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Class notes BPP- LPC -Corporate finanace
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- BPP- LPC -Corporate finanace
BPP- Corporate Finance notes-LPC
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CF notesSGS 1 – flotations 1: preparation for listing
Two ways to raise money: debt finance and equity finance
- Floatation when the company first list its shares on public market for the example London
exchange so the shares are listed not the company
- The official list I the main market not AIM
- Full listing is the company being officially listed on the official list
- Company wants capital to expand to acquire another company or to increase its profile
- Investment bank will take fill responsibility for Initial public offering IPO
- Broker will liaise between the company and the London exchange and inform the company
about the current market condition
- The investment bank will act as sponsor and the sponsor must FCA approved firm and the
sponsor does is help the company put together its application for listing on the normal stock
exchange and ensures that is complaints with all relevant and listing rules and regulations
- The investment bank is also the lead underwriter and ensures that the company will get all
the money that it wants to get on listing so it like a guarantee your insurance
- When co applies for listing so it can apply for standard listing where the company has to
comply with EU directives and with premium it has to comply with stringent uk requirement
and EU directives
- And if the company is not subject to premium listing it would not be included in the footsie 350
ect and this is significant
- Crest is electronic settlement system that allowed shares to be traded on the London stock
exchange both on main market and on AIM.
- Shall we float?
- To float the private company has to register from private company to public company
- S755 prohibited private company to offer its share to the public so it needs to pass special
resolution
- Preparation for listing
- Listing involves 2 applications – FCA application for admission to listing on the official list
(must comply with LRs) and LSE application for admission to trading on main market by LSE.
- Conditions relating to the applicant (chapter 6 LR):
- 3 years accounting history and if the company doesn’t have 3 years, then it may consider a
standard listing then converting into premium listing afterwards or being admitted to aim
instead of the main market
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, - The latest set of its account must not be more than 6 months old from the date of the prospectus
- sufficient working capital must be available for the group’s requirements for at least the next
12 months from the date of publication of the prospectus (LR 6.7.1R).so the point of this that
FCA wants to make sure that it doesn’t want the company list on the main market and then
immediately become insolvent
- 1. the applicant must have published or filed historical financial information which covers at
least 3 years – LR 6.2.1R ( 3 years trading history )
2. the applicant’s latest balance sheet date must be more than 6 months before the date of
the prospectus and no more than 9 months before the date of admission (LR 6.2.1R(3)(a)
and (b)), and where the applicant has subsidiaries, the historical financial information must
include the consolidated accounts – LR 6.2.1R(4);
Corporate governance
DTR 7.2.2 R stated that the company must publish a corporate governance statement in its annual report
and that statement must refer to corporate governance code that company is subject to
DTR 7.2.3R that statement must explain where the company has deviated from the corporate
governance code if it has and why so we call this to comply or explain principle. the corporate
governance code itself is not legal requirement but complying with listing rule is. and the company that
is not complying with good governance code is less attractive to investors than compliant one.
Primum listed companies are also subject to listing rules LR9.8.6(5) and 6 which requires them to
mention the corporate governance code that adhered to and to comply or explain again.
The CGC applies from the time of admission so you must make sure that all the corporate governance
procedures are in place before listing otherwise you will be in breach as soon as the company is listed.
And CGC are related to board composition so how many directors on the board, is that the right number,
is there a good balance between executive and non-executives
we need to check if the client is below the 350 so smaller companies below 350 on admission may not
be subject as stringent rules.
Non executives’ directors have supervisory role
• Retail offer – to public-
• Institutional offer – certain institutions
• Niche? Well known? You can do combination of both as well
• So we need to know if we want to offer for subscription or for sale
Offer for subscription: New shares are offered to the public – (subscription)
Offer for sale is where existing shareholders are selling their shares to the public
What usually happen we have mix of both
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, Institutional offer: the company/shareholders is selling shares so the companies use brokers
who they place shares with places who give the money to investment bank who passes to
company or shareholders. We have narrower shareholder base and specific investors
Prospectus: key documents (Marketing document telling investors why investing in this
company is a great idea)
Prospectus: two purposes :marketing document and disclosure to enable the investor to
make decision
Þ Specific PR 3.1.1
Þ S87A FSMA general duty of disclosure
S85 FSMA prohibition of offering or dealing with shares to public without approved
prospectus
Two types of prospectus:
• Price range prospectus:
Prospectus in final form except in relation to the price and in relation to price it will have a
price range rather than a final price.
Pathfinder: only used for institutional offer- placing distributed to potential investors so it
is not a prospectus and it is not approved by FCA and it doesn’t contain any information as to
price and it is document to engage interest and followed by final prospectus which is approved
by FCA so pathfinder is a financial promotions FSMA 21 (restriction on financial promotion)
Prior to prospectus before the intended approval day (impact day – intended approval day) PR
3.1.3 ( applying for approval )
-20 clear working days or
- 10 clear working day
Prior to listing hearing
- 48 hours documents3.3.2 LR- Submit the document approved prospectus and listing
application
Admission day is the next business day after hearing
Road shows can be used in institutional offer or in combined institutional and retail offer. but road
shows are only for institutional investors so they are marketing tool by the directors of the company
delivered to the banks to get them to buy shares in the company. but because of section 21 of FSMA
and the prohibition on financial promotion the attendance is restricted at roadshows made
Under writing: applies to primary and secondary issues of shares and the lead underwriter is the
investment bank and underwriter basically agrees to float or issue and how much money the company
will get. Why bother underwriting? As a company you want to make sure you will recover or receive a
certain amount of money as a result of the share issue. so, the whole process is incredibly time
consuming, complex and costly. you don’t want to go through all of this and hassles of preparing a
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, prospectus so the company pays a commission fees to lead underwriter to underwrite what in other
words ensures or guarantee that all of the shares will be taken up and paid for so you spreading
the risk and the lead underwriter may also spread the risk among by sub underwriters so if the
shares are not bought by people on the market , these underwriters take up those shares instead so the
company gets the money it had intended to get
Book building used when you have a price range prospectus so on impact day you published a price
range prospectus and you send it out to your investors and they look at that document and try to
decide whether or not to invest in the company and the book building process begins and this can be
feature of both retail and institutional offer and it is based on that book building process that the offer
price is determined by the investment bank and announced about week before the admission day so
it is an effective way of assessing the demands for the shares and setting a realistic price for them
and yet even before the impact day when a company has an intention to float the investment bank and
the broker will initially contact their clients to engage in interests in the shares so we run the book and
once the price range prospectus is published , the book runners provide clients with formal terms
provided in the prospectus and then those investors give non-binding indication of interest so non-
binding indication of how many shares they would sign up to and how much they are willing to pay for
them and based on these bids the investment bank determines a realistic price for the shares so if you
say in the prospectus that the share price will be in the range between 2-4 per share and based on the
level of demands and pre-order of those shares to book builders we will build the book and either go
towards the higher price within that range if there is a lot of demands or lower amount.
SGS 2 – flotations 2 – the offer and listing application process
When is prospectus is required?
Test 1 86(1) FSMA– offer to public ( FSMA)( 102B)– exemptions
Test 2- admission to a regulated market – exemptions-aim will not fell within test 2 cuz it is not
regulated market.
How to approach it
Test 1
• Section 86(1) FSMA
• Offer made to qualified investors only
• Offer made to fewer than 150 persons EEA state
• Section 85 (5) FSMA
• Planning and preparation (Financial due diligence and legal DD)
• Short form report
• Long form report (confidential and stays with the company)
• Legal due diligence: verification
• Suitable company for listing – does has the proper procedures to comply with DTR
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