BPP University College Of Professional Studies Limited (BPP)
DISTINCTION LEVEL. This document contains all the information you will require for your BPP open book equity finance exam. I completed the course in July 2021 and so it is all up to date. The notes are laid out to include all notes from the chapters and SGS application in a clear and concise manner...
BPP University College Of Professional Studies Limited (BPP)
BPP University College Of Professional Studies Limited
Equity Finance
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EQUITY FINANCE As the demand for shares in a company grows, a listed company
has a ready-made market for trading, unlike a private company
1 x 3 hour exam. First section MCQ, then long form
where trading is restricted.
Chapter 1
FLOTATIONS
The FCA’s strategic objective: Employee Incentive schemes
to ensure that the relevant markets function well Lack of a market can cause issues for companies with large
numbers of shares held by employees - floating on a market will
enable employees to either realise gains by selling their shares at
The FCA’s operational objectives: the time of the flotation, or provide an opportunity for them to
to secure an appropriate degree of protection for invest in further shares, perhaps as part of an incentive plan.
consumers (the consumer protection objective);
to protect and enhance the integrity of the UK financial
system (the integrity objective); Good at maintaining morale cheaply and may be cheaper for the
to promote effective competition in the interests of company to retain employees.
consumers in the markets for regulated financial
services and services provided by RIEs (the competition Public profile
objective); and
Publicity created by a flotation is usually good for business. The
Under s. 1B(6) FSMA, the FCA's general functions are to: company must keep its investors informed of its financial
make rules under FSMA; performance means that its progress can be closely monitored,
make technical standards; enabling a company to gain the confidence of its investors, or new
prepare and issue codes under FSMA; investors looking to invest in the company.
give general guidance under FSMA; and
determine the general policy and principles by reference Liquidity
to which it performs particular functions under FSMA. Listing makes shares more liquid and therefore may drive up their
price.
The LPDT Rules apply to the listing of “securities”, which includes Disadvantages
both equity and debt instruments (i.e. shares and bonds) on the Burden of disclosure and reporting requirements
Main Market of the London Stock Exchange.
Companies listed on the Official List must comply with many
Primary issue: the first time that a company makes an offer of regulatory requirements e.g., LPDT Rules, MAR and London
listed shares, known as a flotation or IPO Stock Exchange’s Admission and Disclosure Standards. This
applies post-listing too and failure to comply can lead to penalties,
Secondary issue: subsequent occasions when a listed company censure or even the suspension of trading and listing of a
makes issues of shares. company’s shares. There are detailed provisions in the LRs, MAR
and the DTRs on the obligations to include information in the
preliminary and half-yearly results and annual accounts of a listed
Official List: the main market of the LSE not AIM. company and other announcements the listed company is
required to make.
Private companies
A private limited company’s ability to raise equity finance is Management time
heavily restricted by s.755 CA 2006 which states that a private
company commits an offence if it offers its shares to the public.
The process of listing on the Main Market or being admitted to
AIM is a complex and time-consuming task and will involve a
‘offer to the public’ = means to any section of the public = wide significant investment of management time, whilst continuing to
definition. It is not if it is to a person connected to the company, run the business effectively.
or under an employee share scheme. s.756 CA 2006
Changes to the board
Public companies are not restricted, so a private company may
convert itself into a public company under s.90 CA.
A listed company will also need to comply with the UKCGC which
may require the board to adopt a different board structure and
Listed companies different management procedures, potentially resulting in board
It is not the company that is listed but its shares. changes and new directors being appointed. Finding non-
executive directors of the right experience may be difficult and
Only companies whose shares are listed on the Official List are costly. There is no equivalent requirement for AIM companies.
‘listed companies’ (Main Market of LSE not AIM). These changes are not mandatory but there is a comply and
explain model – market practice.
A company must be a public company before it applies to have its
shares listed or traded. However, not all public companies apply The company’s directors are potentially more exposed to the risk
to have their shares listed. of being sued in their personal capacity.
Do not assume that a company whose name ends in plc is a listed Cost and Fees
company. It may be registered as a public limited company. AIM
companies are also public limited companies but are not listed on The costs of floating a company are significant due to the various
the Official List. advisers involved = a substantial proportion of the money raised
will be used to meet these costs. Often 7-8% of the issue.
WHY WOULD A COMPANY SEEK A LISTING?
APPLY TO FACT PATTERN – WHY ARE THESE ISSUES ON THE Loss of control
FACTS.
Advantages The directors may lose some control to large scale investors which
may have different priorities e.g, short and long term returns.
Access to capital to fund growth and/or reduce debt Institutional investors that have significant shareholdings may be
able to block resolutions.
A flotation is a way of gaining an injection of cash into a company.
This cash can be used by the company to expand, either through Listed companies should also follow the guidelines issued by the
acquisitions of other businesses or organic growth, or to pay off bodies which represent institutional shareholders, e.g.,
existing debt. Generally, a company will gain many new Investment Association (“IA”) and Pensions and Lifetime Savings
shareholders because of a flotation, and these new shareholders Association (“PLSA”). Although such guidelines do not have
will be a potential source of future funding for the company. statutory force, breaching them would risk incurring the
displeasure of institutional investors.
Providing a market
External forces
In obtaining admission to trading on the Main Market or AIM, As shares are listed, anyone can invest without the directors
shareholders can take advantage of ready-made public markets. necessarily knowing, making them suseptible to hostile takeovers.
, listed, record share transfers on the register, send out
They are also vulnerable to market forces, geopolitical climates, notices to shareholders and process dividends; and
recessions etc – factors that affect the share price. a ‘receiving bank’ is often appointed to carry out the
large amount of administration involved in receiving
applications for the shares that are to be listed,
processing those applications, making relevant
payments and allocating the shares to applicants.
ADVISERS ON A LISTING TO THE MAIN MARKET
Investment bank
Primarily responsible and the financial adviser to the company.
The Investment Bank heads up the team of advisers. Its functions
can include:
financial adviser – advising on the timing, structure of the offer,
marketing and due diligence;
acting as Lead Underwriter – ensuring they get the money PREMIUM AND STANDARD LISTINGS
preparing research on the company;
acting as Broker; When a company applies for listing, provided it satisfies the
acting as Sponsor applicable eligibility requirements, it can apply for its equity
shares to be subject either to a “premium listing” or a “standard
Broker listing” or an AIM listing.
Brokers act as agents for investors for the shares, in return for
commission. May also advising companies in relation to a
flotation. In the context of a primary issue the broker will be Exam: looking at a company and making changes /
responsible for finding investors for the shares. documentation in preparation for listing is a big exam topic.
Sponsor Distinction between premium and standard listing
Companies which apply for a “standard listing” of shares are
subject to minimum standards set by EU Directives. Companies
A premium listing must appoint a sponsor (LR 8.2.1R). which apply for a “premium listing” are subject to those same
Sponsors must be approved by the FCA (LR 8.6.2R). minimum standards but also more stringent UK requirements.
Applying for a standard listing can however be a cheaper, more
The sponsor is responsible for (LRs 8.3 and 8.4): flexible option.
helping the company put its application for listing
together and submitting that application to the FCA; The table below highlights the key differences between the two
satisfying itself that the company meets all the relevant segments of listing:
requirements and conditions for listing; and
making a declaration to the FCA that it has performed
its responsibilities under the LRs.
The sponsor drives and project–manages the process of applying
for a listing.
The FCA will monitor and supervise the sponsor to ensure that it
continues to satisfy the criteria for approval as a sponsor and to
ensure that it remains in compliance with the applicable LRs (LR
8.7). E.g., the FCA may require specified documents or
information from the sponsor and may make supervisory visits to
a sponsor on a periodic and ad hoc basis (LR 8.7.1AR and LR
8.7.3G). Generally, the sponsor will be either a broker or the
company’s investment bank.
Reporting accountants
A company wishing to float must appoint a firm of accountants to
produce financial information about it. They will produce the
long-form report, short-form financial information, and the
working capital review plus various comfort letters. Moving between the tiers
It is possible to migrate from a standard to a premium listing of
Solicitors shares (and vice versa) without having to cancel the initial listing.
However, if a company with a premium listing of shares wants to
move down to a standard listing of shares, it needs the support of
The legal advisers to the company will generally be responsible 75% of shareholders to do so. Shareholder approval is required
for ensuring the company is prepared for flotation. They will because the shareholders will lose certain protections (e.g.
prepare a legal due diligence report and draft and verify the shareholder approval requirements under LR 10 and LR 11 for
prospectus. certain transactions). In addition, many funds are unable to
invest in shares which are not included in a FTSE index.
There is likely to be more than one firm of solicitors working on a
listing project. The investment bank will have its own legal
advisers also, who will prepare and review documentation for the CREST
investment bank. This will generally involve working with the An important issue for a company prior to listing is the settlement
company’s solicitors on the drafting of the prospectus and and transfer of its shares once it is listed.
preparing and negotiating the underwriting agreement.
The Uncertificated Securities Regulations 2001 enable listed
Other advisers shares to be held in dematerialised (electronic) form without the
need for a paper share certificate. This facility is useful for
institutional investors who buy and sell shares frequently. Some
There are a host of other advisers that may be involved in advising shareholders in listed companies hold paper share certificates but
a company on a flotation. For example: most choose to hold their shares in electronic form.
public relations advisers are generally appointed in
connection with a flotation, to give advice on the
marketing and advertising of the company; As a listed company usually has large numbers of members, it is
registrars usually manage shareholder record-keeping impractical for its Company Secretary to update the company’s
and administration for listed companies once they have register of members by hand. Instead, listed companies appoint a
,Company Registrar that maintains an electronic database of the
company’s shareholder register on the company’s behalf. The
Company’s Registrar will also have a connection to CREST so that
it can receive updates to the register. Listed companies must
ensure its shares must be compatible with electronic settlement
There must be nothing inherent within the constitution of a
company which prevents electronic settlement.
The Central Securities Depository (“CSD”) Regulation governs the
central securities depositories. A CSD is an institution which holds
financial instruments and allows ownership of those instruments
to be transferred electronically by the updating of electronic
records. For this purpose, CREST is the CSD for the UK. The CSD
Regulation makes it obligatory for listed shares to be settled
electronically.
What is CREST?
CREST is a computerised system which allows shares to be held,
and trades in those shares to be settled, electronically. A
transferee in a CREST transaction pays a stamp duty reserve tax
(“SDRT”) which is imposed on transactions and is payable at a rate
of 0.5% of consideration. Note that this is different to the position
in relation to a stock transfer form (a transfer document) where
stamp duty is only payable at a rate of 0.5% if the consideration
exceeds £1,000.
All members must appoint a settlement bank that agrees to
satisfy the member’s payment obligations through CREST.
THE PROCESS FOR LISTING ON THE MAIN MARKET
CREST members can transfer shares to and from other members Go through the below process when considering how a company
by sending electronic instructions to CREST about the price and lists on the market.
number of shares to be transferred. The only shares transferable
via CREST are shares in UK companies and shares in companies For a company to be admitted to the Official List both the
incorporated in other jurisdictions that have adopted the CREST company itself and its shares must be eligible for listing. The
system. sponsor must consider whether the conditions set out in the LRs
have been met. The sponsor may only complete the sponsor’s
How can a shareholder hold shares through CREST? declaration if the conditions have been met (LR 8.4.2R). Chapters
A shareholder can: 2 and 6 of the LRs specify the conditions for listing that must be
met (note that chapter 6 is only applicable to companies seeking a
premium listing). Broadly, these consist of:
be a direct user: conditions relating to the applicant; and
A direct user has the hardware and software capabilities to have a conditions relating to the shares to be listed.
direct connection to CREST. Direct users are usually banks or
stockbrokers who settle trades through CREST daily.
First consider eligibility:
Issue Context
be a sponsored member: Is the company A private company cannot offer its shares to
A sponsored member does not have a direct link to CREST but private? the public under s.755 CA. Therefore it must
appoints a direct user to communicate with CREST on his behalf. re-register as a plc by:
A sponsored member holds stock in his own name. A sponsored
member’s name will therefore appear on the company’s register special resolution – s.90 CA(1)
of members. Individuals who are sponsored members are often Change its name to include plc
referred to as ‘personal’ members. (s.90(3)
change the AoA as necessary –
s.90(3) – see below.
hold shares through a nominee: Minimum share When a company is re-registered as a plc, it
A shareholder can appoint a nominee (usually a stockbroker) who capital. must have a minimum allotted share capital
holds the shares on behalf of the shareholder in a nominee of £50,000 to satisfy s.91(1)(a) and s.763
account (together with shares that the nominee is holding on CA.
behalf of other clients). The nominee is a direct user, and its name
will appear on the company’s register of members. The nominee
will therefore hold legal title to the shares. The nominee will agree ALSO: the company’s allotted shares must
with the shareholder to forward all communications and dividends be paid up to at least 1/4 of their nominal
or other payments it receives from the company to the value and the whole of any premium –
shareholder. s.91(1)(b) and s.586 CA.
Documents s.90(1)(c) CA: Application for re-registration
in a prescribed form, together with a
Other facilities available through CREST statement of compliance and the
If a shareholder is not a CREST member but wishes to transfer his documents required by s.94.
shares into CREST in order to sell them in a flotation, a CREST
transfer form will be used to effect this transfer. The shares will
dematerialise on transfer. s.94(1) CA: the application must contain:
(a) the company’s proposed name on
re-registration; and
It is possible for listed companies to effect rights issues, open (b) in the case of a company without
offers and takeover offers to CREST shareholders through the a secretary, a statement of the
CREST system. company’s proposed secretary.
CREST shareholders can also use the CREST system to appoint s.94(2): the application must be
proxies and receive dividend and interest payments. accompanied by:
(a) a copy of the SR that the company
What will a company consider when offering shares to the should re-register as a public
public? (a) company;
• Are they private? (b) a copy of the AoA as proposed to
• How they will list e.g., standard, premium, aim be amended; and
• What advisers are necessary? (c) a copy of the balance sheet (‘BS’)
required under CA s.92.
Then consider the procedure next:
s.92(1) CA: a company applying to re-
register must obtain:
, (a) a BS prepared as at a date not ** the question may just state to consider the CA and LR rather
more than 7 months before the than to also include DTR and UKCGC. If it states just CA and LR
(a) application is delivered; then do not consider management as part of eligibility.
(b) an unqualified report by the
company’s auditor on that BS ;and A listed company must state in their annual financial report:
(c) a written statement by the • how it has applied the UKCGC principles – LR 9.8.6R(5)
company’s auditor that in his • how it has complied with the UKCGC provisions, giving
opinion at the BS date the reasons for any non-compliance (LR 9.86R(6))
company’s net assets were not
less than the aggregate of the
called-up share capital and the A listed company that has complied with LR 9.8.6R(6) satisfies
distributable reserve. requirements of DTR 7.2.2R and 7.2.3R (DTR 7.2.4RG)
Accounts A new applicant must have published or Therefore, UKCGC compliance is not compulsory as companies can
filed accounts that: explain non-compliance. However, institutional investors are more
• cover at least 3 years (LR 6.2.1R(1)); likely to invest in a company that declares that they follow these
• represent at least 75% of the principles of good corporate governance. Therefore, compliance is
applicant’s business (LR 6.2.1R(2)); still advisable.
• are the latest accounts for a period
ended not more than 6 months before Disclosure and Transparency Rules (DTR) 7.2.1R: companies must
the date of the prospectus (LR produce a corporate governance statement in the directors’
6.2.1R(3); s.442) or 9 months before report, containing a reference to the UKCGC.
date of admission;
• if the company has a subsidiary, include Provisions to which it is subject (DTR 7.2.2R) and explaining where
the consolidated accounts for the it does not comply DTR 7.2.3R. – UKCGC is not mandatory but
Holdco and its subsidiary (LR 6.2.1R(4)). DTRs are.
LR 6.2.4R: All submitted accounts must be Issue Notes
audited. Directors UKCGC Prin. G: the board should include a
balance of executive and non-executive
DTR4.1.3 needs to have their accounts directors (ensuring that no individual or small
published no later than 4 months than the group can dominate decision making).
end of the account period (stricter rule
takes precedence) UKCGC Prov. 10 and 11: at least ½ of the
board should be independent non-exec
Check dates of last accounts to see whether directors (excluding the chair)
new ones need to be created.
Working LR 6.7.1R: the group must have sufficient Independent may be infringed by (UK CGC
Capital working capital available for the group’s prov. 10):
future needs for at least the next 12 months • being an employee for over 5 years
from the date of publication of the • has had within the last 3 years a
prospectus material business relationship
Constitution / LR 2.2.4R: listed shares must be freely • has received additional
AoA transferable. Listed companies require new renumeration from the company;
AoA that remove pre-emption rights on participates in the share option or
share transfers and should remove any SH in pension scheme
place. • close family ties with company
advisers, directors or senior
Note: the company giving the shares can employees
have pre-emption rights but LR 2.2.4 • cross-directorships
=means that the SH must be free to sell to • significant shareholder
whoever they wish. • served on the board for more than
Central Securities Depository (‘CSD’) 9 years
Regulation: the constitution of the company
and the terms of its equity shares must be Chairman and UKCGC prin. G: there should be a clear
compatible with CREST. Therefore, the CEO division of responsibilities at the hrad of the
company must amend its AA to reflect the company to ensure no one has unfettered
fact that some shares will be held in powers of decision. UK CGC Prov 9: contains
electronic form. three rules:
1. the chair and CEO should not be the
Communication LR 7.1.2G: a company must have due regard same
/ Corporate to the fundamental role that they play in 2. The chair should meet
Procedures maintaining market confidence. independence criteria above
3. CEO should not go on to be the
chair of the same company
Further, a company should consider its duty Audit DTR 7.1.1R & &.1.3R: UKCGC Prov 24:
under LP 1 to take reasonable steps to Committee Establish an audit committee to monitor audit
establish and maintain adequate procedures and group systems of internal
procedures, systems, and controls to enable financial controls.
it to comply with its obligations.
This is a requirement of DTRs too, the
E.g., LR 7.2.2G and 7.2.3G – must have company must establish this committee and
formalised procedures so any potential price cannot explain any non-compliance.
sensitive info is identified and immediately
reported for broad consideration for
disclosure in a timely manner. Reg (EU) 537/2014: a listed company must
put the appointment of its auditor to tender
every 10 years.
Companies must communicate information
to holders in such a way as to avoid the
creation or continuation of a false market
(PLP 6) and ensure that all holders of the Nomination UKCGC Provision 17: Establish a Nomination
same class of shares are treated equally Committee committee that leads the process for board
(PLP 5). E.g., the board must have appointments and makes recommendations
procedures in place to ensure that all price to the board. The majority should be
sensitive info is communicated to the independent non-executive directors. The
market by way of an announcement before chair should not chair the committee when it
it is disseminated informally to SH, is dealing with the appointment of their
suppliers, journalists etc. successor.
Then, consider management: Remuneration UKCGC Provision 32: Establish a
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