#10493 - Flotations - Equity Finance

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
Access to capital to fund growth and/or reduce debt (gearing ratios), as well as access to future funding Providing a market – increasing liquidity of shares (enabling shareholders and employees to realize gains by selling shares) Public profile – publicity may be good for business	Burden of disclosure and reporting requirements Process of listing is complex and time-consuming – will divert management time from the business 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 Cost and fees – significant expense to float a company Loss of control by the board – in addition to regulatory requirements, board will also need to follow the guidelines issued by institutional shareholders

Access to capital to fund growth and/or reduce debt (gearing ratios), as well as access to future funding
Providing a market – increasing liquidity of shares (enabling shareholders and employees to realize gains by selling shares)
Public profile – publicity may be good for business

Burden of disclosure and reporting requirements
Process of listing is complex and time-consuming – will divert management time from the business
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
Cost and fees – significant expense to float a company
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:

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

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).
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

Re-register as plc, if private company (see above).
Review any corporate governance procedures and identify areas which need to be addressed prior to admission.
Application to the FCA for admission to the Official List
Application to the LSE for admission to trading [NB: 3 and 4 will become effective simultaneously once both applications are successfully processed]
Sponsor will ensure that both the company itself (LR 6 – for premium listings) and its shares (LR 2) are eligible for listing – it can only complete the declaration if all conditions are met (LR 8.4.2R).

Also need to consider the specific and general disclosure requirements for the Prospectus.

Consider whether the company is compliant with the Listing Principles and whether it will be able to comply with its continuing obligations (e.g. adequate systems?)

Fleshing out some of these points in more detail:

Conditions relating to the applicant (i.e. the company itself)

CONDITION	REFERENCE
Applicant must have published or filed historical financial information for at least three years	LR 6.1.3R(1)(a)
Applicant’s latest balance sheet must be dated no more than 6 months before the date of the prospectus and no more than 9 months before the date of admission	LR 6.1.3R(1)(b)
Where the applicant has subsidiary undertakings, historical financial information must include consolidated accounts.	LR 6.1.3R(1)(c)
The historical financial information must represent at least 75% of the applicant’s business and put prospective investors in a position to make an informed assessment of the applicant’s business	LR 6.1.3BR
The applicant must be carrying on as its main activity an independent business	LR 6.1.4R
Sufficient working capital must be available for the group’s requirements for at least the next 12 months	LR 6.1.16R
The PRs requiring disclosure in any relevant prospectus if the applicant is directly or indirectly controlled must be complied with.	PR App 3.1.1 Annex I, 18.3

Conditions relating to the shares

CONDITION	REFERENCE
The shares must be duly authorized in accordance with the company’s constitution.	LR 2.2.2R
The shares must be admitted to trading (i.e. must submit an application for admission of shares to trading to coincide with application for listing)	LR 2.2.3R
The shares must be freely transferable	LR 2.2.4R
The market capitalization of all shares to be listed must be at least 700 000	LR 2.2.7R
25% of the shares to be listed must be ‘distributed to the public’ and ‘in public hands’	LR 6.1.19R – 6.1.20G⁴
The whole class of the shares must be listed	LR 2.2.9R
The company’s constitution and the rights attached to its shares must be compatible with CREST.	LR 6.1.23R

Although not strictly a ‘condition’, it may also be necessary to consider sub-division of the shares to create a realistic price for trading. An ordinary resolution to subdivide will be required under s.618(1)(a) CA 2006.

If new shares are being allotted, the company will need to pass an OR granting authority to allot (s.551(1)) as well as an SR disapplying pre-emption rights in relation to such new shares (s.570(1)).

The Listing Principles (the most relevant ones)

A company intending to list must be in compliance with the LPs as soon as it is listed, so will need to take them into account when preparing to list.

LP 2: A listed company must take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations.

LP 4: Listed companies must promptly communicate information in such a way as to avoid the creation or continuation of a false market.

LP 5: Holders of the same class of shares in the same position must be treated equally.

Corporate Governance

Rules relating to the composition and functioning of boards of listed companies are embodied in LR 9, DTR 7 and the CGC.

How do the CGC and LPDT interact?

DTR 7.2 requires issuers to produce a...

#10493 - Flotations - Equity Finance

About Oxbridge

More Equity Finance Samples