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Equity Finance Notes

LPC Law Notes > Public Companies and Equity Finance Notes

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Equity Finance

1. Flotations - Preparation for listing a. Advantages and disadvantages of listing Advantages

1. Access to capital to fund growth and or reduce debt

2. Providing a market

3. Public profile Disadvantages

1. Burden of disclosure and reporting requirements

2. Management time

3. Changes to the board

4. Cost and fees

5. Loss of Control b. AIM v Market Advantages of AIM

1. LR apply only to companies listed on the Official List and do NOT apply to companies on AIM

2. Besides DTR 5, DTRs DO NOT apply to Aim companies because AIM not a regulated market

3. AIM companies may find it easier to fall within exemption from requirements to produce full prospectus under the PR. (NB: if no exemption available for s 85(1) FSMA AIM company will still need to produce a full FCA approved prospectus)

4. AIM rules less onerous than LPDT Rules Advantages of Main Market

1. More money, more investors interested

2. Prestige, greater profile, greater publicity (of course flipside, muss more regulation and disclosure requirement).

3. Exposure to analyst coverage, investor confidence (and remember that the main investors are professionals so for them the work of analysts is very important.)

4. Access to LSE only main market.

1 5. Since main investors are institutional, they will tend to be roaming around on the main market, this is an advantage.

AIM only Applicant must be a public company Minimum market cap of 700,000 No restrictions on transferability of shares An applicant requires a nominated adviser and a broker

Main Market only


Applicants must comply with the rules of the London Stock Exchange and the LSE Admission and Disclosure Standards Applicants must comply with the Listing, Prospectus, Disclosure and Transparency Rules

X X (except DTR 5)

25% of the applicant's shares must be held in public hands at the time of admission

X Class 1 transactions will require shareholder approval

X The market has "regulated market" status

X Applicants must publish annual audited accounts no later than four months after the end of the financial period to which they relate

X If a company contravenes its continuing obligations, it may be fined or censured and/or the admission of its securities may be cancelled/suspended

c. Steps to be taken by a company in preparation for listing including Preparation for listing Re-registration s. 755

Prohibition of public offers by private companies

s 90(1)-(3) CA;

Re-reg as public company

s. 21(1)

Amendment of articles

s 77(1) CA

Change of name

LR 6.1.3


LR 6.1.16

Working Capital

LR 2.2.4R


LR 6.1.23R Listing Principles

Corporate procedures at LP 2, 4, 5

2 AIM and Main Market X

X LR 7.2.1 Management LR 9.8.6R(5)-(6)

Two statements relating to Corporate Governance Code

DTR 7.2.1R

Must include a corp gov statement in directors report

DTR 7.2.2R

What the corp gov statement must contain a reference to

DTR 7.2.3R

Publicly available and 'comply or explain'

DTR 7.2.4G

A listed company which complies with LR 9.8.6R will satisfy requirements of DTR 7.2.2R and 7.2.3R

UK CG Code B.1

Composition of the Board




Make-up of non-executive v executive


Nomination Committee

UK CG Code A.2

Division of Responsibilities


Chairman and Chief Exec not same person


Chairman on appointment must meet B.1.1. If CEO also Chairman, requirements to be met.

UK CG Code D.1.5

Remuneration committee

D.2.1 DTR 7.1.1R

Audit Committees and their functions

DTR 7.1.3R

Relevant Audit body must do certain things

UK CG Code C.3.1 s. 273 CA 2006

Composition of Audit Committee guidance Qualification of secretaries

Share Capital LR 2.2.3R

Admission to trading

LR 2.2.9R s. 551 CA 2006

Whole class to be listed Authority to allot shares

s. 570(1) s. 618(1)(a) + (3)

Disap of pre-emption rights Sub-division of shares and resolution needed

LR 2.2.7R

Market Capitalisation minimum requirement to be listed

Shareholders LR 6.1.19R(1)

Shares in Public hands

LR 6.1.19R(3) LR 6.1.19(4)

Definition of "sufficient number of shares" Examples of when NOT held in "public hands"

LR 6.1.20G

Power of FCA to modify the 25% rule in 6.1.19R(3) above, but this is rare.

3 2. The offer and application process a.

Methods of offer: offer for subscription, offer for sale and placing

There are two main types: retail and institutional offerings


Retail More expensive as must appoint

Institutional Shares offerd through IB and

receiving bank to deal with share

broker directly to investors

applications. Also more advertising Timing

4 required which adds to cost More marketing required and share

Fewer investors usually

application requests to be processed,

identified prior to Launch


so generally takes longer Results in larger shareholder base


Lower liquidity as shares held in hands of fewer SH

Retail Offers


Includes two elements: offer for subscription (in which new shares are sold to public) and offer for sale (in which existing shares sold). Often both are used in same floatation.

Offer for subscription: "...subscribe for securities not yet in issue.." A. Company issues new shares as way of raising capital for company B. Shares offered to public in IPO: Investors subscribe for shares; and C. Company appoints receiving bank to accept applications from public and eal with payment for shares Offer for Sale: "...purchase securities of issuer already in issue or allotted..."

* Offer of existing shares. Sold to public in IPO by selling shareholders. Does not raise any new capital for company. Selling shareholder appoints bank to accept applications and receive payment

Institutional Offers

Placing: " of securities already in issue but not listed..."

* Both new and existing shares can be offered by company and selling shareholders. Shares offered to "placees" (clients of sponser, broker, or IB) rather than public. Not usually necessary to appoint receiving bank as there are fewer places than subscribes in an IPO. Investment bank deals with proceeds of issue. Documentation o Placing letter sent to places detailing terms of offer. Placees sign return o Placing agreement: is between sponsor and company to place shares o Bookbuilding: IB running book of interest in shares from interested investors. Intermediaries:

* Similar to placing but shares can be marketed only to firms who are intermediaries as defined


in FCA Handbook.

5 b.

When a prospectus is required

Prospectus Also used to market issue to investors. Must contain all relevant info an investor would require in order to make an informed decision as to whether to invest in shares. It is required either by s. 85(1) FSMA or s. 85(2) FSMA and with no relevant exemptions applying.

c. Format of prospectus

PR 2.1.1-2.1.7

The Summary

PR 2.2.1

Can be single doc or separate doc

PR 2.2.2

If separate, must divide the info into reg doc, sec note, and summary Reg doc + sec note + summary = valid prospectus

PR 2.2.3

PR 2.2.4

If already have a reg doc approved by FCA must only draw up sec note and summary on admission to trading (see PR 5.1.4: Reg doc valid 12 months so long as updated) and be aware of PR 2.2.5

6 PR 2.2.6

When requesting admission, can choose to file reg doc without approval. If do so, entire documentation including updated info, is subject to approval.

PR 2.2.10

Format of the prospectus, both if single document or separate documents.

d. Contents of prospectus - specific and general disclosure obligations

s. 87A FSMA and PR 2.1.1

General Obligation of disclosure

Articles 3 - 6 and 21 PD Reg

How to determine specific disc obligations

Annexes I-III and XVIII as set out in PR App 3.1 Art 24 PD as set out in PR 2.1.4

Contents of Summary (use Annex XVIII as PRs not correctly

and Annex XXII of PD REg as


set out in PR 3.1 PR 2.1.7R

Summary must also contain a warning

e. Timetables for retail and institutional offers

Approval of Prospectus PR 3.1.1, 3.1.3

Applying to FCA for approval of Prospectus and when this must be done (PR 3.3.3(2))

PR 3.1.4

7 Drafts of documents

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