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  1. 1. A guide to listing on the London Stock ExchangePublished by White Page Ltd in association with the London Stock Exchange, with contributions from:
  2. 2. Publishing editor: Nigel Page A guide to listing on the A guide to listing on the London Stock Exchange London Stock ExchangePublisher: Tim Dempsey is published by: © 2010 London Stock Exchange plc and White Page LtdDesign: London Stock Exchange plc White Page Ltd, 17 Bolton Street London W1J 8BH Copyright in individual chapters rests with thePrinting and binding: Argent Litho Ltd United Kingdom authors. No photocopying: copyright licences Phone: + 44 20 7408 0268 do not apply. Fax: + 44 20 7408 0168 Email: This guide is written as a general guide only. It Web: should not be relied upon as a substitute for specific legal or financial advice. Professional advice should always be sought before taking white page any action based on the information provided. Every effort has been made to ensure that the First published: November 2010 information in this guide is correct at the time of ISBN: 978-0-9565842-1-2 publication. The views expressed in the articles contained in this guide are those of the authors. London Stock Exchange, AIM and the coat of arms device are registered trademarks of London Stock Exchange plc. The publishers and authors stress that this publication does not purport to provide investment advice, nor do they bear the responsibility for any errors or omissions contained herein.
  3. 3. A guide to listing on theLondon Stock ExchangeContents3 Foreword London Stock Exchange5 The Main Market – the standard for excellence London Stock Exchange13 The role of the UKLA The United Kingdom Listing Authority19 Preparing for an IPO UBS Investment Bank31 The legal framework for an IPO Freshfields Bruckhaus Deringer LLP43 Accounting requirements and advice through the IPO process Ernst & Young LLP57 Generating and capturing investor demand during an IPO UBS Investment Bank69 Managing the company’s profile Fishburn Hedges81 The role of the registrar in an IPO Capita Registrars87 London: a unique investment opportunity FTSE Group91 Preparing to list depositary receipts Cleary Gottlieb Steen & Hamilton LLP105 Establishing a depositary receipt programme J.P. Morgan116 Useful contacts
  4. 4. A guide to listing on the London Stock Exchange Foreword By Tracey Pierce, Director of Equity Primary Markets, London Stock Exchange With roots stretching back to the coffee houses of 17th century London, the London Stock Exchange is built on a long history of integrity, expertise and market knowledge. It has become one of the world’s largest and most international stock exchanges, playing a pivotal role in the development of global capital markets. We offer the widest choice of routes to market, which are available to both UK and international companies, and today we have close to 3,000 companies from over 70 countries listed and trading on our markets. In challenging market conditions, the London markets have proved their value by providing companies with access to capital when other funding channels have not been available. At the Exchange, we strive to build on this success by working with market regulators and the wider financial community to ensure that our markets are well-regulated, transparent, liquid and neutral. This success is underpinned by the dedicated community of advisers and investors that continues to support the companies on our markets. We understand that joining a public market is one of the most significant decisions a business will ever take; the sheer range of topics that need to be considered building up to IPO can seem like a daunting task. With this in mind, this guide has been developed with input from some of the key advisers experienced in bringing companies to our Main Market and our Professional Securities Market, providing you with a practical outline of the listing process, as well as an insight into life as a public company. I hope you find this publication useful and wish you every success, both in bringing your company to market and as a publicly-traded company.A guide to listing on the London Stock Exchange Page 3
  5. 5. The Main Market –the standard for excellence London Stock Exchange
  6. 6. QUOTEDWhatever your company’s size or sector, we can put you at the heartof one of the world’s most sophisticated financial communities.The Main Market is home to approximately 1,400 companies fromover 60 countries, including some of the world’s most successful anddynamic organisations. So far this year £20.8 billion has been raisedon the London Stock Exchange, of which £17.9 billion has beenraised on the Main Market.Here at the London Stock Exchange we help companies to access thedeepest pool of international capital. Premium Listed companies on theMain Market meet the highest listing standards helping to raise theircorporate profile and increase their exposure to investors.Learn more about the Main Market and why leadingcompanies choose to list on the London Stock Exchange – November 2010 London Stock Exchange plcLondon Stock Exchange, the coat of arms device and AIM are registered trademarks of the London Stock Exchange plc.London Stock Exchange statistics as at end September 2010
  7. 7. The Main Market – thestandard for excellenceEstablished in 1698, the London Stock Exchange’s Why join a public market…?(the ‘Exchange’) Main Market has long been home Joining a public market – the Main Market or AIMto some of the UK’s, and indeed the world’s, (our market for smaller, growing companies) – is alargest and best-known companies. There are over way to grow and enhance your business. When1,400 companies on the Main Market with a considering the available financing options, thecombined market capitalisation of £3.7 trillion. following factors are frequently cited as the keyCompanies of all types, nationalities and sizes benefits of admission to a public market:together represent some 40 sectors. l providing access to capital for growth,As well as sectoral and geographical diversity, the enabling companies to raise finance forMain Market accommodates the admission to further development, both at the time oftrading of companies with a Premium Listing or a admission and through further capitalStandard Listing. The FSA’s listing categories are raisingsdescribed in detail in the chapter ‘The role of the l creating a market for the company’s shares,UK Listing Authority’ on page 13. broadening the shareholder base l placing an objective market value on theA listing on the Main Market demonstrates a company’s businesscommitment to high standards and provides l encouraging employees’ commitment andcompanies with the means to access capital from incentivising their long-term motivation andthe widest set of investors. Over the last 10 years, performance, by making share schemes£366 billion has been raised through new and more attractivefurther issues by Main Market companies – capital l increasing the company’s ability to makethat has seen companies through the good times acquisitions, using quoted shares asand the bad. currencyJoining the Main Market Responsibility for the approval of prospectuses and admission of companies to the Official List lies with the UK Listing Authority (UKLA). The Exchange is responsible for the admission to trading of companies to the Main Market. Joining the Main Market consequently involves two applications: one to the UKLA and one to the Exchange. UKLA admits securities to London Stock Exchange the Official List admits securities to trading on the Main Market Official List notice issued Admission to trading notice to the market issued to the marketThe Main Market – the standard for excellence Page 7
  8. 8. l creating a heightened public profile – A respected and balanced regulatory stemming from increased press coverage and environment analysts’ reports – helping to maintain The UKLA’s listing framework underpins London’s liquidity in the company’s shares reputation for balanced and globally-respectedl enhancing the company’s status with standards of regulation and corporate governance. customers and suppliers. Regulatory requirements in London are principles- based and provide an appropriate balance ofCompanies that choose to seek admission to a investor protection, practitioner certainty andpublic market in London have a range of options flexibility. The Exchange aims to be involved in alldepending on their size, stage of development and relevant processes where amendments orcapital-raising requirements. The options open to additions to the regulatory framework arecompanies should be discussed in detail with their considered. This is to ensure that London’steam of advisers. competitive advantage remains undiminished; that listings and subsequent capital raisings are cost-Companies which are successful on AIM and reach effective and efficient for our companies; and thata certain size and stage of development, may seek investors have the appropriate amount ofto transfer their securities from AIM to the Main information to make informed investmentMarket, provided that they meet the eligibility decisions.criteria. While a move to the Main Market maysubject the company to increased regulatory Choicerequirements, it can bring benefits in terms of a Companies with either a Premium or a Standardheightened profile and attracting different Listing can choose to admit to trading on the Maininvestors. Market.…and why the Main Market? A Premium Listing means that a company must meet standards that are over and above (oftenThe success of the Main Market is built on a wide described as ‘super-equivalent’) those set forth inrange of factors: the EU legislation, including the UK’s corporate governance code. Investors trust the super-l a respected and balanced regulatory equivalent standards as they provide them with environment additional protections. By virtue of these higherl choice standards, companies may have access to al access to capital from a broad and broader range of investors and may enjoy a lower knowledgeable investor base cost of capital owing to heightened shareholderl expert advisory community confidence. A Premium Listing is only available tol enhanced profile and status. equity shares issued by commercial trading companies.The Main Market has attracted companies of allsizes and from all sectors over many years. With a Standard Listing, a company has to meetIrrespective of their sector, origin or strategic the requirements laid down by EU legislation. Thisdirection, they have all sought to take advantage means that their overall compliance burden will beof the range of benefits a listing on the Main lighter, both in terms of preparing for listing andMarket affords. Those benefits include: on an ongoing basis. Standard Listings cover the issuance of shares and Depositary ReceiptsPage 8 The Main Market – the standard for excellence
  9. 9. (‘DRs’) as well as a range of other securities, Underpinning the Main Market is a network ofincluding fixed-income. Large companies from experienced advisers who will guide you on theemerging markets may wish to list their DRs, thus journey to an initial public offering (‘IPO’) andattracting investment from the significant provide ongoing advice once your company isinternational pool of capital available in London. listed.(A table showing the key differences between aPremium Listing and a Standard Listing can be Selecting the right advisers for you and yourfound in the chapter ‘The role of the UK Listing company is vital. Getting it right early on will helpAuthority’ on page 18). ensure that disruptions to the process are minimised and you are able to get on with the taskIn this guide, the chapters ‘Preparing to list at hand. Factors to consider when appointingdepositary receipts’ and ‘Establishing a depositary advisers include the firm’s relevant and recentreceipt programme’ are dedicated to the listing experience in relation to your business and theand admission to trading of DRs on both the Main sector you operate in, as well as the personalMarket and the Professional Securities Market rapport you develop with the individuals with whom(‘PSM’). The PSM provides an alternative route to you will be working.a listing on the Exchange for issuers of DRs. The diagram on page 10 below shows the differentAccess to capital advisers typically involved in a flotation on theWe provide access to the largest pool of Main Market and briefly highlights their varyinginternational equity assets in the world. This roles and responsibilities.culture is embedded in London’s investmentmanagement community, which understands Profilecompanies from home and abroad and wants to Floating a company on the Main Market raisesinvest in the global economy. your company’s profile and helps you to meet your strategic objectives. You will have the opportunityOnce they are listed and admitted to trading on to project your company onto a global stage withthe Main Market, companies should not increased media coverage, investor interest andunderestimate the value of being able to return to broad analyst coverage.the market to raise funds through further issues.Even during the recent difficult market conditions, With a Premium Listing comes the potential forthe Exchange successfully facilitated significant inclusion in the FTSE UK series of indices whichlevels of capital raising. Further issues by Main includes the FTSE 100, FTSE 250 and FTSEMarket companies provided capital injections that Small Cap indices. Access to these indices iswere used to pay off debt, rebuild balance sheets often seen as one of the key benefits of achievingand fund further growth. a Premium Listing since so many investment mandates – particularly in respect of the vastExpert advisory community amount of capital represented by tracker funds –The decision to join the Main Market is a pivotal are driven by FTSE indexation. For moreone. To achieve a successful listing and admission information see chapter ‘London: a uniqueto trading, companies must deliberate over many investment opportunity’ on page 87.considerations. Our commitment to the primary markets There is a continuous stream of proposed regulatoryThe Main Market – the standard for excellence Page 9
  10. 10. Advisers’ roles and responsibilities Sponsor Bookrunner • Overall co-ordination and project • Prepare company for roadshow management of IPO process • Facilitate research • Co-ordination of due diligence and prospectus • Build the book pre-float • Ensure compliance with applicable rules • Marketing and distribution • Develop investment case, valuation and • Pricing and allocation offer structure • Manage communication with LSE and UKLA • Act as adviser to the company’s board • Ongoing support/advice after flotation Lawyers • Legal due diligence Other advisers • Registrars THE COMPANY • Draft and verification of prospectus • Corporate restructuring • Financial printers • Provide legal opinions • Remuneration consultants Financial PR Reporting accountant • Develop communication strategy • Review financials – assess company’s to support pre-IPO process readiness for IPO • Enhance market perceptions to • Tax structuring develop liquidity and support • Financial due diligence - long form, share price short form and working capital reports • Pre- and post-IPO press releaseschanges affecting companies on our markets, with Once you are listed on the market, we arelegislation stemming from changes here in the UK committed to helping you raise your profile andand in Brussels. With companies’ best interests keeping you abreast of market developments. Wefront of mind, we continue to lobby on their behalf help to do this through the provision of brand marksto ensure our markets are fit for purpose. It is (see page 11); a dedicated page on our websitecrucial that through our lobbying we continue to specific to your company (including latest news andpromote a regulatory regime based on principles, pricing information on the trading of yourseeking to limit disproportionate legislation securities); educational initiatives, such as seminarsapplicable to issuers that are admitted to trading on and practical guides; and investor-focused eventsour markets, while ensuring sufficient investor such as capital markets days that bring companiesprotection. and investors together.Page 10 The Main Market – the standard for excellence
  11. 11. Main Market brand marks LISTED LISTED LISTED STANDARD PREMIUM STANDARD SHARES DEPOSITARY RECEIPTS These brand marks are provided exclusively to companies listed on the Main Market. Companies may use the brand mark across corporate and investor relations materials to showcase their association with the London Stock Exchange and provide information as to their listing status. More information is available on the Exchange’s website: finally…Listing and admission to trading on the MainMarket is an efficient way for companies to accesscapital to fund their growth, while simultaneouslybenefiting from enhanced profile and liquiditywithin a well-governed and regulated marketstructure.As an ambitious company with plans to take yourbusiness to the next level, joining the Main Marketis an ideal way to assist you in realising your globalaspirations.The Main Market – the standard for excellence Page 11
  12. 12. The role of the UK Listing Authority UKLA
  13. 13. The role of the UK Listing AuthorityThe UK Listing Authority (‘UKLA’) is the name As a consequence, when a company wishes toused by the Financial Services Authority (‘FSA’) make an initial public offering (‘IPO’) of itswhen it acts as competent authority for listing, as securities onto a regulated market such as thecompetent authority for the purposes of the Main Market of the London Stock Exchange, theEuropean Prospectus and Transparency Directives, UKLA has two principal roles to perform: to reviewand as competent authority for certain aspects of and approve the issuer’s prospectus, and to admitthe Market Abuse Directive. These roles have a those securities to listing once it is happy that thestatutory basis in Part VI of the Financial Services issuer complies with all relevant eligibility criteria.and Markets Act 2000 (‘FSMA’). Threesourcebooks in the FSA Handbook implement the Listing categoriesrelevant rules. These are: The term ‘listed’ is used in a number of different contexts, but in the UK this technically meansl Listing Rules – these rules include the admitted to the Official List of the UKLA. The eligibility requirements for admission to the UKLA has created a number of different listing Official List (or ‘listing’) and the continuing categories which determine the eligibility criteria obligations that apply thereafter. They come and continuing obligations that apply to the issuer partly from the European Consolidated and its securities. Admissions and Reporting Directive, but also include a significant body of rules that are The UKLA introduced the listing categories to help ‘super-equivalent’ or additional to the clarify that listing refers to admission to the European minimum requirements. These Official List of the UKLA, and does not relate to additional requirements include substantive the market to which a security is admitted to eligibility requirements such as the need for a trading. Listing categories are also intended to three-year track record, the class test and clarify the regulatory standards that apply to related party regimes, and the requirement different types of listing. A Standard Listing for a sponsor in relation to a Premium Listing. requires compliance only with EU minimuml Prospectus Rules – these rules stem standards, whilst a Premium Listing also requires primarily from the enactment of the European compliance with the more stringent super- Prospectus Directive and detail the equivalent standards. Note that only equity shares circumstances when a prospectus is required may be admitted to a Premium Listing; issuers of and the disclosures a prospectus should other securities may only seek a Standard Listing include. for their securities. A table showing the keyl Disclosure and Transparency Rules (‘DTRs’) differences between Premium and Standard – these rules govern the periodic and ad hoc Listings can be found on page 18. disclosure of information by listed companies. Periodic information includes interim and Eligibility annual accounts, and ad hoc disclosures, An issuer will generally select its preferred market including major shareholding notifications and and listing category in consultation with its details of significant developments that might advisers prior to engagement with the UKLA. For affect the price of the securities. These rules issuers requesting a Premium Listing of their originate from the Transparency Directive and equity shares, contact with the UKLA will be part of the Market Abuse Directive, and also undertaken by the issuer’s appointed sponsor firm. from the 4th/7th Company Law Directives. The role of a sponsor is to guide the issuer on the application of the Listing Rules and the ProspectusPage 14 The role of the UKLA
  14. 14. Listing segment Premium Standard Listing Equity Equity Equity Shares GDRs Debt & Securitised Misc. category shares shares shares debt-like derivatives securities Debt Commercial Closed- Open- Equity Options Examples of companies ended ended shares* securities types of investment investment Asset-backed Subscription funds companies Non-equity securities warrants companies/ shares Convertible securities securities - Preference shares (specialist securities) Listing Rule LR6 LR15 LR16 LR14 LR18 LR17 LR19 LR20 chapter* an investment entity will only be able to benefit from this Standard Listing category for a further class of equity shares if italready has (and only for so long as it maintains) a Premium Listing of a class of its equity sharesRules. This includes liaison with the UKLA on requirements. The UKLA suggests that suchbehalf of the issuer, and to provide certain letters are sent in as early as possible in the IPOdeclarations to the UKLA that provide comfort process and that they are as detailed as possible,that the relevant rules have been complied with including relevant background information on theand the issuer has established appropriate nature of the issuer’s business. This is becauseprocedures. unnecessary delay can be caused to the timetable where significant eligibility concerns arise late inThe UKLA maintains a list of approved sponsors the IPO process.and conducts supervisory activities in order toensure that the list of sponsors contains only those Issuers seeking a Premium Listing of equity sharesfirms that meet the eligibility criteria for a sponsor. will be required to comply with the moreFor issuers that are seeking a Standard Listing, the substantive eligibility requirements that areUKLA has no preference as to whom the main imposed by the super-equivalent parts of thepoint of contact should be, although it should be Listing Rules, in addition to those requirements insomeone that is reasonably knowledgeable about the Listing Rules based entirely on EU law. Forthe UKLA and its processes. commercial companies, these additional requirements include the requirement for a cleanTo start the eligibility process, the UKLA generally three-year track record of operations, and theexpects that a letter is submitted detailing the requirement for a clean working capital statementissuer’s compliance with the applicable eligibility for at least the next 12 months. For investmentThe role of the UKLA Page 15
  15. 15. entities, these requirements include an additional The prospectus can be published once it has beendegree of regulation in relation to the corporate formally approved by the UKLA. The actual timinggovernance of the issuer. Overseas issuers wishing of that approval will depend on the issuer’s choiceto comply only with the minimum standards applied of issuance method – for example, if the issuanceby the EU Directives can apply for a Standard involves a retail offering then approval andListing of either equity shares or GDRs. The UKLA publication must occur sufficiently in advance ofhas recently also extended the Standard Listing the beginning of the offer. A prospectus relatingcategory to UK issuers of equity shares which only to an introduction where no offer to the publiccould previously only have had a Premium is made may be approved as little as 48 hours prior(formerly ‘Primary’) Listing. to admission to listing.Prospectus review and approval Listing ParticularsAn admission of securities onto the Official List Although no prospectus is required for theand the Main Market of the London Stock admission of securities to unregulated marketsExchange requires the production of an approved such as the Professional Securities Market (theprospectus. As the UKLA is the UK’s competent ‘PSM’), the UKLA does require Listing Particularsauthority for the purposes of the Prospectus for the admission of those securities to listing onDirective, it typically approves prospectuses the Official List. In these cases, the process forproduced during an IPO. reviewing the document, and the content requirements, are very similar to the requirementsAlthough final confirmation of an issuer’s eligibility for a prospectus. The principal difference is thatcan only be given once its prospectus has been the financial information in a prospectus must beapproved, the UKLA will generally try to resolve prepared in accordance with IFRS or anany major eligibility issues prior to starting its equivalent GAAP. In the case of Listingreview of an issuer’s prospectus. This review Particulars where securities are to be admitted toinvolves an iterative process of reviewing and the PSM, the financial information can becommenting on drafts of the prospectus until the prepared in accordance with local standards.UKLA is satisfied that all applicable rules havebeen complied with. The number of drafts Passportingnecessary to reach this point will depend on the An overseas issuer may also seek to passport ontocomplexity of the issues and the quality of the a UK-regulated market, using a prospectus thatsubmissions. By way of example, many large IPOs has been approved by another competentcan involve the review of five or more substantive authority. Although in these circumstances thedrafts for one reason or another. UKLA will rely upon the passport to satisfy the requirement for an approved prospectus, it will stillThe UKLA seeks to comply with its published separately assess the issuer against the relevantservice standards for the document review and eligibility requirements. As part of this process, theapproval process, and aims to provide comments UKLA reviews the issuer’s proposed prospectus toon an initial draft of a new applicant prospectus help in its assessment of eligibility, so again thewithin 10 working days, and comments on each UKLA recommends that an issuer makes contactsubsequent draft within five working days. On sufficiently early in the process, and certainlyaverage, the review and approval of a prospectus before the prospectus has been approved by thetakes around 6-8 weeks for an IPO. home competent authority.Page 16 The role of the UKLA
  16. 16. Post-IPO interaction with the UKLA l Timetables – the UKLA staff (or ‘readers’)l DTRs – a listed issuer must comply with the allocated to a particular case will typically be DTRs on an ongoing basis, as failure to working on a large number of transactions at comply with these rules may result in the any one time. Whilst the UKLA makes every suspension of the listing of its securities. The effort to accommodate tight timetables it UKLA has a team dedicated to monitoring cannot deal with every issue immediately or issuers’ compliance with the DTRs, and to meet unrealistic timetables. Complex issues providing guidance on these rules on a real- will need time for proper consideration prior time basis. to resolution and therefore the UKLA alwaysl Prospectus requirements – if the issuer advises that such issues should be brought to seeks admission of further securities of the its attention as early as possible. same class it will be required to produce a l Helpdesks – the UKLA offers several prospectus, unless an exemption applies. different helpdesks to provide guidance on Exemptions include, among other things, the the Listing Rules, Prospectus Rules, and the issue of shares under employee share DTRs. This enables complex issues to be schemes and bonus issues. The UKLA would discussed and agreed prior to the submission typically be required to approve any future of documents, or in relation to significant prospectus. transactions (Tel: +44 (0)20 7066 8333).l Significant transactions – if the issuer has a Premium Listing of its equity shares, it will be required to consider whether any significant transaction that it undertakes will need announcement or, if it is of sufficient size, shareholder approval. Lower size thresholds are applied if the transaction is being undertaken with a related party such as a director or substantial shareholder. The Listing Rules include rules governing the disclosure requirements in circulars where shareholder approval is sought, and also clarify which circulars require UKLA approval.The role of the UKLA Page 17
  17. 17. A summary of the key differences between Premium and Standard listings Premium – Standard – Standard –Key eligibility criteria Equity Shares Shares Depositary ReceiptsFree float 25% 25% 25%Audited historical financial Three years or such Three years or such Three yearsinformation shorter period shorter period75 per cent of applicant’sbusiness supported by revenue- Required n/a n/aearning record for the three-yearperiodControl over majority of the Required n/a n/aassets for the three-year periodRequirement for clean Required n/a n/aworking capital statementSponsor Required n/a n/aKey continuing obligationsFree float 25% 25% 25%Annual financial report Required Required RequiredHalf-yearly financial report Required Required n/aInterim management statements Required Required n/aEU-IFRS or equivalent Required Required RequiredUK Corporate Governance Code Comply or explain n/a n/aModel Code Applies n/a n/a As required by relevantPre-emption rights Required n/a company lawSignificant transaction Rules apply n/a n/a(‘Class tests’)Related-party transactions Rules apply n/a n/a 75 per cent No shareholder No shareholderCancellation shareholder approval approval required approval required requiredThis list is not exhaustive and should be read in conjunction with the FSA Handbook (Listing Rules, Prospectus Rules andDisclosure & Transparency Rules).Page 18 The role of the UKLA
  18. 18. Preparing for an IPOJohn Woolland and David Seal UBS Investment Bank
  19. 19. AdvertisementPersonalwealthmanagementAt UBS Wealth Management we Drawing on the expertise of the UBS opportunities, blending traditional asset classes with private equity, hedge funds, commodities and real estate (where suitable to the client). UBS provides brokerage services, foreign exchange execution and strategy, collateral backed lending and whole-of- market advice. Where there is a need for provides advice on structuring personalMost people who IPO a business want and corporate assets, pensions optionsto realise part of the value in cash. A and succession planning, with full back-higher proportion of their assets may up at every stage of be in stocks or shares. Early wealthmanagement advice can help the owners For more information about UBS Wealthextract and maximise the value of the Management please contact Michaelinvestments they have built up. Bishop on +44-20-7568 9587.
  20. 20. Preparing for an IPOInitial public offerings (‘IPOs’) are among the most allowed to list on a market. Unsurprisingly, achallenging transactions that a business can number of the UKLA’s requirements coincide withundertake. The decision on whether to list a the attributes which investors are looking for in acompany’s shares on a public market is a company. The precise regulatory requirements aresignificant one; obtaining a public quote is a major covered in the chapter ‘The legal framework for anmilestone in any company’s life. The process of IPO’ on page 31. Areas such as a demonstrablegoing public is time-consuming, but it is an trading record and appropriately experiencedopportunity for a company to critically examine directors clearly help to satisfy both the regulatorsitself. A company, its management and its owners and the potential shareholders. Ultimately, theare likely to be in the public eye to a much greater ability to meet the market’s commercialextent than before. expectations is crucial.A company’s decision to launch an IPO must be For management and owners, an IPO may alsobased on a realistic assessment of its business, its crystallise the need to examine their tax planningmanagement resources, its stage of development and personal wealth management. This should beand its prospects. Public ownership offers addressed early to avoid distraction during thesignificant advantages, such as access to the final, and often hectic, few weeks of the IPOpublic equity and debt markets to finance growth process.and strengthen a company’s financial position, aswell as the creation of an open market for a Pre-IPO preparationcompany’s shares. However, a company will face Businesses often begin their preparations forheightened scrutiny and greater demands on its becoming public companies well before they launchmanagement. the IPO process. Typically, pre-IPO preparations take four to six months, but they can takePlanning is a key element in any IPO. In order to considerably longer. Advance preparation is a keyavoid unnecessary delays and distraction, which success factor that allows for a smooth andcould be costly, management should evaluate in efficient execution process and the ability to takedetail how it will commit adequate resources to advantage of market the pressing deadlines of an IPO process. Management teamThe run-up to a company seeking a listing on the A company’s management team will need toMain Market can be broadly divided into two explain the business, its strategy and prospects tophases – pre-IPO preparation and the IPO process investors, and demonstrate knowledge of theitself. Pre-IPO preparation includes the critical sector, as well as its challenges, in order to gainreview of a company’s business plan and growth the support and confidence of the market. Theprospects, assessing the management team, directors of a company will be accountable to itsappointing an appropriate board, tightening new and existing shareholders for the performanceinternal controls, improving operational efficiency of the business when it is a public company.and resolving issues that may adversely affect the Therefore, as a company prepares for its IPO itlisting early on. may need to ensure that its management has sufficient depth and breadth.The United Kingdom Listing Authority’s (‘UKLA’)Listing Rules set the specific regulatory Business planrequirements that a company has to meet to be For the purposes of an IPO, a company needs aPreparing for an IPO Page 21
  21. 21. comprehensive business plan that sets out its existing shareholders (a primary offering)products, markets, competitive environment, l existing shareholders selling their shares tostrategy, capabilities and growth objectives. new or other existing shareholders, ie noCompanies engaging in successful IPOs tend to additional capital is raised for the business (ahave a clearly defined vision for the future secondary offering); orperformance of the business that can be l a combination of both.articulated credibly, clearly and quantifiably. If existing shareholders intend to sell in the IPO, itCompanies that are in mature or shrinking is helpful to know the likely quantum early so thatindustries, operate within small markets, or the IPO can be planned accordingly.provide a narrow range of products to a small andhighly specialised customer base may be Use of proceedsunsuitable for an IPO. If a company is raising new capital, the use of proceeds should be clearly articulated and in lineFinancial performance with its strategy. In many cases, the proceeds willA company should expect to show investors a be used to either pay down debt, fund capitalconsistent pattern of top- and bottom-line growth investment or to provide working capital forand a sound balance sheet post-IPO. For a company expansion.seeking a Premium Listing, its financial statementsneed to adhere to International Financial Reporting In determining the quantum of new capital, aStandards (‘IFRS’). Further technical requirements company needs to consider its future capitalof the financial information required to be included structure and its ability to pay dividends at anin a prospectus are covered in the chapter appropriate level.‘Accounting requirements and advice through theIPO process’ on page 43. Financial controls The market expects companies to have properGrowth prospects financial controls in place. In addition, the UKLABefore investing in a company, most investors requires the sponsor to provide writtenwant to feel confident about its future growth confirmation of the adequacy of a company’sprospects. A company should develop a financial financial controls. Companies contemplating amodel that quantifies its business plan and listing will therefore need to ensure that they haveexpected growth. The sponsor (see page 26) may systems in place to ensure a flow of accurate,work closely with management and external timely information.consultants/experts to develop this model and willconduct due diligence on the assumptions behind Boardthe model and stress-test the projections. A public company needs to satisfy corporate governance requirements. The principles are setRaising funds? out in the UK Corporate Governance Code (theThe majority of listings take place with a ’Code’) and a company is required to comply withsimultaneous share offering to investors. This can the Code, or explain why it has not, in itstake the form of: prospectus. It is typically necessary to appoint new members to the board who are independent and tol raising additional capital for the business by form new committees (eg audit and remuneration). issuing new shares in a company to new and Identifying suitable candidates can take aPage 22 Preparing for an IPO
  22. 22. significant amount of time. Potential directors an IPO is an opportunity to realise or transfer partoften want to be involved in the IPO process at an of their wealth. Early planning of their personal taxearly stage. The sponsor frequently assists in the and financial affairs is advisable to avoid delay orrecruitment and assessment of potential board difficulty in the final stages of an IPO.members for a company seeking a listing. Controlling shareholdersGroup reorganisation Potential investors may be influenced, negativelyThe reorganisation steps undertaken in preparation or positively, by the presence of a controllingfor an IPO will vary, depending on the existing and shareholder. A company should assess what willintended group structure. One of the key steps is happen with such shareholders post an IPO, iedetermining the jurisdiction of incorporation of the whether they will sell down some or all of theirlisting entity. At IPO it is essential to ensure that holdings, continue to have board representation orthe group holds all assets, intellectual property and maintain veto rights on certain company decisions.contractual rights necessary to carry on its In most situations, any special rights will bebusiness operations. Part of the group unwound and, where appropriate, a relationshipreorganisation may involve their transfer where agreement may be entered into as part of the IPOthey are currently held by related parties outside process to avoid potential future conflicts ofof the group. interest.Change may be necessary to optimise a group’s Related-party transactionstax position, or to remove businesses or assets Any internal transactions, compensationthat are not part of the group to be floated. For arrangements and relationships involvingexample, company-owned horses, boats and so on management or the board that might beare unlikely to be appropriate for a quoted appropriate for a private company but improper forcompany. a public company must be eliminated. A company should therefore consider whether any outsideDetermine employee and management affiliations will be negatively perceived by thecompensation and incentive plans market.As part of the IPO process, many companiesreview the amount of equity owned by their top Investor relations (‘IR’)executives and employees. Additional equity IR is the term used to describe the ongoing activityoptions or other incentives at the IPO may be of companies communicating with the investmentgranted to increase management and employee community. While the communication that publicownership and to align incentives from the IPO companies undertake is a mix of regulatory andwith a company’s new investors. Remuneration voluntary activities, IR is essentially the part ofconsultants can advise on the structure of any public life that sees companies interacting withschemes, as well as trends in the appropriate existing shareholders, potential investors, researchindustry. The recommendations should be analysts and journalists. Larger companiesreviewed by the sponsor and bookrunner(s) to frequently create a separate IR function to meetensure that the awards are in line with market the demands for information and to assist in allexpectations. communications with the market. Please refer to the chapter ‘Managing the company’s profile’ onWealth management and financial planning page 69 for more detail on this topic.For many managers and owners of a business,Preparing for an IPO Page 23
  23. 23. IPO timetable Private execution phase Week 1 2 3 4 5 6 7 Process Execution kick-off meeting ⧫ Weekly meeting/conference calls ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ Due diligence Long form report Preparation of audited numbers Valuation and capital structure Forecasts finalised ⧫ Working capital report Valuation discussion Capital structure discussions Agree offer size Documentation Draft prospectus Prospectus filed with UKLA ⧫ UKLA review prospectus Publish pathfinder prospectus Publish final prospectus Preparation of placing agreement Auditors’ comfort letters Marketing and roadshows PR process Analysts pres’n prepared and delivered Research prepared and reviewed Prepare and rehearse roadshow Announce intention to float Publish research Pre-marketing Price range set Roadshow Bookbuilding Pricing/allocation Settlement and closing Stabilisation Week 1 2 3 4 5 6 7 Active IPO executionPage 24 Preparing for an IPO
  24. 24. Public execution phase8 9 10 11 12 13 14 15 16 17 ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ +30 days8 9 10 11 12 13 14 15 16 17 Active IPO executionPreparing for an IPO Page 25
  25. 25. IPO process Private phase Public phase Preparation Preliminary Analyst Investor Bookbuilding Aftermarket of the IPO valuation presentation education • Appoint all • Set initial • Preparations at • Announcement • Management • Admission advisers valuation range advanced stage of intention to roadshow float (’AITF’) • Stabilisation • Kick-off meeting/ • Existing • Due diligence • One-on-one weekly meetings shareholder views substantially • Publication of meetings • Research on price, complete research • Due diligence size, structure • Analyse demand • Investor relations • Analyst briefing • Target • Prepare key investors • Continuing prospectus and obligations other legal • Monitor market documents • Analyse feedback • Develop investment case • Refine size, valuation • Corporate housekeeping Ensure basic Decide to proceed Decide to proceed Decide to launch Price, sign placing preparedness of with analyst with pre-marketing (size, price range agreement and Life as a Plc company for the IPO presentation decision) allocate Key objectives High-quality Stable, rising Liquid trading IPO price maximised shareholder base aftermarket and quality research coverageThe IPO Process extended period. Since acting as a sponsor requiresThe IPO process involves both a private and public a high degree of commitment, the appointmentphase (see ‘IPO Process’ chart above). process is often ‘two-way’. Hence, the sponsor will also want fully to understand a company’s businessPrivate phase before agreeing to take on the listing.Select the sponsor The sponsor has responsibilities both to theA company seeking a listing is required to appoint a company and to the UKLA. For example, thesponsor. The sponsor leads a company’s team of sponsor is required to submit an eligibility letter toprofessional advisers and coordinates their roles to the UKLA setting out how the company satisfies aensure a company successfully completes the listing number of the Listing Rules. The sponsor is alsoprocess. A full list of approved sponsors and their obliged to consider whether “the admission of thecontact details is available on the Financial Services equity shares would be detrimental to investors’Authority (‘FSA’) website: interests”.Often, companies approach the appointment of Appointment of other professional advisersadvisers by holding ‘beauty parades’ with a series In addition to the sponsor, a company needs toof sponsors, asking each about their expertise, assemble a number of other advisers to guide itexperience and fees, and getting a feeling for what through the process. This includes theit would be like to work closely with them over an bookrunner(s), lawyers (one firm advising thePage 26 Preparing for an IPO
  26. 26. company and another firm to advise the sessions will take place on various sections of thesponsor/bookrunner(s)), accountants, financial document. From a marketing perspective, thepublic relations advisers, remuneration prospectus outlines a company’s strengths,consultants, registrars and financial printers. strategy and market opportunity. The precise areasExperts in valuations or sector consultants may that must be covered in a prospectus, such as thealso be appointed. inclusion of risks relating to a company, are covered in the chapter ‘The legal framework for anIPO timetable IPO’ on page 31.See ‘IPO timetable’ chart on pages 24 and 25. The sponsor is responsible for submitting drafts ofAn IPO can generally be completed within 15 to 20 the prospectus to the UKLA. The UKLA is allowedweeks. The exact timetable will vary depending on 10 business days after the first submission tomarket conditions, the scope and complexity of the respond to the sponsor with a comment sheet. Thedeal and a range of other factors. company and its advisers will then revise the prospectus so that the sponsor can submit anKick-off meeting updated draft with the UKLA for a further review.A kick-off meeting is usually held in person and For the second and subsequent drafts, the UKLAinvolves discussions to make sure that the working responds via its comment sheet within five businessgroup fully understands the structure of the days. As every transaction is unique, it is impossibletransaction, the process, timetable and all other to predict exactly how long this process will take.relevant issues. The sponsor will usually provide a However, as a rule, the timeframe is approximatelydetailed organisation book that goes through all six to eight weeks from initial submission of thethese issues in detail. prospectus to the UKLA (approximately three to four submissions) to preliminary approval ahead ofWeekly meetings launching the transaction, often with a PathfinderIn order to ensure that the process remains on prospectus (see page 29).track, the sponsor is likely to organise weeklymeetings/conference calls. These meetings give Due diligencean opportunity for all parties to be kept fully up to The overall purpose of due diligence is to ensuredate on the process and for any key issues to be the accuracy, truthfulness and completeness of araised. company’s prospectus, and to understand any issues associated with the company. While eachProspectus – UKLA process professional adviser performs a different role inBefore a company can be listed, the sponsor must this process, the sponsor/bookrunner(s) will focusget a company’s prospectus approved by the on the diligence of a company’s operations,UKLA. Although the prospectus is a legal management, financial prospects, historicaldocument, it is also a marketing tool to help to sell performance, competitive position and businessshares to potential investors. A company’s lawyers strategy. The advisers will also look closely atusually take the primary responsibility for drafting factors such as a company’s suppliers, customers,the prospectus although the creditors and anything else that might have asponsor/bookrunner(s) assist a company in bearing on the offering or viability of a company ascrafting the appropriate marketing story. The a public company and on the accuracy anddrafting of the prospectus takes several weeks and completeness of the prospectus.will involve all advisers. A number of draftingPreparing for an IPO Page 27
  27. 27. Due diligence comprises many interrelated l litigationprocesses. Business due diligence is conducted l compliance with laws and regulationsmainly by the sponsor and bookrunner(s) and is l title to principal assetsdesigned to verify a company’s business strategy l corporate structureand potential for future growth. As part of the l debt covenantsinformation and fact-gathering process, the l environmental issuessponsor/bookrunner(s) may conduct onsite l intellectual property.inspections, particularly for manufacturing andproperty-intensive businesses. They may also Legal restructuring, documentation andinterview company officials, suppliers and agreementscustomers to understand fully every aspect of a During this stage, a company’s management,company’s business and its financial statements. sponsor and lawyers work together to draft theThe knowledge obtained will later help the necessary legal documentation and implement anysponsor/bookrunner(s) and management to craft a required corporate restructuring. The collectivestrong, consistent message that can be used purpose of these documents is to assure investorsduring the marketing process. and regulators that the IPO has been objectively vetted for gaps, irregularities, misleadingFinancial due diligence is geared toward confirming statements and other potential problems. Thea company’s historical financial results and documents include:understanding its operational and financialprospects. Key areas of focus include: l the placing agreement (if funds are being raised)l audited and interim financial statements l comfort lettersl capital structure l legal opinionsl breakdown of historical financials by business l lock-up agreements.l detailed review of budgetsl meetings with auditors Continue to prepare a company to become al budget versus actual financial statements public companyl accounting policies and auditor management The sponsor/bookrunner(s) will assist a company letters on a number of matters critical to itsl use of proceeds transformation into a public entity. These include:l financial control systemsl working capital requirements l discussion of valuationl debt covenants. l development of investment case l the composition of the board and itsThe financial due diligence workstreams are committeescovered in more detail in the chapter: ‘Accounting l internal controlsrequirements and advice through the IPO process’ l prevailing market conditions.on page 43. Marketing strategyLegal due diligence is conducted by the solicitors The bookrunner(s) and sponsor will set up aand is the process of verifying a company’s legal comprehensive marketing plan to target specificrecords, material contracts and litigation. Key investors.areas of focus include:Page 28 Preparing for an IPO
  28. 28. Analyst presentationIt is common practice for senior management to Considerations for overseas companiesmeet with the research analysts employed by the For inclusion in the FTSE UK Index Series, it isbookrunner(s) before the IPO and for such important for overseas companies to note that:analysts to publish pre-deal research on acompany before the start of the roadshow. To l a company not incorporated in the UK will beprepare fully for the presentation, several required to publicly acknowledge adherencemeetings and rehearsals with senior management to the principles of the UK Corporateare usually required. Material information must be Governance Code, pre-emption rights and theincluded in the prospectus, but considerable UK Takeover Code, as far as is practical; andadditional information will be provided to the l a company not incorporated in the UK mustanalysts to ensure a full understanding of a have a free float of not less than 50 per’s business and sector. Details in relation to the FTSE UK Index SeriesPublic phase are covered in the chapter: ’London: a uniqueThe main components of the marketing process investment opportunity’ on page 87.are outlined below and explained at greater lengthin the chapter: ‘Generating and capturing investor investors using the research they have written.demand during an IPO’ on page 57. This takes place on larger IPOs and is in advance of the management roadshow.Announcement of Intention to Float (‘AITF’)The first time that a company provides specific Management roadshow presentationconfirmation of its IPO plans is in a public The management roadshow is a series ofannouncement known as the AITF. At this stage meetings with potential investors. It typicallythe marketing process begins in earnest, often includes a formal presentation by the CEO andwith publication of research by analysts connected CFO outlining the company’s businessto the bookrunner(s). Larger companies are likely operations, financial results, performance,to have a carefully developed media PR campaign markets, products and services. As with theto promote knowledge of the business and analyst presentation, the role of themanagement to the media. sponsor/bookrunner(s) in this workstream includes assisting a company in the preparationPathfinder prospectus of the presentation and organising rehearsals.At this stage in the process, a draft prospectus(also referred to as a Pathfinder prospectus) is Completion and pricing meetingoften made available to prospective investors. This Following the management roadshow and thedocument is an almost final version of the pricing of the IPO, a completion meeting takesprospectus. Apart from details of the precise size place where all relevant documents and paperworkof the IPO and the subscription price of the new are reviewed in their final form by both theshares to be offered (which are unlikely to be directors and their advisers. The exchange of newfinalised at this stage), it should include all other shares for funds typically occurs three businessrelevant details. days after pricing. During this three-day period, the shares may trade on a ‘when issued’ basis,Investor education meaning that the bargains are not settled until theInvestor education is the process whereby the listing becomes effective.analyst(s) referred to above market the story toPreparing for an IPO Page 29
  29. 29. Impact Day companies and certain financial companies. InThis is typically the day after the completion some cases, expert reports will be required (eg tomeeting and is the day on which the availability of report on oil and gas reserves).the prospectus is advertised and the listing isofficially announced to the market. Occasionally, companies may be able to IPO when they do not meet the three-year rule onUKLA final approval financial statements, such as when they areThe prospectus must be submitted in final form, seeking a Standard Listing. The requirements forwhich will include the relevant pricing and size listing should be discussed in advance with bothinformation, to the UKLA for final approval. the sponsor and the London Stock Exchange or the UKLA.The UKLA also requires any supportingdocuments, including directors’ service contracts, Summaryaudited accounts and all reports referred to in the When contemplating an IPO, a company’sprospectus, to be delivered on the date of management and its owners should notapproval. The UKLA only approves the prospectus underestimate the significant time, resources andon the day it is dated and published. planning required in listing a company on the Main Market.Applications for listing and tradingAt least 48 hours before admission, the formal There are two distinct stages: pre-IPO preparationapplication for a listing is submitted to the UKLA. and the IPO process itself. It is imperative for theAt the same time, a formal application for success of an IPO that a company undertakesadmission to trading is submitted to the Exchange. sufficient pre-IPO preparation to ensure it is suitable to become a public company.AdmissionThis is the point at which a company’s shares are To assist in the planning process, a sponsor, which‘admitted’ to listing and the shares are traded is usually an investment bank, should bepublicly on the Main Market. The listing is officially appointed. A sponsor is able to advise a companygranted by the UKLA in conjunction with through its pre-IPO preparation and will, duringadmission to trading being granted by the London the IPO process, lead a company’s team ofStock Exchange. professional advisers and coordinate their roles to ensure a smooth listing process.Specialist companiesSpecific rules apply to a variety of businessesincluding investment companies and resourcePage 30 Preparing for an IPO
  30. 30. The legal framework for antitle Section IPO Simon Witty and David Cotton Freshfields Bruckhaus Deringer LLP
  31. 31. An IPO is just the beginning.In 2009, we helped our clients complete 14 initial public offerings(IPOs) globally, raising in excess of $15bn. We also completed58 further issues, raising in excess of $62bn.We’re proud of those statistics, but they’re only a part of the story.We cover every kind of mandate and, because we workhard to maintain long-standing client relationships, we get towork with clients through the good times and the challenging.Freshfields Bruckhaus Deringer currently acts for over a third of theFTSE 100 and those clients know that, when the going gets reallytough, we are the law firm they can turn to for business-focusedadvice on the most complex challenges.With over 2,500 lawyers in 27 offices, we are able to offer our clientsthe best legal advice for their business – wherever they need it,whatever the jurisdiction and through every stage of development.If you would like more information please contact any, Freshfields Bruckhaus Deringer LLP is proud to be the official legal services provider to the London 2012 Olympic and Paralympic Games.
  32. 32. The legal framework for an IPOThis chapter provides an insight into the following (the ‘Official List’), and then for the Exchange toareas: admit those shares to trading on the Main Market.l regulations governing the Main Market and In order to obtain admission to the Official List, a an overview of the relevant rulebooks company must meet the requirements of thel eligibility criteria for companies seeking Listing Rules and have published, or passported Premium and Standard Listings into the UK, an approved prospectus. Thel contents requirements for the prospectus requirements of the Listing Rules will varyl considerations for companies located outside according to the type of listing being sought – a the UK Premium Listing or a Standard Listing. In order tol continuing obligations. be admitted to trading on the Main Market, in addition to obtaining admission to the Official List,The legal and regulatory basis of a company must comply with the Exchange’s ownthe Main Market regulations as laid out in its Admission andThe Main Market of the London Stock Exchange Disclosure Standards (‘A&DS’).(the ‘Exchange’) is governed by EU law, UK Actsof Parliament, regulations drawn up by the Eligibility for joining theFinancial Services Authority (‘FSA’) and the Official List/Main MarketExchange’s rules. For shares to be admitted to the Official List and to trading on the Main Market, a company and theEU law, through various directives and regulations, shares it issues must satisfy the relevant Officialprovides the minimum standards (applicable EU- List and the Exchange’s eligibility requirements. Awide) that apply to the Main Market. The UK has, company also needs to bear in mind, and ensurewhere necessary, implemented these directives that it is able to comply with, the continuingand regulations through the Financial Services and obligations to which it will be subject followingMarkets Act 2000 (‘FSMA’) and through the listing and admission. These are described onListing Rules, the Prospectus Rules and the page 39 and following.Disclosure and Transparency Rules. Among otherthings, FSMA gives statutory powers in relation to UKLA eligibility requirementslistings and listed companies to the FSA, which The UKLA eligibility requirements are found in thealso acts as the UK Listing Authority (‘UKLA’). Listing Rules. There are requirements that apply toThe UKLA is also the UK’s ‘competent authority’ all listings, as well as additional requirements thatfor the purposes of EU legislation. Also relevant to apply only to Premium Listings. One suchinterpreting and applying the relevant EU and UK requirement that applies to companies seeking alegislation are guidance published by the Premium Listing is that they must appoint aCommittee of European Securities Regulators ‘sponsor’, which will generally be an investment(‘CESR’), materials published by the FSA/UKLA bank, to advise them on the Listing Rules and(eg LIST!) and the UK Corporate Governance Prospectus Rules and to give confirmations as toCode (formerly the ‘Combined Code’), which is their compliance with those rules and certain otherpublished by the Financial Reporting Council. matters to the UKLA. Although a sponsor is required to provide advice to the company, itsAccess to the Main Market is a two-stage process: primary responsibilities and obligations are owedfirst it is necessary for the UKLA to admit a to the UKLA. The Listing Rules contain provisionscompany’s shares to the official list of the FSA as to the independence of the sponsor andThe legal framework for an IPO Page 33
  33. 33. identifying and managing conflicts of interest ‘Free-float’ requirementbetween its relationship with the company and its In order to obtain a Premium or Standard Listing,role as sponsor (it is, for example, customary for a at least 25 per cent of the entire class of sharessponsor also to be a bookrunner or underwriter in must, by the time of their admission to listing, bean offering). See the chapter ‘Preparing for an held by ‘the public’ in one or more EEA states. TheIPO’ on page 19 for more detail on the role of the amount of share capital held by the public is alsosponsor and the chapter ‘Generating and capturing known as the ‘free-float’. Generally speaking,investor demand during an IPO’on page 57 for shares are deemed held by the public unless theymore information on the role of the bookrunner(s). are held by one or more of the following: (i) directors of the company or group members;Eligibility requirements that apply to both (ii) persons connected with directors of theStandard and Premium Listings company or group members; (iii) trustees of any group employee share scheme or pension fund; (iv)Chapter 2 Listing Rules requirements a person who has the right to nominate a director;Chapter 2 of the Listing Rules contains basic and/or (v) persons who individually or acting inrequirements that, subject to some modifications, concert have a 5 per cent or greater interest in theapply to listings of all types of securities. share capital.The first set of requirements relates to legal matters This rule is to ensure that there are sufficientand these require that the company is duly smaller and non company-related shareholders forincorporated, validly existing and operating in the market in the shares to operate properly – thatconformity with its constitution and that its shares is, for there to be sufficient liquidity in the shares.comply with the laws of the company’s place of Given this, the UKLA does sometimes allow aincorporation, are duly authorised and have all smaller free-float than 25 per cent – for instance,necessary statutory and other consents. The shares where there are shares held outside the EEA thatmust also be admitted to trading on a recognised would be capable of being traded, or where theinvestment exchange, such as the London Stock company’s market capitalisation is so large that aExchange (in practice, the listing and admission to smaller percentage might still allow for atrading will take place simultaneously), be freely sufficiently liquid market in the stock.transferable, fully paid and free from any liens orrestrictions on the right of transfer (save for failure This rule is of particular interest in an IPO whereto comply with a statutory notice requiring the existing owners intend to maintain ainformation about interests in shares). Neither usual substantial majority stake following the listing, asselling restrictions imposed as part of an offering it will limit the number of shares they can retainnor a contractual lock-up arrangement would be post-IPO, especially if there is also a ‘strategic’considered a bar on transferability for these investor with more than 5 per cent.purposes. In addition, all the shares of the sameclass as the listed shares must be listed and the Eligibility requirements for a Premium Listingshares must have a minimum market capitalisation The eligibility requirements for a Premium Listingof £700,000. Finally, a prospectus relating to the are found in Chapter 6 of the Listing Rules (‘LR6’).shares must be approved by the FSA (or by another As indicated above, these go beyond the basicEEA state competent authority and passported into requirements of the EU legislation.the UK) and published.Page 34 The legal framework for an IPO
  34. 34. Audited historical financial information after IPO, it is customary to put in place aA company seeking a Premium Listing must relationship agreement between thosegenerally have published or filed accounts for at shareholders and the company to assist inleast the last three financial years, audited without demonstrating its operational independence.modification (which will generally mean withoutqualification), and the most recent must be for a The requirements relating to the nature andperiod ended not more than six months prior to the duration of the company’s business activities aredate of the prospectus. This requirement will often intended to enable investors to make a reasonabledrive the IPO timetable and will necessitate the assessment of the future prospects of thepreparation of interim audited accounts where the company’s business. Accordingly, an issuer mayexisting annual accounts are not sufficiently recent. not satisfy these provisions if its strategy, business or financial performance in the future is expectedIn addition to the above requirements, the auditors to be significantly different from that in its three-must be independent of the company and the year track must obtain written confirmation fromthem that they comply with the relevant Working capitalaccounting and auditing independence guidelines. A company seeking a Premium Listing is required to satisfy the FSA that it has sufficient working capital75 per cent of the business being supported by for at least the next 12 months. On a practical level,revenue-earning record, control of assets and this is generally satisfied by the working capitalindependence statement to this effect included in the prospectusAt least 75 per cent of the business of a company and the sponsor’s declaration to the FSA. Byseeking a Premium Listing must generally be contrast, an issuer seeking a Standard Listing needsupported by a revenue-earning record covering the not have sufficient working capital for the next 12period for which accounts are required under LR6 months, although if not it would need to explain in– namely, at least three years. In practical terms, its prospectus how it intends to procure suchthis means that a company that has made major capital. To support the working capital statementacquisitions (amounting to 25 per cent or more of and, where applicable, the related declaration, theits business) over the financial track record period company and its accountants will prepare a workingmust include financial information for these capital report. The sponsor will review this reportbusinesses both before and after their acquisition. and conduct other related due diligence.The form this information will take will be Warrants or options to subscribedetermined in accordance with the rules relating to The total of all issued warrants and options to‘complex financial histories’ (rules contained, subscribe for equity share capital of the companyamongst other places, in Regulation 211/2007, must not exceed 20 per cent of its issued sharewhich amended the Prospectus Regulation capital.809/2004 EC (the ‘EU PD Regulation’)). Mineral companies and scientificA company must also have controlled the majority research companiesof its assets for at least the three-year period for Mineral companies and scientific researchwhich accounts are required and be carrying on an companies are subject to additional eligibilityindependent business as its main activity. Where requirements, although they are not required to haveshareholders continue to own a substantial stake a three-year, revenue-earning, audited track record.The legal framework for an IPO Page 35