When the funding for a proposed acquisition (which itself constitutes inside information) is the proceeds of a placing, it will be necessary to wall cross placees on the proposed acquisition as part of the fundraising process. This gives rise to some important MAR related points of practice for the issuer which we consider in this article. In writing this article, the author expressly acknowledges the invaluable contribution of the MAR Q&A (Updated 22 May 2018) prepared by the City of London Law Society and Law Society Company Law Committees’ Joint Working Parties on Market Abuse, Share Plans and Takeovers Code.
Wall-crossing and selective disclosure
The first point to consider is the legal basis on which the issuer is able to selectively disclose details of the proposed acquisition to placees without that constituting unlawful disclosure contrary to Article 14(c) of MAR. Key points of practice here are (i) the carve-out (in Article 10(1) of MAR) for disclosure of inside information “in the normal exercise of an employment, a profession or duties” and (2) the guidance in DTR2.5.7(c) which acknowledges that selective disclosure may be made to person with whom the issuer is negotiating an investment transaction (including prospective underwriters or placees of shares of the issuer).
The wall crossing of placees will be typically carried out by the issuer’s broker under the market soundings regime set out in Article 11 of MAR. Where this is the case, Article 11(4) provides that the disclosure of inside information in compliance with Articles 11(3) and (5) is deemed to be made “in the normal exercise of a person’s employment, profession or duties” and is not unlawful disclosure.
In terms of the scope of what can be legitimately disclosed to placees, as a matter of commerciality it would seem trite that they will need to know the background to and the reasons for the proposed placing, including the proposed use of proceeds. However, clear legal authority for this is not apparent in the MAR or the technical guidance issued under it. Thankfully, the MAR Q&A points out that ESMA has acknowledged (albeit not formally or in a binding way) that this will generally be the information relating to the characteristics of the transaction in question (i.e., the placing) but may also include some other information not necessarily directly related to the possible transaction but providing important context to the transaction. On the back of this, the CLLS make the following comment: “By way of example, where an issuer intends to conduct an equity financing to finance an acquisition, it would typically be considered justifiable to disclose the fact of the associated acquisition to potential subscribers and placees”.
Cleansing and securing binding funding commitments
The second point to consider is the strategy for “cleansing” placees and the process for securing their commitment to subscribe in the placing, which will of course constitute a dealing. We understand that a number of institutions, as a matter of policy, will no longer sign placing letters and where this is the case the accelerated bookbuild (ABB) process, which is increasingly common, is usually the way forward. Under an ABB, the book will typically be built “soft” by the broker shortly prior to announcement, with firm legally binding commitments only secured by telephone using recorded lines following announcement of the acquisition and launch of the placing process, thereby cleansing wall crossed institutions in advance of their dealing. Where this approach is followed, issuers may be keen to have the placing underwritten.
Where there is no policy objection to their use, placing letters continue to be used in practice, with the key benefit being security of funding (fundamental where the broker’s placing obligation is a reasonable endeavours obligation only) prior to entering into a legally binding sale and purchase agreement. Where placing letters are used, it is necessary to consider the basis upon which such dealings fall outside of the ambit of the insider dealing provisions of MAR.
Here, the guidance in the MAR Q&A is again extremely helpful, pointing out, amongst other things, recital 23 of MAR which notes that “the essential characteristics of insider dealing consists in an unfair advantage being obtained from inside information to the detriment of third parties … and consequently, the undermining of the integrity of financial markets” and consequently that the prohibition on insider dealing should apply where “a person who is in possession of inside information takes unfair advantage of the benefit gained from that information by entering into market transactions in accordance with that information”. The key points of practice that one can draw from this, and the other sources referred to in the MAR Q&A, are that entering into a placing letter is not a “market transaction” and that using inside information in this way should not infringe the interests protected by MAR.