective investors. The publication of a supplementary prospectus should satisfy this requirement to bring the correction to the attention of investors.
S. 90 FSMA: False and Misleading Statements
• Ss. 90(10), (11) and (11A) FSMA: “prospectus” includes both any supplementary prospectus that has been published in connection with the original prospectus, and any pricing statement published in order to confirm the final price following a price-range prospectus
• S.90(4) FSMA extends s.90 to loss resulting from a failure to publish a supplementary prospectus when required pursuant to the Prospectus Regulation
• Persons responsible are those as listed in PRR 5.3.2R(2)
- Para 7: A director may be able to avoid liability for failure to publish a supplementary prospectus under s. 90(4) if he or she satisfies the court that he or she reasonably believed that a supplementary prospectus was not required
- S87G FSMA: Persons responsible for P who become aware of need for SP must give notice to the issuer
Supplementary prospectuses and advertisements
- PRR 3.3.2EU/Art. 15, Prospectus RTS Regulation: publication of SP also requires issuer to amend and re-issue any advertisements previously disseminated in relation to the offer/admission to listing that have been rendered materially inaccurate or misleading.
So if director finds out relevant matters after approval of prospectus but before admission:
So if director finds out relevant matters after approval of prospectus but before admission:
- Any person responsible for the prospectus who is aware of any new factor, mistake or inaccuracy which may require the submission of a supplementary prospectus must give notice to the issuer to which the prospectus relates: s.87G(5) FSMA.
- The director should therefore call urgent board meeting to ensure that full details of the matter are disclosed to the board and consider whether a supplementary prospectus is required.
- It is very important that key representatives of the sponsor and the company’s solicitors are present.
- The issuer should investigate urgently the nature of the matter arising e.g. if litigation matter, get Counsel opinion on the merits of the claim.
- PRR 3.4.1EU/Art. 23(1), Prospectus Regulation provides that every:
1) significant new factor; or
2) material mistake; or
3) material inaccuracy,
relating to the information included in a prospectus which may affect the assessment of the relevant securities and which arises or is noted between (i) the time when the prospectus is approved; and (ii) the closing of the offer period or the time when trading on a regulated market begins, whichever later occurs, requires supplementary prospectus without undue delay.
- As the issuer would be within the period covered by PRR 3.4.1EU/Art. 23(1), it must consider whether the information about the claim could trigger the need for a supplementary prospectus:
• Consider value of claim etc. and see PRR 2.1.1EU/Art. 6(1), Prospectus Regulation and PRR 1.1.8R applying the PRRs generally to supplementary prospectuses)
Scenario where issuer sought advice on whether litigation should be disclosed and was told no need to and judgment entered against issuer after admission
- Issuer cannot publish a supplementary prospectus because we are no longer in the period between approval of the prospectus and admission to trading, during which PRR 3.4.1EU/Art. 23(1), Prospectus Regulation applies
- Information should, however, have been disclosed in original prospectus in order to comply with the general disclosure obligation contained in PRR 2.1.1EU/Art. 6(1), Prospectus Regulation and the specific disclosure obligation contained in Item 18.6.1 of Annex 1, PR Regulation.
• In practice, even if the issuer had received advice that the claim would fail, it is likely that disclosure of the collapse in the relationship with Namib plc, a key JV customer, should have been included in the risk factors (see Item 3.1 of Annex 1, PR Regulation).) - As the claim was not disclosed in the prospectus, under s.90(1) FSMA the “persons responsible” for the prospectus could be liable to pay compensation to investors.
- In order to defence claim under s. 90 FSMA, consider Schedule 10 FSMA to ascertain whether any of the directors could rely on exemptions to escape potential liability (under s.90(2) FSMA).
- Could try to defend a claim based on Schedule 10, paragraphs 1(2)(b) and 1(3)(a): based on advice from solicitors, issuer continued to believe that there was no further material litigation to disclose.
- Note: Initial investors in Aqua’s shares could also potentially sue under common law for negligent misstatement, misrepresentation and/or breach of contract.
- To prevent any liability to investors buying shares in the future, the issuer should announce details of the claim to the market via an RIS as it is likely to constitute inside information which directly concerns the issuer (will be required to notify an RIS anyways of any inside information as soon as possible under Art. 17(1) MAR).
- If an investor were to acquire shares following the announcement, the persons responsible would then be able to rely on the defence contained in Schedule 10, paragraph 1(2)(b) and paragraph 1(3)(c) in that they had “taken all steps as it was reasonable for them to have taken to secure that the correction was brought to the attention of those persons”.
- Publication of the RIS statement is also likely to constitute a defence under Schedule 10, paragraph 3: Corrections of Statements.
