Lecture notes
Equity Finance LPC Notes at BPP Law School - achieved a high distinction (85%)
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- Equity Finance
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Equity FinanceRegulated market = Main market of the LSE NOT AIM
Prescribed market = MAIN MARKET AND AIM. LSE is RIE
Quoted company = equity share capital listed on official list
Traded company = company that carry rights to vote at general meetings and are admitted to trading on a
regulated market in an EEA state
Focus - Process company goes to obtain a premium listing on main market of the LSE
Primary issue – first time that a company makes an offer of listed shares – flotation / IPO – although not all
flotations will involve a public offering
Secondary issue – subsequent occasions where a listed company makes issues of shares
Private companies – ability to raise equity finance is restricted by s.755 CA 2006 – private company
commits an offence if it offers its shares to the public.
Public companies – enable company to offer new or existing shares to the public at large (to make
business more successful), private companies convert into public companies. Follow procedure in section
90 CA 2006. After coverting to plc, to seek a listinh and admission to trading of their shares – company not
listed but the shares are.
▪ Listed companies – shares are listed on the official list, shares are admitted to trading on Main
Market of the LSE but not those on AIM. Must be a public company first.
▪ Aim companies are public limited companies but are not listed on official list. Not all public
companies apply to have their shares listed.
Advantages of seeking a listing?
▪ Access to capital to fund growth / reduce debt – injection of cash into a company. Can be used
to expand (through acquisitions) or to pay off existing debt. Gain new shareholders and a potential
source of future funding.
▪ Providing a market – ready made public markets, as demand for shares in a company traded on
LSE grows, easier for more shares issues to be made to raise further finance. Will allow employees
to realise gains by selling their shares at the time of the flotation or provide an opportunitiy for them
to invest in further shares (incentive scheme)
▪ Public profit – good for business, gain confidence of investors as they can monitor the companies
financial performance publicly
,Disadvantages
▪ Comply with regulatory requirements (LPDT rules, MAR and LSE admission and disclosure
standards) must be observed post listing. Failure to comply – penalties, censure or suspension.
▪ Management time – complex, time-consuming task. Continue to run business effectively and
involved significant amount of time in the flotation.
▪ Changes to the board – need directors will experience and expertise as important consideration to
investors. Director more exposed to being sued in their personal capacity. Corporate governance
code compliance.
▪ Costs and fees – various advisors need to be paid and substantial proportion of the cash raised will
need to meet these costs
▪ Loss of control – directors subect to additional influence and pressures on way they run the
company. Investors will have significant shareholdings – position to block resoluitions they do not
approve of.
Advisers on the listing to the main market
▪ Investment bank – global coordinator.
Broker – agents for clients who want to buy or sell shares. Commission. Primary issue – responsible for
finding investors for the shares.
Sponsor – LR 8.2.1R – applicant for a premium listing appoints a sponsor to assist with its application.
Sponsors must be approved by FCA (LR 8.6.2R).
▪ Responsibilities – LR 8.3 and 8.4. Sponsor who drives and project-manages the process of
applying for a listing.
▪ FCA will monitor and supervise the sponsor to ensure it continues to satisfy the criteria for approval
as a sponsor and remains in compliance with applicable LRS (LR 8.7)
▪ FCA may require specified documents or information from the sponsor and may supervisory visits
on a periodict and ad hoc basis (LR 8.7.1 AR and LR 8.7.3G)
▪ Sponsor either be a broker or company’s investment bank
▪ Ss 88A – 88E FCA impose wide range of sanctions on sponsors failng to perform their duties
Reporting accountants – appoint firm of accountants to product financial information. Long-form report,
short-form financial information and working capital review for prospectus plus various comfort letters.
Solicitors – responsible for ensuring company is prepared for flotation. Legal DD report and draft/verify the
prospectus.
,Distinction between premium and standard listing
Possible to move from standard to premium listing of shares without having to cancel the intial
listing. However, if company wants to move down to SL, needs the support of 75% of its
shareholders. SH approval is required as shareholder lose protections (LR 10 and LR 11).
Crest
▪ Settlement and transfer of its share once it is listed. Private companies shares are evidenced by
share certificates, executing STF, new shareholders inserted into register of members.
▪ Listed companies appoint company registrar to maintain an electronic database of company
shareholder register on company’s behalf. Listed companies must ensure it shares are compatible
with electronic settlement (through CREST). Consition of company should not prevent this.
▪ CREST is the CSD for the uk (central securities depository)
▪ Allows shares to be held and trades in those shares to be settled, electronicially.
, ▪ Transferee pays a stamp duty reserve tax (rather than stamp duty) which is imposed on
transactions (rather than documents) and payable at a rate of 0.5% of consideration. Stock transfer
form (transfer document) stamp duty payable at a rate of 0.5% if the consideration exceeds 1,000.
▪ Member must appoint settlement bank that agrees to satisfy the member’s payment obligations
through crest. Crest members can transfer shares to other members by sending electronic
instructions to crest about the price and number of shares to be transferred.
▪ Only shares transferrable via crest – shares in UK companies and shares in companies
incorporated in other juridictions that adopted crest system.
Shareholder holds shares through crest
A) Direct user – hardware/software capabilities to have a direct connection to CREST. Banks /
stockbrokers who settle trades through crest.
B) Sponsored member – no direct link but appoints a direct user to communicate with crest on his
behalf. Holds stock in his own name. sponsors member name appears on company register of
members. Individual sponsor members = personal members.
C) Hold shares through a nominee – shareholder can appoint a nominee. Usually a stockbroker –
holds shares on behalf of shareholder in a nominee account (together with shares nominee is
holding on behalf of other clients). Nominee is direct user and name will appear on company
register of members. Nominee holds legal title to the shares – agree with SH to forward
communications / dividends from company to SH.
SH is not a CREST member but wishes to transfer his shares into CREST to sell them in a flotation, a
CREST transfer form will be used to effect this transfer. Shares will dematerialise on transfer. Listed
companies to effect right issues, open offers and takeover offers to CREST shareholders through the
CREST system. CREST Sh can use the crest system to appoint proxies and receive dividend and interest
payments.
Proccess for listing on the main market
▪ Preparation
▪ Re-registration as public company (section 90)
▪ Review corporate governance procedure and identify areas need to be addressed prior to
admission DTR 7
▪ Application to the FCA for admission to the official list - appoint a sponsor and sponsor is
responsible for ensuring that the company and its directors understand their obligations /
commitments in connection with the listing
▪ Application to the LSe for admission to trading – LSE’s admission and disclosure standards. Does
not require sponsor, recommends company nominates a representative to assist with the
application.
Conditions for listing
▪ Both the company itself (applicant) and its shares must be eligible for listing
▪ Sponsor may only complete the sponsor’s declaration if the conditions have been met (LR 8.4.2R)
Conditions relating to the applicant
▪ Application must have published or filed historical financial information which covers at least 3 years
(LR 6.2.1R(1))
▪ Applicant’s latest balance sheet must be no more than 6 months before the date of the prospectus
and no more than nine months before the date of admission (LR 6.2.1R(3)(a) and (b), and, where
the applicant has subsidiary undertakings, historical financial information must include consolidated
accounts (LR 6.2.1R(4)
▪ Historical financial information must represent at least 75% of the applicant’s business and put
prospective investors in a position to make an informed assessment of the applicant’s business (LR
6.2.1R(2)
▪ Applicant must be carrying on, as its main activity, an independent business (LR 6.4.1R)
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