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LPC Law Notes Equity Finance Notes

Flotations Notes

Updated Flotations Notes

Equity Finance Notes

Equity Finance

Approximately 50 pages

A collection of the best LPC Equity Finance notes the director of Oxbridge Notes (an Oxford law graduate) could find after combing through dozens of LPC samples from outstanding students with the highest results in England and carefully evaluating each on accuracy, formatting, logical structure, spelling/grammar, conciseness and "wow-factor". In short these are what we believe to be the strongest set of Equity Finance notes available in the UK this year. This collection of notes is fully updated ...

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The following is a more accessible plain text extract of the PDF sample above, taken from our Equity Finance Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

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 DISADVANTAGES

  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

  1. Burden of disclosure and reporting requirements

  2. Process of listing is complex and time-consuming – 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 [re-registration].

Therefore, a private company must:

  1. Pass a SR that the private company should be re-registered 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).

  • E.g. get rid of any SHA, which would prevent shares from being freely transferable as required by LR 2.2.4R

  1. Ensure that it has the minimum allotted share capital of 50 000 to satisfy ss.91(1)(a) and 763, and that the company’s allotted shares are paid up to at least of their nominal value and the whole of any premium (ss.91(1)(b) and 586).

  2. Under s.90(1) and s.94(2), submit to Companies House:

    1. An application for re-registration in the prescribed form

    2. A copy of the SR that the company should re-register as a plc

    3. A copy of the articles as proposed to be amended

    4. A copy of the balance sheet as required under s.92.

Parties to a listing

ADVISER ROLE
Investment Bank 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.
Broker Act as agents for clients who want to buy or sell shares. Responsible for finding investors for the shares.
Sponsor

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 8.3-8.4).

The FCA can impose a wide range of sanctions on sponsors failing to perform their duties under ss.88-88F FSMA. It monitors and supervises the sponsor.
Reporting accountants Produces the long-form report, short-form financial information and the working capital review for the prospectus. Will have to accept responsibility for part of the prospectus.
Solicitors Legal advisers to the company – produces the due diligence report, drafts and verifies the prospectus.
PR advisers Gives advice on the marketing and advertising of the company
Registrars Manages shareholder record-keeping and administration, sends notices to shareholders and processes dividends.

Premium and standard listings

The LRs allow for a two-tier 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 pre-emption 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.

Premium Standard
Three year accounting history required? Yes No
Sponsor required? Yes No
Share dealing restrictions? Model Code for PDMRs3 None
Corporate governance CGC DTR 7
FTSE UK Index series? Yes No
Shareholder approval for significant transactions? Yes – LR 10 No
Shareholder approval for related party transactions? Yes – LR 11 No

The impact of CREST

Listed companies must ensure that the constitution of the company and the terms of its equity shares are compatible with electronic settlement under CREST (LR 6.1.23R). This is to facilitate the frequent buying and selling of shares without need for a paper share certificate. However, shareholders can still hold shares in paper form.

CREST is a computerized system that allows shares to be held and trades in those shares to be settled electronically. The transferee pays stamp duty reserve tax (SDRT) which is imposed on transactions (rather than stamp duty, which is imposed on documents). SDRT is collected in respect of all transactions where consideration is given (i.e. no 1000 threshold as in stamp duty).

CREST maintains and updates an electronic register of members holding uncertificated shares. It is regularly updated by the company’s registrar throughout the day.

The process for listing on the Main Market

  1. Re-register as plc, if private company (see above).

  2. Review any corporate governance procedures and identify areas which need to be addressed prior to admission.

  3. Application to the FCA for admission to the Official List

  4. Application to the LSE for admission to trading [NB: 3 and 4 will become effective simultaneously once both applications are successfully...

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