The UK Listing Authority has published a special edition of List! discussing the interaction between working capital statements and risk factors. In reviewing equity prospectuses over the last year or so the UKLA has commented extensively on this topic. In particular, the disclosure of risks associated with the financial crisis has frequently created an apparent tension with an issuer’s statement in the prospectus that it has sufficient working capital for its present needs (at least the next 12 months). A clean working capital statement of this kind may be inconsistent with a risk disclosure that suggests that the issuer will not in fact be able to carry on without further capital.
The new List! Issue No. 24 focuses exclusively on this topic. It explains the principles that the UKLA is now applying in reviewing risk factors and working capital disclosures in prospectuses. In particular:
-
The issuer is responsible for proper disclosure. The UKLA’s role in the context of risk factors is limited to ensuring that the document as a whole, including the working capital statement, is consistent with the risk factors. It will not redraft risk factors or seek their removal where they appear to be inconsistent with a clean working capital statement. If risk factors describe a situation that is fundamentally inconsistent with a clean working capital statement, either the facts underlying the risk must be addressed or the working capital statement must be given on a qualified basis.
-
Some risk factors are fundamentally incompatible with a clean working capital statement: for example, a statement that an issuer may not be able to access sufficient future sources of funding to meet its requirements. If this is in fact the case, a clean working capital statement cannot be given.
-
Risk factors relating to financial matters may be compatible with a clean working capital statement but should be carefully delineated in scope. For example, it is not necessarily incompatible with a clean working capital statement to state that covenants within an issuer’s facilities may force it to pass over future acquisition opportunities, or to highlight that increasing costs of capital may restrict future profitability.
-
The document as a whole should be consistent, with risk factors, business strategy and working capital sections telling the same story. If the issuer’s future strategic actions may be constrained by lack of working capital, the business description section should not set out plans that would be not be achievable in those circumstances.
-
High impact, low probability risk factors may be material for disclosure and even if they would be “terminal” are not necessarily incompatible with a clean working capital statement. This is likely to be the case, however, only in limited cases or when there is acute economic or market disruption. Any such factors must be tightly drafted.
-
Risks should be expressed to apply “in the longer term” only if this is genuinely the case. This formulation should not be used solely to take the risk outside the period covered by the working capital statement, and where it is used the UKLA will question the disclosure to ensure it is accurate.
-
Any inconsistency between risk factors and working capital statements cannot be remedied through the use of general disclaimers or preambles.
Finally, the UKLA reiterates its previous statements (see List! Issue No.21 of May 2009, available here) that risk factors should be particular to the issuer and deal with specific risks; they should not be drawn too broadly or generically and should not seek to cover all risks irrespective of materiality.
Conclusion
Following the principles set out here by the UKLA should help issuers to make appropriate risk disclosure without cutting across the working capital statement, which is regarded by the UKLA as one of the most important disclosures in both prospectuses and circulars. In cases where any issues about the drafting of risk factors are likely to arise it is advisable for issuers to enter into early dialogue with the UKLA to ensure clear and appropriate disclosure.
List! 24 is available here.
