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Herbert Smith Freehills (HSF) worked with music industry entrepreneur Merck Mercuriadis to help him realise his plan to “destroy” the traditional music publishing model and replace it with “song management” in which more streamlined companies maximise smaller collections of high-value hits.

Mercuriadis founded Hipgnosis in 2017, creating the first publicly traded fund investing in music royalties. HSF has worked with Hipgnosis since its inception, guiding the business right through to its most significant growth period to date. In the 12 months to January 2021, its share capital increased from approximately £615m to more than £1bn, its New York law governed NAV-based revolving credit facility (RCF) increased from £65m to $600m and the acquisition of a further 70 catalogues comprising approximately 47,500 songs.

This transformative year forms the backdrop to Project Mercury, which was Hipgnosis’ first attempt, in earnest, to tap the US market and bring in US investors. Project Mercury represents a significant pivot towards the US and a key step in Hipgnosis’ growth trajectory as it continues to diversify its operations and fundraising strategy, including with a new equity raise announced on 16 June 2021.

Adam Hickley, HSF
Adam Hickley, HSF

Investment funds partner Nigel Farr and corporate senior associate Adam Hickey have worked on the corporate and listing workstreams for Hipgnosis since before its 2018 IPO, and have supported the fund through its various fundraises, corporate actions and certain acquisitions.

Hickey joined HSF as a paralegal on 3 October 2011, going on to start a training contract at the firm in August 2014 and qualifying in September 2016. “For listed funds work, I predominantly work with Nigel Farr and Tim West. For private funds work, I have predominantly worked with Stephen Newby,” Hickey explains. “Through my work with listed infrastructure funds, some of which have not yet launched, I have worked closely with our corporate energy/M&A partner, Sarah Pollock.”

Chelsea Fish, HSF
Chelsea Fish, HSF

Chelsea Fish is a finance senior associate and joined HSF in January 2020, about a month and a half before the UK went into its first lockdown. She is a New York qualified lawyer. Having graduated from law school in 2016, she started her legal career in the capital markets team at Dechert London office.

“The amendment of Hipgnosis’ financing arrangements was one of the first transactions I worked on when I started at HSF in January 2020, and over the course of the nearly two years I have worked with HSF, I have had the opportunity to work closely with Hipgnosis’ finance, deal and intellectual property teams while Hipgnosis has progressed on its spectacular growth trajectory,” says Fish.

The Hipgnosis financing project

To tap the US markets by undertaking a Rule 144A offering, permitting sales of securities to “qualified institutional buyers” in the US, Hipgnosis prepared a prospectus that met the detailed disclosure requirements of a US Securities and Exchange Commission (SEC) registered offering, known as a 10b-5 prospectus.

Project Mercury is one of only a handful of 10b-5 prospectuses for a UK investment fund. A 10b-5 prospectus involves significantly more detail with regards to certain financial disclosures, which are not often seen in UK investment fund prospectuses, and a principles-based approach to determine what investors would regard as material in the total mix of information made available on Hipgnosis.

To ensure that the prospectus contained all the information that was required by the UK/US regime, HSF worked closely with its ALT team in Belfast to undertake the documentary due diligence review process, whereby the firm hosted the data room and worked with Hipgnosis’ service providers to populate it and Hipgnosis’ auditors and accountants to ensure that the financial information in the prospectus complied.

In addition to the US securities law and regulatory context, the rapid growth of Hipgnosis’ business challenged the HSF team to ensure the disclosure in the prospectus was relevant, up-to-date and exhaustive – given its pace of growth, fulfilling that standard was often a moving target.

“The production of prospectus disclosure, in particular a prospectus for a 144A transaction, always involves getting stuck into the details of an issuer and how their business works. Project Mercury was no different, and although my role in the prospectus drafting and due diligence was primarily focused on Hipgnosis’ financing arrangements, I learned a great deal about Hipgnosis’ business model, their assets and the music publishing industry generally,” says Fish.

“Prior to the publication of the prospectus for Project Mercury, the covenants in Hipgnosis’ revolving credit facility had evolved from a customary set of covenants typically found in NAV-based fund financings to incorporate covenants more typically applicable to operating companies or more mature investment funds. Along with the fund and US securities team, I was challenged when drafting the disclosure to balance the materiality requirements for a Rule 144A prospectus with the technical nature of these amendments. Drafting the disclosure on these points was an iterative process and the input of my colleagues in our funds US securities practices was critical to strike the right balance and provide clear disclosure for investors.”

“Under UK laws and market practice, a listed fund will typically incorporate interim accounts by reference, with little to no analysis thereof, unless there is something out of the ordinary which warrants separate disclosure, and listed funds are not subject to the pro forma accounting rules, or the requirement to produce an operating and financial review (OFR). For a Rule 144A prospectus, this all goes out of the window,” adds Hickey.

“The aggressive timetable between publication of the accounts and the prospectus (which was not helped by the Christmas holidays falling within this period) added additional challenges, but we were able to overcome those too with careful planning and constant dialogue with clients and auditors as to what we needed and by when we needed it.”

Not only did Hipgnosis materially increase its RCF from £65m to $600m over the course of 2020, it made other significant changes to the RCF documentation, including a full amendment and restatement, followed by other substantial amendments to provide Hipgnosis with adequate flexibility to permit the ongoing evolution of its business and strategy.

To account for the acquisition of Big Deal Music and the addition of new music catalogues to the security package, the covenant package in the RCF was amended from a customary set of covenants typically found in NAV-based fund financings to incorporate covenants more typically applicable to operating companies or more mature investment funds, including with respect to permitted acquisitions, investments, advances and employee related covenants. The challenge for the funds and finance teams for Project Mercury balancing the materiality threshold required to satisfy the disclosure requirements for a 10b-5 prospectus with the innovative, highly technical and often confidential nature of such amendments.

“Project Mercury represented a transaction where, arguably, all three teams – listed funds, finance and US securities – were the lead team. We all had our own expertise and we all needed to take ownership for, and instruct the other teams on, those aspects. This could have led to conflicts, or to the risk of items falling between the cracks, but that was not an issue due to the close collaboration between teams,” Hickey says.

“This includes on the associate level where Chelsea Fish in finance, Gaelen Perrone in US securities, our ALT practice run out of Belfast by Victoria Brown and me – spent a lot of time on Teams calls with each other, getting to know each other’s living rooms rather well, and (from my perspective) helped each other through an incredibly demanding transaction. There were so many moving parts to the transaction up until publication, and I do not think it would have been possible to have brought everything together, on time and to the standard we did if it wasn’t for that collaboration between the teams. That’s what I remember most fondly from this transaction.”

Fish adds: “Project Mercury specifically, and our ongoing finance work with Hipgnosis more generally, has provided me with critical insight and experience into music and entertainment law and into royalties and music product as an asset class. Hipgnosis has been and continues to be a market leader in this space and the sector experience I have gained from working with their team has been invaluable. The market for music product and royalties as an asset class continues to grow and I am looking forward to continuing to advise clients in this space.”

The end of the Brexit transition period also resulted in the prospectus, published in January 2021, being one of the first to be published under the new UK laws, which required a last-minute overhaul of many references to EU legislation throughout the document.

In September 2019, Hipgnosis transferred its entire issued share capital from the Specialist Fund Segment to the Premium listing segment of the Official List of the FCA and to the London Stock Exchange’s Premium segment of the Main Market, and in March 2020 became a constituent of the FTSE 250 Index.

The scale of Project Mercury, and indeed the amount of work undertaken in the 12 months leading up to the publication of the prospectus, involved around 30 lawyers across funds, finance, corporate and securities, tax and IP teams in our London office.

Fish has spent most of her time to date at HSF working remotely. Despite an adjustment period at the outset, she says the team were well adjusted to remote working (and its benefits and challenges) by the time they started work on Project Mercury. “The key benefit to working remotely on Project Mercury, which entailed a lot of late nights and early starts, was eliminating the commute and having the flexibility to work when required. Of course, there were challenges, primarily ensuring that all of the team members were communicating effectively in a remote working environment and that junior team members felt comfortable reaching out in real time, whether in a Teams message or a call, to ask questions,” she explains.

“If any transaction was going to test the ability to conclude transactions whilst working remotely, this was it,” Hickey adds. “There were at least 20 lawyers (including paralegals and legal assistants) across the firm working on this transaction, undertaking a due diligence exercise, working through a documents list that comprised comfortably over 100 documents and working to a very tight timetable, with many moving parts,” he says. While he admits that remote working makes teamwork harder, he said the commitment of the HSF team to do what was required meant “we completed the challenging yet successful transaction with good humour and hard work”.

Fish says 2021 has continued to be a busy year, with uncertainty around the pandemic abating to make way for a rush of activity. “We are continuing to advise Hipgnosis on its current financing arrangements and our funds practice is advising on fund financings across a variety of sectors, including music and entertainment,” she adds. “I have also worked on a number of successful structured financing transactions, where we collaborated with Vincent Hatton’s team in Paris acting for Credit Agricole, and have also been involved with advisory work for a range of corporate clients in the UK, including Dyson, Johnson Matthey, Hammerson and more.”

About Adam Hickey and Chelsea Fish

Adam Hickey
2021-present: Senior associate, Herbert Smith Freehills
2016-2021: Associate, Herbert Smith Freehills

Chelsea Fish
2020-present: Associate, Herbert Smith Freehills

Who’s Who: the Herbert Smith Freehills team

Investment funds: Nigel Farr (partner) and Adam Hickey (senior associate)

Finance: Gabrielle Wong (partner), Soumya Rao (of counsel), Chelsea Fish (senior associate), Sarah Baldwin (associate) and Will Beynon (associate)

US securities laws requirements: Dinesh Banani (partner), (Dennis Hermreck) and Gaelen Perrone (associate)

Acquisitions: Mike Flockhart (partner) and Lucy Gemmell (senior associate)

IP: Hayley Brady (partner) and Emma Sherratt (senior associate)

Tax and structuring: Isaac Zailer (partner) 

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