Navigating the new recommendation on directed share issues – Towards greater transparency

The Finnish Securities Market Association’s new recommendation on directed share issues, effective December 1, 2024, represents a shift towards greater transparency on the actual reasons behind potential derogations from the existing shareholders’ pre-emptive subscription right and aims to promote good securities market practice. Understanding these new guidelines is essential for any company listed in Finland, either on the Main Market or First North Growth Market, that is planning to raise funds by way of a directed share issue.

A call for increased transparency towards both existing shareholders and potential investors

Although the recommendation does not change the criteria for assessing the legitimacy of a directed issue under the Finnish Companies Act, it underlines the importance of transparent communication towards the public and requires more thorough consideration on the justification of directed share issues. The recommendation can be seen as a more agile way of guiding issuers in the direction of more transparent investor communications without creating new statutory regulation.

When a company decides to bypass the pre-emptive subscription right of its shareholders, it must provide a clear and comprehensive justification for such derogation. Merely a general reference to time or cost savings is not sufficient. The company must instead justify why the saved time and costs are decisive in their case, and in the interest of the company, and ultimately all its existing shareholders.

In terms of the time and costs savings, it’s vital to take into account that the recent amendments introduced by the Listing Act to the Prospectus Regulation, effective December 4, 2024, provide new exemptions to prospectus requirements and thereby can make a rights issue faster and cheaper to arrange for companies.

As a consequence of these amendments, the issuers are exempt from the obligation to publish a prospectus for public offers of shares fungible with those already admitted to trading on the same regulated market, provided that (i) the shares to be issued represent less than 30% (earlier 20%) of the shares already admitted to trading over a period of 12 months, (ii) the issuer is not subject to a restructuring or to insolvency proceedings, and (iii) a short summary document (11 pages in length) is submitted to the competent authority and made public. Consequently, more attention will have to be paid to the justification for a directed share issue as fairly large public share issues can be made in the form of rights issues without publishing a prospectus.

In addition to the justification for derogating from the shareholders’ pre-emptive subscription right, companies executing directed share issues must provide information on (i) how the subscription price is determined, (ii) how it is verified that the price is determined on market terms, and (iii) who are the subscribers, with a special emphasis on identifying existing shareholders among them.

The recommendation considers the use of appropriate bookbuilding procedure in a directed share issue as a factor that, to some extent, reduces the required level of detail for disclosing the principles affecting the determination of the share price and the selection of the group of subscribers. However, the recommendation does not shed much light on the grounds on which a book building procedure is considered to be appropriately organised, but it does state that an appropriate book building procedure is publicly disclosed, and a larger group of investors can indicate their interest in participating in the share issue.

The Nasdaq First North Growth Market Rulebook for Issuers of Shares and Nordic Main Market Rulebook for Issuers of Shares, applicable to companies whose shares have been listed on First North or the main market, respectively, have already previously required the disclosure of all significant information concerning a share issue, including the reasons for the transaction, subscription price and to whom the issue is directed. The new recommendation complements existing regulation and provides more insight into the level of detail required. This in turn allows investors to better assess the justification for the directed share issue.

Practical implications of the recommendation

For Finnish listed companies contemplating directed share issues, the recommendation, together with the changes in the Prospectus Regulation, necessitates a more thorough consideration of the justification of a directed share issue and their disclosure practices.

Companies must ensure that their justifications for derogating from pre-emptive right (and determining the subscription price) are robust and well-documented. The requirement to disclose, in certain cases, investor identities and the rationale for their selection adds another layer of consideration, particularly for companies with significant shareholder involvement.

Based on the recommendation, issuers can be advised to consider at least the following practical aspects:

• Thorough Assessment of Options: Companies should thoroughly review the options available to them for raising equity financing and consider, whether there are sufficient grounds for a directed share issue.
• Comprehensive Documentation: Companies should meticulously document the decision-making, especially regarding the justification for directed share issue and the determination of subscription price. In addition to documenting the decision-making on the directed share issue, it is recommended to document what alternative options there are and why they are not, at least as clearly, considered to be in the interest of the company and its shareholders.
• Transparent Communication: Clear, comprehensive and timely communication with shareholders and the market is essential. However, the recommendation explicitly states that it does not require the disclosure of information that is commercially sensitive to the company (inside information is however always subject to disclosure obligation).

The recommendation is a roadmap to enhancing transparency in directed share issues. As companies begin to implement the recommendation, it will be interesting to observe whether, and to what extent, it actually changes prevailing market practices, and whether disclosure to the public becomes more transparent.

Although criticism on directed share issues might in some cases be well founded, directed share issues still have certain clear advantages – in particular, if funding through a directed share issue is available fast and without the risk of disclosing business-sensitive information to the public prematurely.