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Flotations Preparation For Listing Notes

LPC Law Notes > Corporate Finance Notes

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Corporate Finance: SGS 1: Flotations (I): Preparation for Listing INDEX OF ABBREVIATIONS
- RIE - Recognised Investment Exchange
- IPO - Initial Public Offering
- PR - Prospectus Rules
- LR - Listing Rules
- DTR - Disclosure Guidance and Transparency Rules
- LP - Listing Principles
- PLP - Premium Listing Principles
- FSMA 2000 - Financial Services and Markets Act 2000
- RAO - Financial Services and Markets Act 2000 Regulated Activities Order 2001
- FPO - Financial Services and Markets Act 2000 Financial Promotions Order 2005
- MAR - Market Abuse Regulations
- CJA - Criminal Justice Act 2002
- FSA - Financial Services Act 2012
- UK CGC - UK Corporate Governance Code
- RCF - Revolving Credit Facility
- LSE - London Stock Exchange
- AIM - Alternative Investment Market
- FCA - Financial Conduct Authority
- MAC - Material Adverse Change
- EoD - Event of Default Corporate Finance: Key Terms and Concepts
- Recognised Investment Exchange - Investment exchange recognised by the FCA and which engages exemptions from general prohibition in respect of regulated activities in s.19(1) FSMA 2000 - includes LSE.
- Regulated Market - Defined in FCA Handbook - includes LSE Main Market BUT NOT AIM.
- Prescribed Market - Defined in FSMA Regulations - includes both LSE Main Market and AIM.
- Quoted Company - Company whose equity share capital listed on the Official List and admitted to trading on LSE Main Market.
- Traded Company - Company, any shares of which carry rights to vote at general meetings AND are admitted to trading on a regulated market in an EEA State.
- Primary Issue - Flotation/Initial Public Offering (IPO) - first time that company makes on offer of listed shares but does NOT always involve an offer of shares to the 'public' (e.g. primary issue can be a purely institutional offer).
- Secondary Issue - Subsequent issue of shares by a listed company.
- CREST - Central Securities Depositories for the UK under the Central Securities Depository (CSD) Regulations 2014 - computerised system which allows shares to be held and traded electronically between CREST members by sending electronic instructions about the price/number of shares being transferred.
- Advantages of Listing Company Shares - Access to capital + providing market for trade in company's shares +
increased public profile for the company.
- Disadvantages of Listing Company Shares - Enhanced disclosure/reporting requirements + requires significant investment of management time/resources + may require changes to board to satisfy demands of new investors/comply with regulatory obligations + expensive process (e.g. adviser's fees/commissions) + loss of control to new investors.
- LR 8.2.1R: Sponsor - FCA requires that a company applying for premium listing on Main Market of LSE appoint a sponsor to assist the application - sponsor usually an investment bank/broker and must be FCA approved (LR 8.6.2R).
- LR 8.3/8.4: Responsibilities of Sponsor - Sponsor responsible for: (a) co-ordinating/project managing the listing application process; (b) helping company prepare/submit application for listing; (c) ensuring that the company/its shares satisfy the applicable requirements for listing on Main Market of LSE; and (d) Making declaration to FCA that sponsor has fulfilled its responsibilities under the Listing Rules.
- LR 8.7: FCA Supervision - FCA monitor/supervise sponsors to ensure that they continue to satisfy criteria for FCA approval as a sponsor and comply with responsibilities under the Listing Rules - FCA can sanction sponsors which fail to fulfil their duties under Listing Rules under ss.88A-88E FSMA 2000. Types of Offering
- Retail Offers - Shares offered to the public in general - creates a large shareholder base which results in greater liquidity for shares but are more expensive and take longer to organise due to increased marketing requirements + need to appoint receiving bank to manage applications process - can be further divided into: (a) LR App 1.1: Offer for Subscription - Invitation to public to subscribe for securities of the issuer not yet in issue (i.e. sale of new shares) as a means of raising capital for the company - new shares offered to public by way of an initial public offering (IPO) with company appointing receiving bank to process applications to subscribe from members of public, obtain payment of purchase price and transfer payment to company. 1

(b) LRD App 1.1: Offer for Sale - Invitation to public to purchase shares in the issuing company which are already in issue (i.e. pre-existing shares issued/allotted prior to flotation) - does NOT involve the company issuing new shares to raise new capital but rather allows existing shareholders to realise their investment - selling shareholders appoint receiving bank to accept applications/obtain payment/forward consideration to selling shareholders.
- Institutional Offers - Shares offered directly to pre-identified institutional investors (e.g. banks/pension funds/insurance companies) through an investment bank/broker - results in smaller shareholder base which leads to reduced liquidity of shares but reduced expense to reduced marketing costs/regulatory requirements - does not usually require the appointment of a receiving bank due to reduced numbers of subscribers/investors.
- LR App 1.1: 'Placing' - Marketing of securities already in issue but not listed OR securities not yet in issue to specified persons/clients of sponsor/securities house which does NOT involve an offer of shares to the public/existing shareholders of the issuer.
- Placing Letter - Sent to places detailing the terms/conditions of the offer - signed/returned by the places if they wish to subscribe for the shares.
- Placing Agreement - Record of agreement between sponsor and company for the sponsor to place shares with investors on behalf of company.
- 'Bookbuilding' - Means of marketing an issue of shares whereby investment bank involved creates a 'book of interest' in shares being placed to record interest from potential investors.
- Once intention to issue shares announced, investment bank/broker will use bookrunners to contact clients to gauge whether they would be interested in subscribing for the shares being offered - price-range prospectus/pathfinder then used to provide interested clients with more information about the issuer/shares on offer who then decide, on basis of such information, whether they wish to subscribe for issuing company's shares and indicate how many shares they would be willing to subscribe for/at what price.
- Response of potential investors in bookbuilding process considered when setting the final price for the shares.
- Intermediaries Offer - Shares marketed only to firms registered as 'INTERMEDIARIES' in FCA Handbook (e.g. fund managers/stockbrokers) who then allocate shares to their own clients in return for a commission - still considered an 'offer of securities to the public in the UK' for purposes of s.85(1) FMSA 2000 so a prospectus is still required.
- Price Range Prospectus - FCA approved document issued prior to flotation to potential investors (usually in course of a retail offer) where the final price of shares has not been determined but a preliminary price range has been set - once final price has been determined this must be published by issuer - used to market issue to potential investors and provide investors with information about the issuing company/shares being offered which they require in order to make informed decision as to whether/not to subscribe for the shares.
- Pathfinder - Used by issuer making an institutional offer with no retail element to market the issue to pre-identified institutional investors - published before a prospectus and acts as a draft prospectus without detailing final share price or an indicative price range + does NOT require FCA approval.
- Allows for publication of final FCA approved prospectus at a later date - ensures that details in final prospectus are accurate/less likely to have to be amended by way of a supplementary prospectus.
- Qualifies as a 'financial promotion' under s.21 FSMA 2000 BUT problems avoided by only distributing the pathfinder to investors qualifying as 'exempt persons' under the FSMA 2000 (Financial Promotions) Order 2005.
- Qualifies as an 'advertisement' and so must comply with Prospectus Rule 3.3 BUT does not require FCA approval
- Underwriting - Underwriter (usually investment bank advising on listing) agrees to purchase any shares which are not subscribed for by investors - if all shares offered are subscribed for then investor has no liability BUT if investors do not take up all of shares issued then underwriter obliged to purchase the remaining shares at issue price.
- Underwriting agreements used by issuing companies to guarantee that it will obtain the capital it is seeking to raise through the issue even if investor demand for the shares is lower than expected.
- Underwriters share a commission for providing underwriting services - usually equivalent to 2-5% of total value of issue but is negotiated as part of drafting of underwriting agreement.
- Sub-Underwriting - Lead underwriter will offset risk/potential liability to purchase shares under underwriting agreement by entering agreements with sub-underwriters who sign SUB-UNDERWRITING LETTERS in which they agree to purchase a specific number of issuing company's shares from the underwriter IF the underwriter is required to purchase those shares under the underwriting agreement. Companies Act 2006: Re-Registration and Public Offers
- Companies Act 2006 s.21(1): Amendment of Articles - Company may amend its articles by special resolution.
- Companies Act 2006 s.90(1): Re-Registration of Private Company as Public - Private company limited by shares may re-register as a public company limited by shares if: (a) company's shareholders pass special resolution in support of the re-registration; (b) statutory conditions met; and (c) application for re-registration/supporting documents/statement of compliance delivered to Registrar in accordance with s.94 Companies Act 2006.
- s.90(2): Conditions - Conditions referred to in s.90(1)(b) are that company has share capital AND that requirements of s.91 (capital) + s.92 (net assets) are satisfied AND that requirements of s.93 (recent allotment of shares for non-cash consideration) are satisfied if applicable AND company has previously re-registered as unlimited. 2

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