#3295 - Classification Of Transactions Crib Sheet - Public Companies and Equity Finance

Classification of Transactions

1. When to classify?

   1. Business Acquisition?

      1. Are both company’s premium listed?

         1. LR 10.1.1R Chapter 10 Listing Rules only applies to premium listed companies

            1. Classify the transaction from the perspective of both companies

      2. If only one company is premium listed?

         1. Classify the transaction from the perspective of the premium listed company only

   2. Share Acquisition?

      1. Only classify the transaction from the buyer’s perspective

         1. The sellers are the shareholders and therefore there is only one premium listed company involved in the transaction; the buyer

   3. APPLY TO THE FACTS

2. Rationale

   1. LR 10.1.2G The aim of Chapter 10 is to ensure that shareholders are protected by being notified of certain transactions entered into by the listed company and having the opportunity to vote on larger proposed transactions

3. Is there a transaction?

   1. LR 10.1.3R(1) Is there an agreement entered into by a listed company, its parent or subsidiary?

      1. LR 10.1.3R(3)-(5) Do the exceptions apply?

         1. LR 10.1.3R(3) transaction of a revenue nature in the ordinary course of business

         2. LR 10.1.3R(4) Issue of securities or a transaction to raise finance which does not involve the acquisition or disposal of any fixed asset of the listed company or of its subsidiaries

         3. LR 10.1.3R(5) any transaction between the listed company and its wholly-owned subsidiary

   2. LR 10.1.4G Is it a transaction outside the ordinary course of business and therefore should it be classified under LR 10.2.1?

      1. LR 10.1.5G In assessing whether a transaction is in the ordinary course of a company’s business, the FSA will have regard to the size and incidence of similar transactions which the company has entered into

         1. FSA may determine that a transaction is not in the ordinary course of business because of its size or incidence

   3. LR 10.2.1G A transaction needs to be classified by assessing its size relative to that of the listed company proposing it

      1. The tests are found in the LR 10 Annex 1 G

4. Apply the Class Tests – try as many as possible in the exam & write out the formula in words & figures

   1. LR 10, Annex 1, Para 8 The latest published accounts should be used, but in the absence of these the preliminary statement of annual results can be used

      1. APPLY TO FACTS

   2. LR 10 Annex 1, Para 2R Gross Asset Test

      1. (Gross assets which are transaction subject/Gross assets of listed company) X 100

   3. LR 10 Annex 1, Para 4R Profits Test

      1. (Profits attributable to assets which are transaction subject/Profits of listed company) X 100

   4. LR 10 Annex 1, Para 5R Consideration Test

      1. (Consideration for transaction/Aggregate market value of listed company’s ordinary shares) X 100

   5. LR 10 Annex 1, Para 7R Gross Capital Test

      1. (Gross capital of the company or business being acquired/gross capital of listed company) X 100

         1. Para 7R(2) This test does not apply where there has been a disposal

   6. LR 10 Annex 1, Para 10G The FSA can modify the class tests

   7. LR 10.2.10R Aggregate certain transactions which have taken place in the preceding 12 months if certain circumstances apply

      1. LR 10.2.11G FSA has discretion to aggregate in other circumstances
         

5. Classification & Consequences (Procedural Requirements)

   1. Class 3

      1. LR 10.2.2R(1) If all of the percentage ratios are less than 5%

         1. Consequences

            1. LR 10.3.1R(1) If the transaction involves an acquisition and the consideration includes the issue of shares which the company is seeking to list, the company must notify an RIS ASAP after the terms of the acquisition have been agreed of

               1. LR 10.3.1R(2) the amount of securities issued, the details of the transaction and the value of the consideration or the value of the gross assets acquired

            2. If the transaction is any other Class 3 transaction and the company releases details of the transaction to the public, the company must notify an RIS of the information in LR 10.3.2R(2)

   2. Class 2

      1. LR 10.2.2R(2) If any of the percentage ratios is 5% or more, but each percentage ratio is less than 25%

         1. Consequences

            1. LR 10.4.1R(1) Company must notify an RIS ASAP after the terms of an Class 2 transaction are agreed

               1. LR 10.4.1R(2) notification must include details of the transaction, including the name of the other party, a description of the business carried on by, or using, the assets which are the subject of the transaction, the consideration and how it is being satisfied

            2. LR 10.4.2R(1) The company must make a supplementary announcement through an RIS without delays if it later becomes aware that there has been a significant change which affects any matter in the Class 2 announcement or a significant new matter has arisen which the company would have been required to mention in the Class 2 announcement if it had arisen at the time it was preparing that announcement

               1. Company will have discharged its DTR 2.2.1 obligation by following the Class 2 procedure as they will have published information to the RIS

   3. Class 1

      1. LR 10.2.2R(3) If any of the percentage ratios is 25% or more

      2. Specific transactions

         1. LR 10.8.9G On entering a Joint Venture a company should cosndier the exit provisions of the venture to determine whether they result in the transaction being classified as a Class 1 transaction

         2. LR 10.2.3R Reverse takeover will be a Class 1 transaction if it satisfies the conditions

         3. LR 10.2.4R Certain exception indemnities where the maximum liability is unlimited, or equal to, or more than 25% of the average of the company’s profits for the last 3 financial years, will be treated as a Class 1 transaction

            1. See LR 10.2.5G

         4. LR 10.2.7R Any break fee payable in respect of a transaction will itself be treated as a Class 1 transaction if the total value of the break fees in aggregate exceeds 1% of the value of the company, calculated by reference to the offer price or 1% of the company’s market capitalisation

         5. LR 10.2.8R If a major unlisted subsidiary of a listed company issues shares for cash, in exchange for other securities, or to reduce indebtedness which will cause a dilution with an economic effect equivalent to the sale of 25% or more of the group, the then share issue will be classified as a Class 1 transaction

            1. LR 10.2.9R if the major subsidiary is itself a listed company,...