Notes on Equity Finance for the LPC at BPP University. These revision notes summarise key SGS course content in a way that is easy to understand and helped me achieve 90% on the EF exam.
- Module outlines the process a company typically goes through to obtain a premium listing on
the Main Market of the London Stock Exchange (LSE).
- The LPDT Rules apply to the listing of “securities” (equity and debt instruments) on the Main
Market of the LSE.
- Primary issue = First time that a company makes an offer of listed shares (flotation / IPO).
- Secondary issue = Subsequent occasion when a listed company makes an issue of shares.
- A private limited company’s ability to raise equity finance is heavily restricted by s755 CA 2006
which states that private company commits an offence if it offers shares to the public.
- The procedure that must be followed to convert the company from ltd to plc is s90 CA 2006.
Listed Companies
- As most commercial investors want to be able to deal freely in their investments and prefer
to invest in a company whose shares are traded on a stock exchange, the third stage of
development for some companies, after converting to plc status, is to seek a listing and
admission to trading of their shares. NB it is not the company that is listed but its shares.
Why Would a Company Seek a Listing?
Advantages
- Access to capital to fund growth and/or reduce debt.
- Providing a market for shares.
- Public profile.
Disadvantages
- Burden of disclosure and reporting requirements.
o Companies listed on the Official List must comply with a large number of regulatory
requirements.
- Management time.
o The process of listing on the Main Market or being admitted to AIM is a complex and
time-consuming task and will involve a significant investment of management time.
- Changes to the board.
o A listed company will need to comply with the Corporate Governance Code which
stipulates how the board of the company should be constituted.
- Costs and fees.
o Expense involved in floating a company is significant. Various advisers need to be paid.
- Loss of control
o The directors of a listed company need to accept that they will be subject to additional
influences and pressures on the way that they run the company. Institutional
investors that have significant shareholdings may be in a position to block resolutions
that they do not approve of.
- Functions:
o Financial adviser – advising the company on the timing and structure of the offer,
marketing and due diligence;
o Acting as lead underwriter;
o Preparing research on the company;
o Acting as broker; and
o Acting as sponsor.
Broker
- Brokers act as agents for clients who want to buy or sell shares. They receive a commission
for doing this.
- In the context of a primary share issue the broker will be responsible for finding investors for
the shares.
Sponsor
- It is a requirement of the FCA that an applicant for a premium listing appoints a sponsor to
assist with its application (LR 8.2.1R). Sponsors must be approved by the FCA (LR 8.6.2R).
- The sponsor is responsible for a number of matters including:
o Helping the company put its application for listing together and submitting that
application to the FCA;
o Satisfying itself that the company meets all the relevant requirements and conditions
for listing; and
o Making a declaration to the FCA that it has performed its responsibilities under the
LRs.
- The responsibilities of a sponsor are set out in LRs 8.3 and 8.4. Generally it will be the sponsor
who drives and project-manages the process of applying for a listing.
Reporting Accountants
Solicitors
- Prepare legal due diligence report and draft and verify the prospectus.
Premium vs Standard Listings
- If a company decides to apply to have its shares listed and traded on the Main Market of the
London Stock Exchange, as part of that process it will have to apply to have its shares admitted
to listing on the Official List.
- Companies which apply for a “standard listing” of shares are subject to minimum standards
set by EU directives.
- Companies which apply for a “premium listing” are subject to those same EU minimum
standards but also more stringent UK requirements.
- 3-year accounting history required – LR 6
- Sponsor required – LR 8
- Share dealing restrictions – MAR
- Corporate governance standards – UK Corporate Governance Code, LR 9 and FTR 7
- Rules governing the relationship between company and a “controlling shareholder” (i.e. with
30% or more of the shares)? Yes – LR 6 and 9.
- Shareholder approval required for significant transactions? Yes LR 10.
- Shareholder approval required for third party transactions? Yes LR 11.
CREST = system for settlement and transfer of listed shares. Listed shares held in dematerialised
(electronic) form without the need for a paper share certificate.
- Listed companies must ensure its shares are compatible with electronic settlement – there
must be nothing inherent within the constitution of a company which prevents electronic
settlement.
- CREST = Central securities depository. An institution which holds financial instruments and
allows ownership of those instruments to be transferred electronically by the updating of
electronic records.
- CREST is a computerised system which allows shares to be held, and trades in those shares to
be settled, electronically.
The Process for Listing on the Main Market
Preparation for Listing
Re-Registration
- A private company cannot offer its shares to the public and must be re-registered as a public
limited company (plc) before it can make an offer of its shares to the public. The re-registration
procedure is set out in s90 CA 2006.
Corporate Governance
- In advising a company applying for listing you will need to review its corporate governance
procedures and identify any areas which need to be addressed prior to admission e.g. in
relation to board composition.
Applications to the FCA and LSE
- When shares are “listed”, they have been admitted to the Official List of the FCA and admitted
to trading by the LSE. Two applications therefore need to be made to obtain a listing:
- Application to the FCA for admission to the Official List
o This application is made in compliance with the LRs, in particular Chapter 3 of the LRs,
which deals with the procedure for applying for a listing.
o A company is required to appoint a sponsor in connection with the application and
that sponsor is responsible for ensuring that the company and its directors
understand their obligations and commitments in connection with the listing.
- Application to the LSE for admission to trading
o This application is made in compliance with LSE’s Admission and Disclosure Standards.
- In order for a company to be admitted to the Official List both the company itself (the
applicant) and its shares must be eligible for listing.
- The sponsor must consider whether the conditions set out in the LRs have been met and may
only complete the sponsor’s declaration if the conditions have been met (LR 8.4.2R).
Conditions Relating to the Applicant
1. The applicant must have published or filed historical financial information which covers at
least three years (LR 6.2.1R(1));
2. The applicant’s latest balance sheet date must be no more than six 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, the historical financial
information must include consolidated accounts (LR 6.2.1R(4));
3. The 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));
4. The applicant must be carrying on, as its main activity, an independent business (LR 6.4.1R);
5. Where there is a “controlling shareholder” – holds 30% or more of the votes which may be
cast at a general meeting – the applicant must have a “relationship agreement” with the
controlling shareholder which contains certain independence provisions (LR 6.5.4R); and
6. Sufficient working capital being 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).
Conditions Relating to the Shares
1. The shares must be duly authorised (in accordance with the company’s constitution) (LR
2.2.2R(2))
2. The shares must be admitted to trading (LR 2.2.3R)
3. The shares must be freely transferable (LR 2.2.4R)
4. The market capitalisation of all securities to be listed must be at least £700,000 for shares (LR
2.2.7R)
5. 25% of shares of the class to be listed must, no later than the time of admission, be in ‘public
hands’ (LR 6.14.1R and LR 6.14.2R) – this is known as the ‘free float requirement’
6. The whole class of the shares must be listed (LR 2.2.9R)
7. The rights attached to the company’s shares must be compatible with electronic settlement
e.g. CREST (CSD Regulation Article 3.1)
Other Considerations
- Listing Principles and Premium Listing Principles – Chapter 7.2 LRs. The purpose of the LPs and
PLPs is to ensure that issuers take into account the spirit as well as the letter of the LRs and
DTRs when considering their obligations under these Rules.
- Continuing obligations
Timing: The process of obtaining a listing will take around 6 to 12 months from the time that advisers
are first appointed to the day of listing. However, the timetable can vary substantially between
different listings depending on the size of the company and the offer structure the company uses.
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