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Flotations Notes

LPC Law Notes > Equity Finance Notes

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FLOTATIONS Definitions:
Primary issue/flotation/IPO: The first time that a company makes an offer of listed shares
Secondary issues: Subsequent occasions when a listed company makes issues of shares Advantages and disadvantages of listing ADVANTAGES

1. Access to capital to fund growth and/or reduce debt (gearing ratios), as well as access to future funding

2. Providing a market - increasing liquidity of shares (enabling shareholders and employees to realize gains by selling shares)

3. Public profile - publicity may be good for business

DISADVANTAGES

1. Burden of disclosure and reporting requirements

2. Process of listing is complex and timeconsuming - will divert management time from the business

3. Changes to the board may be necessary to comply with the CGC1 - finding appropriate NED2s may be difficult and costly, especially since directors of listed company potentially more exposed to being sued

4. Cost and fees - significant expense to float a company

5. Loss of control by the board - in addition to regulatory requirements, board will also need to follow the guidelines issued by institutional shareholders

Prologue to listing: taking a private company public Remember that a private company's ability to raise equity finance is heavily restricted by s.755 CA 2006 - the prohibition on offering shares to the public. Hence, in order to list a company, it is necessary to take the private company public first, under the procedure in s.90 CA 2006 [reregistration]. Therefore, a private company must:

1. Pass a SR that the private company should be reregistered as a public company (s.90(1)).

2. Under s.90(3), make changes to its name and articles as are necessary in connection with becoming a plc (ss.77(1) and 21(1) respectively). o E.g. get rid of any SHA, which would prevent shares from being freely transferable as required by LR 2.2.4R

3. Ensure that it has the minimum allotted share capital of PS50 000 to satisfy ss.91(1)(a) and 763, and that the company's allotted shares are paid up to at least 1/4 of their nominal value and the whole of any premium (ss.91(1)(b) and 586).

4. Under s.90(1) and s.94(2), submit to Companies House: a. An application for reregistration in the prescribed form b. A copy of the SR that the company should reregister as a plc c. A copy of the articles as proposed to be amended d. A copy of the balance sheet as required under s.92. 1 Corporate Governance Code 2 Nonexecutive directors

Parties to a listing ADVISER Investment Bank

Broker Sponsor

Reporting accountants Solicitors PR advisers Registrars

ROLE Heads up the team of advisers. Usually acts as financial adviser (i.e. advising company on timing and structure of offer, marketing and due diligence), lead underwriter, Broker, and Sponsor. Act as agents for clients who want to buy or sell shares. Responsible for finding investors for the shares. Required by LR 8.2.1R. Sponsors must be approved by the FCA under LR 8.6.2R. Responsible for helping the company put its application for listing together, satisfying itself that the company meets all the relevant requirements and conditions for listing, and declaring to the FCA that it has performed its responsibilities under the LRs (set out in LRs 8.38.4). The FCA can impose a wide range of sanctions on sponsors failing to perform their duties under ss.8888F FSMA. It monitors and supervises the sponsor. Produces the longform report, shortform financial information and the working capital review for the prospectus. Will have to accept responsibility for part of the prospectus. Legal advisers to the company - produces the due diligence report, drafts and verifies the prospectus. Gives advice on the marketing and advertising of the company Manages shareholder recordkeeping and administration, sends notices to shareholders and processes dividends.

Premium and standard listings The LRs allow for a twotier system of Premium and Standard listings. This is to allow a level playing field for UK and overseas companies. Previously, an overseas company with a primary listing was not subject to the CGC or the preemption rights set out in the Listing Rules (LRs). Now, Premium Listings are subject to not only EU Directive minimum requirements but also more stringent UK requirements. However, the focus here will be on Premium Listings - these are more likely to attract investment.

Three year accounting history required?
Sponsor required?
Share dealing restrictions?
Corporate governance FTSE UK Index series?
Shareholder approval for significant transactions?
Shareholder approval for related party transactions?

Premium

Standard

Yes

No

Yes Model Code for PDMRs3 CGC Yes

No None DTR 7 No

Yes - LR 10

No

Yes - LR 11

No

The impact of CREST

3 Persons Discharging Managerial Responsibilities

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