BPP University College Of Professional Studies Limited (BPP)
Concentrated notes for BPP's Equity Finance Elective Module. Contains key things you need to know from the course across all SGSs. These notes are distinction level in detail and useful for online exams.
BPP University College Of Professional Studies Limited (BPP)
BPP University College Of Professional Studies Limited
Equity Finance
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1. FLOTATION PROCESS OF AN IPO
LEARNING OUTCOMES 1. Preparation:
Private Ltd company re-register as a Plc and;
1. Key UK legislation/regulations for equity securities Meet Corporate Governance Code requirements
2. Advantages & disadvantages of flotation
3. Systems and controls (LR Chapter 7)
4. Legal due diligence & appropriateness of flotation
5. Corporate Governance Code 2. Application to FCA (Admission to the Official List)
Procedure contained in LR 3.2; becomes effective simultaneously with...
WHY SEEK FLOTATION?
Pro’s Con’s
Raise Capital Management Time
3. Application to LSE (Admission to Trading)
Access to capital fund Timely to set up; time could be
Applicant company must comply with LSE's Admission & Disclosure Standards
growth/repay debt used elsewhere
UK Corporate Governance
Code may require the co. to
change the management
structure (board) and change
procedures.
4. Trading of Listed Shares Commences
Attractive investor market for shares Board Changes Required
for subsequent issues Listed company directors more
Investor certain exit option likely to be sued by investors
Ability to raise further finance Loss of control (dilution) OPTIONS FOR LISTING
Global buyers – if listed, wider range Adverse publicity – if float
Step 1: Step 2: Step 3:
of global buyers are accessible; unsuccessful, affecting share value
helpful if company has plans for due to loss of investor confidence. AIM or Main Domestic or Global Institutional
geographical expansion in future Market Offer and/or Retail Offer
Publicity Costs
Company becomes more Banks, brokers, lawyers and 1. AIM V MAIN MARKET
publicly attractive others will charge high fee’s
Low compares to capital raised AIM Advantages Main Market Advantages
Reputation Burden of Compliance Younger Companies: More Investors on MM:
Knowledge that company is in Greater potential penalties for No 3-year trading history Access to more finance
compliance with LPDT’s and non-compliance requirement (MM only)
Code No 12-month working capital
More attractive to investors – requirement (MM only)
Lack of confidentiality to an extent –
listing makes shares more Simpler Corporate Governance: More Analyst Coverage:
due to company must file info public
liquid, thus could drive up price LPDT’s do not apply Companies on MM subject to
e.g. annual reports. Which could
impact the company’s o (Except for DTR 2, 3, & buy/sell recommendations
competitiveness (i.e. give away info 5) More investor research/
as to pricing etc.) UKCGC not obligatory knowledge ∴ access to more
AIM Rules: less onerous capital
PARTIES TO AN IPO o Fewer disclosure
obligations
o No minimum market
Investment Bank
capitalisation (£700k on
Acts as “Global co-ordinator” functions including: financial advisor, lead MM)
underwriter, researcher, broker and sponsor o No requirement for 25%
Receiving Bank of shares to be in public
hands
Separate bank appointed for administrative purposes, namely receiving
payments from investors & allotting shares accordingly Not Regulated Market: Publicity & Prestige
Prospectus may not be
Broker:
required under s.85(2) FSMA
Finds/seeks out the investors to purchase the shares Admission Document instead –
Sponsor: does not require FCA approval
Project manage and aid the company with the application for listing Audited Accounts: Greater Liquidity:
o LR 8.2.1R: Applicants for premium listing require a sponsor Published within 6-months of 25% of shares in the public
o LR 8.6.2R: Sponsor must be FCA approved end of financial year hands - shares change hands
(opposed to 4-months on MM) more often ∴ more accurate
share price is set
Specialist Funds & Companies No NOMAD:
More suitable for companies Only a sponsor is required
such as mining, oil & gas AIM requires a NOMAD and
broker at all times
1
,2. DOMESTIC OR GLOBAL OFFER 3) Listing Rules:
Global Offers:
Reference Requirement
Offer to a wide base of investors: additional interest, investors ∴ may be
LR 2.2.2R Shares must be duly authorised (company’s constitution)
able to obtain a higher price (domestic = one country ∴ opposite)
LR 2.2.3R Application for admission on a regulated market (e.g. LSE)
Compliance with many regulatory regimes: costly & timely
Shares must be submitted on a Recognised Investment
Raise Public Profile: potentially increasing investor base and business
Exchange (RIE)
opportunities outside the UK
Same time; company applies to FCA for admission to
In summary: the Official List
Global Offer: if the company has a presence outside the UK LR 2.2.7R(1)(a) Market Capitalisation
Domestic Offer: if a company is located solely inside the UK Aggregate market value of all securities (ex. treasury
shares) to be listed must be at least £700,000
3. INSTITUTIONAL OR RETIAL OFFER? Calculate: no. of shares issued x market price of share
Retail/Public Institutional LR 2.2.9R Whole class of shares must be listed
Costly - Receiving bank required and Cheaper - Shares offered through LR 6.14.1R Sufficient number of shares in public hands, no later than at
more advertising investment bank which brokers the time of admission
directly to investors LR 6.14.2R(2) Sufficient number is to mean 25% of shares in public hands
Timely - Processing share Quicker - Fewer investors & LR 6.14.3R(1) Sets out when shares are not in the public hands, notably:
application & marketing the shares identified prior to launch (1)(a) - Shares held by a director = not in public hands
Greater Liquidity - Larger Less Liquidity – less shareholders ∴ (1)(b) – connected person to a director
shareholder base: more buying/ less accurate share price (1)(e) - Shares held by any person who has a 5% or
selling ∴ accurate share price more interest in any one relevant class (cover SHs with
5% or more)
Suitable for Well-Known Companies Suitable for Specialist/Niche
who are in the public eye Companies; or those with low public LR 6.14.1R Location: sufficient public shares in one or more EEA states
profile LR 6.14.5G FCA may accept lower percentage than 25% if it considers
that the market will operate properly with a lower
percentage in view of the large number of shares of the
PREPARATIONS FOR LISTING same class and the extent of their distribution to the public
LR App 1 Any controlling shareholder (holding 30% + votes cast at a
1) Company Ltd re-register as a public company Definition; GM) must enter a ‘relationship agreement’ with the
2) Shares re-organise share capital, sub-divide and re-distribute LR 6.5.4R applicant which contains certain independence provisions.
3) Accounts Amend accounting procedures and/or draw up new accounts (Often needs to be checked where company is a FAMILY
4) Model Articles Amend Articles to not be Model company. apply exam facts!))
5) No Independent Non-Exec Directors Appoint new non-exec directors
6) Amend company procedures that do not comply with Listing Principles
3. PREPARING ACCOUNTS
LR 6.2.1R: New applicant must have published or filed audited accounts that:
1) Cover the last 3 years;
1. RE-REGISTERING TO PUBLIC COMPANY 2) Representing at least 75% of the company’s business
s.755 CA: Private limited company cannot offer its shares to the public 3) Are the latest accounts & dated no more than 6 months before date of
Company must re-register as public under s.90 in order to list; must have: prospectus; or 9 months before admission; and
4) If any subsidiaries, must be group or consolidated accounts
Allotted share capital of at least £50,000 (s.91(1)(a) & s.763 CA); and
Paid up 1/4 of nominal share value & any premium (s.91(1)(b) & s.586 CA)
Re-registering requires: 4. WORKING CAPITAL REQUIREMENTS
1) SR to re-register (s.90(1) CA)
LR 6.7.1R: Applicant must satisfy the FCA that it has sufficient working capital for
2) SR for any necessary changes in connection to becoming public (e.g.
the group’s requirements for at least the following 12 months from the date of
changes to its name and Articles) (s.90(3) CA)
publication of the prospectus
3) Submit application for re-registration to CH (s.90(1) CA) containing:
o Proposed Name on re-registration (now Plc);
o Company’s proposed secretary; and
5. ARTICLES & SHAREHOLDERS AGREEMENTS
o Statement of compliance with Part 7 CA requirements
4) Application must be accompanied by certain documents (s.94(2) CA): LR 2.2.4R: to be listed, shares must be freely transferable
Copy of the SR to re-register as Plc Coy. articles in the form of Table A (CA 85) or Model Articles (CA 06) ∴
Copy of the proposed Amended Articles likely inappropriate articles for a listed company - needed to be amended
Copy of the Balance Sheet required (per s.92 CA) by special resolution (SR) to include the following:
o Eligibility for CREST: restrictions on transfer removed (requirement
set out in the Central Securities Depository (“CSD”) Regulation
2. SHARE REQUIREMENTS (Regulation (EU) No. 909/2014 of 23 July 2014))
1) Sub-dividing Share Capital o Pre-Emption Rights: any pre-emption rights removed, in line with LR
o OR required by Model Articles/CA (s.618(1)(a) & (3)) 2.2.4R which requires listed shares to be freely transferable.
o Shares should be listed at £2-6 each to attract investors
2) Permission to allow new shares on flotation
6. LISTING PRINCIPLES
o OR for director’s authority to allot (s.551(1) CA) Listed companies will need to consider the impact on its everyday corporate
o SR to disapply pre-emption rights (s.570(1) CA) procedures and reconsider its policies and procedures:
LR 7.2.1R: All listed companies to comply with Listing Principles (‘LP’s’)
2
, LR 7.2.1AR: Premium Listed companies must comply with Premium LP’s (Code recommended)
(‘PLP’s’)
UKCGC Provision Notice period of directors to be at most 1 year, or less.
LR 7.1.2G: Principles ensure listed companies maintain market confidence 39
and ensure fair and orderly markets.
CA s.273 Company secretary to be professionally qualified, with
Listing Principles: requisite knowledge and experience
LP 1 A listed company must take reasonable steps to establish and
maintain adequate procedures, systems and controls to
enable it to comply with its obligations under LR’s & DTR’s 2. PRIMARY SHARE ISSUE
(including identifying information to be disclosed)
PLP 2 & 5 (PLP 5) Listed company ensures that Shareholders of the same OFFERING METHODS FOR A PRIMARY SHARE ISSUE
class are treated equally in respect of rights
(PLP 2) Listed company must act with integrity towards holders Retail Offer Institutional Offer
and potential holders of its premium listed securities
A retail offer will have 2 elements: Placing:
PLP 6 Ensure adequate communication of information to SHs to avoid
creating or continuing a false market Both new and existing shares are
1) Offer for Subscription: offered by the company and existing
New shares are sold to the shareholders directly to selected
7. BOARD REQUIREMENTS public by the company placees (rather than the public)
UKCGC: Compliance not compulsory but, under the mandatory “comply or
explain principle”, in practice, the code is complied with: And; Broker/Investment Bank arranges,
LR 9.8.6R (5): coy. Must provide a statement how it has applied the main manages and administers
2) Offer for Sale:
principles of UKCGC, in a manner that would enable SHs to evaluate how
Existing shares are sold to the
the principles have been applied; public by existing shareholders (FSMA purposes – NOT an ‘offer to
LR 9.8.6R(6)(a): state how the listed coy. has complied/not complied with public’)
relevant provisions of UKCGC , as well as giving reasons for non-compliance Intermediaries Offer:
(9.8.6R(6)(b)(iii)) Shares offered to fund managers and
o Aids company in looking attractive in annual report to investors stockbrokers; who sell on to clients
DTR 7: Compliance is compulsory:
(FSMA purposes – IS an ‘offer to the
DTR 7.2.1R: issuer must publish a corporate governance statement in its
public’)
Directors Reports, and must contain at least the information set out in
7.2.2R to 7.2.7R and where applicable, 7.2.8AR and 7.2.10R.
PROSPECTUS REQUIRED?
o DTR 7.2.2R: Must contain reference to UKCGC to which the company
is subject to (i.e. the code) EXAM TIP: go through all the tests, explain what client is doing (APPLY FACTS)
DTR 7.2.4G: Listed companies that comply with LR 9.8.6R (6) will satisfy the and if any test/exemptions apply!
requirements of DTR 7.2.2R & 7.2.3R
Section 85(1) and 85(2) FSMA set out two tests:
∴ Clear overlap between DTR 7 and LR 9.8.6R and the UKCGC Code
A Prospectus is needed whenever:
Listed companies therefore comply with the UKCGC Code in order to
S.85(1) and s.102B FSMA: Transferable securities are being offered to the
comply with the LR and DTR
public in the UK/EEA; or
S.85(2) FSMA: An application is made to admit transferable securities on a
UKCGC CODE PROVISIONS: regulated market, and no exemptions are available
Reference Requirements If either test is satisfied (& no exemptions apply) a prospectus will be required
UKCGC Principle Principle G: Board to have a balance of non-exec and
G and Provision exec directors (∴ appoint more ind. non-exec directors) TEST 1: SECTION 85(1) AND S.102B FSMA
11 and 10 Provision 11: at least half of the board should be
independent non-executive directions. Is there an offer of transferable securities to the public?
Provision 10: “Independence requirements”: no family s.102B FSMA: Definition of “offer of transferable securities to the public”:
ties, not former employee within the last 5 years, no
Communication in any form, by any means s.102B (3)
material business relationship with company in the last
3 years, has received additional remuneration from the Presenting sufficient information on securities offered, and the terms,
company apart from a director’s fee, represents a enabling an investor to decide whether to buy s.102B (1)
significant SH, has cross-directorships or significant links an offer made to any one person (in UK) is deemed to be public s.102B (2)
with other directors through other companies/bodies, includes the placing of securities through a financial intermediary
served on the board for 9 years from first appointment. (“intermediaries offer”) s.102B (4)
UKCGC Principle Principle G: should be clear division of responsibilities
G and Provision 9 of the head of the company. If so, do any exemptions apply?
Provision 9: Two Categories of Exemption:
1) Role of Chairman and CEO should not be same 1) s.86(1) FSMA: Exempt offers:
person o Offers made to qualified investors s.86(1)(a); or
2) Chairman appointed to meet independence
o Offer is made to fewer than 150 people s.86(1)(b)
criteria (set out in Provision 10)
3) CEO should not become Chairman of same coy. 2) s.85(5) and (6A): Exempt Securities:
o Refers to Sch. 11A FSMA & PRR 1.2.3
DTR 7.1.1R Need Audit Committee – monitoring the audit
process/systems o Sets out a list of securities which are exempt from prospectus req.
DTR 7.1.3R
Recommended under Code and mandatory under DTR e.g. PRR 1.2.3R Art.4(a): offer to qualified investors only, (b) fewer
Code C.3.1
than 150 people, (i) securities offered to existing or former directors
UKCGC Provision Need Nomination Committee – deals with appointment
or employees.
17 of directors (Code recommended)
UKCGC Provision Need Remuneration Committee of independent non- TEST 2: SECTION 85(2) FSMA
32 exec directorsi – sets remuneration levels for directors
3
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