Summary Consolidation Notes - Equity Finance (Accelerated LPC)

SGS 1 – FLOTATIONS I: PREPARATION FOR LISTING
whether MM/AIM listing based on co info; advise co on changes to ensure suitability asapplicant for premium listing (ignore standard listings)
NB. SGS activities v relevant to assessment  REMEMBER TO GIVE ADVICE TO THE CLIENT
 When you go through the SGS activities, look at them and think: if I have a question like this, would I have a structure?
 Share capital reorganisation, converting from private to PLC? Restrictions of transfer on shares? Market cap? Public hands?

CA 2006
 Sections 21, 77, 90, 91, 92, 94 to 96, 586, 755 and 763 CA 2006
 LRs 2.2.4R, 6.2.1R, 6.2.4R, 6.2.6R, LR 6.3.1R, 6.4.1R and 6.7.1R
 LR 7 (in particular LP 1 and PLPs 5 and 6).
Corporate Governance
1. LR 9.8.6R(5) and (6);
2. DTRs 7.1.1R, 7.1.1AR, 7.1.3R, 7.1.7G, 7.2.1R to 7.2.4G;
3. from the UK Corporate Governance Code (July 2018) (the “UKCGC”):
4. Principles F and G, Provisions 9 to 11 inclusive, Principles J, K and L, Provision 17, Principle M, Provision 24 and footnote 8, Principles
P, Q and R, Provisions 32 and 39; and
5. s.273 CA 2006.
Share capital
a) LRs 2.2.3R, 2.2.7R, 2.2.9R, 6.14.1R to 6.14.3R and 6.14.5G; and
b) Sections 551, 561, 570 and 618 CA 2006.

[What are the listing principles]
 Listed co has to take reasonable steps to establish and maintain adequate procedures + systems + controls to enable it to comply
with its obligations as a listed co and deal with the FCA openly and be cooperative
 PLP – for premium listing:
o Take reasonable steps to enable directors to understand responsibilities or obligations as directors
o Act with integrity totwards holders and potential holders of its premium listed shares
o Treat all holders same class equally in respect of rights attaching to listed shares
[MAR]
 Behaviour wrt financial instruments including shares that are traded on a European regulated market e.g. LSE MM
 MAR 17: inside information needs public disclosure. Exceptions:
o Where immediate disclosure prejudices legitimate interests of issuer
o Delay would not mislead public
 Then if confidentiality is maintained, can delay disclosure
 DTR provides guidance supplementing MAR so is rlvt to issuers subject to MAR, Comply with both DTR/MAR
o If issuers where UK is home MS
o Shares listed on the official list

[Why seek a listing?]
 Raising finance through share issue
 Larger scale finance – need to be a public company to offer shares to the public (CA)
o Plc = technicality – can technically offer shares to public
 Want to be listed. Gives public investors confidence to invest in you – makes you saleable

Advantages of listing Disadvantages of listing
NB tend to be outweighed by the money available

Publicity Loss of control – TAKEOVER VULNERABLE, LOSS CONTROL, DILUTE OWNERSHIP / CULTURE
 Publicity (but note that  Loss of control to new investors with significant shareholdings
publicity isn’t always good and  Always vulnerable to a hostile takeover by a competitor
brand could be damaged)  Loss of control re selling company – who buys the company in the future (decision of
 Listed co has to keep investors public shareholders)
informed of financial  Diluting ownership – can’t pass resolutions on your own anymore e.g. if significant
performance, meaning institutional investor
progress closely monitered  Change of culture due to new SH vs family business

Investor confidence Time & expense
 Progress must be carefully  Listing process requires a lot of management time
monitored = good for investor o because it is complex – directors may dedicate a substantial amount of time
confidence to floatation while also running the business effectively
 Listing process is expensive
Market o Various advisers needed (+ high costs)
 Ready-made market provided, o Substantial proportion of floatation cash will be used to meet these costs 
can sell off shares
 Cf. unlisted cos = cannot trade Regulation (disclosure, reporting requirements)
shares due to lacking buyers +  Burden of disclosure and reporting requirements (info made public – problem for
employees who get ‘shares’ confidentality)
and want to realise a gain as  Failure to comply will lead to e.g. penalties/censure – e.g. must disclose half-yearly
1

, part of an incentive plan results + annual accounts
 If demand on LSE grows – can  Have to make a lot of changes to the board due to compliance wit hthe UK CGC
lead to subsequent share  May need to alter SH agreement
issues with further finance
Board changes
Cash  Investors will want directors with appropriate experience and expertise
 Injection of cash into company  But finding non-exec directors with right experience will be difficult and costly
(pay off debt or expand)
 E.g. gain new shareholders who Personal liability
are also a potential secure  Listed company directors more exposed to being sued in personal capacity
source of funding


[Advisers]
 Investment bank will generally act as e.g. undewriter/financial adviser/broker
 Need accountants, soliciters (for DD/prospectus) + e.g. PR advisers
 Sponsor
o Requirement under LR 8.2.1R + LR 8.6.2R for need for sponsor who will project manage the process of applying for listing
o Need to help put application together, satisfy that listing conditions have been met + make a dec to FCA that it has fulfilled
its sponsor duties under the Listing Rules
o FCA can supervise the sponsor LR 8.7 e.g. by requiring adhoc visits under LR 8.7.1AR + 8.7.3G

[What are listed shares?]
 You need one application to FCA to be on the Official List and one application to be admitted to trading by the LSE
 Application to FCA for admission to Official List – comply with LRs
o Need sponsor who will ensure that co + directors understand obligations and commitments in connection with listing
 Application to LSE for admission to trading
o Need to comply with LSE’s admission/disclosure standards
o No need sponsor but in practice a ‘rep’ needed to assist with application who = sponsor.
Admissions to trading + listing effective once both applications successfully processed + trading announced to RIS – LR 3.2.7G

[Conditions]
 Sponsor to make declaration that LR conditions met – LR 8.4.2R
 LR 6.2.1R(1)-(3)  need:
o Info in historical financial information needed
 LR6.3.1R(2): needs to give investors ability to make informed assessment of applicant’s business
 LR 6.4.1R + LR 6.5.4R + LR 6.7.1R

[Conditions relating to the shares]
 Duly authorized wrt co’s constitution – LR 2.2.2R
 Admitted to trading on a regulated market LR 2.2.3R
 Must be freely transferable LR 2.2.4R
 Market capitalisation of all shares to be listed must be at least £700,000
 25% of shares of the class to be listed must – no later than time of listing – be in public hands  LR 6.14.1R – 6.14.3R. AKA ‘free float’
requirement
 Whole class of shares must be listed (LR 2.2.9R)

[Listing Principles and Premium Listing Principles] – ensures spirit + letter of LRs/DTRs taken into account when considering obligations
 LP1 = listed co must take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to
comply with obligations – eg obligations under disclosure requirements (MAR 17-19; DTRs; LRs)
o LR 7.2.2G and 7.2.3G have further guidance in relation to ensure listed co’s obligation nto ensure timely and accurate
disclosure of information to market eg inside information (detailed disclosure requirements relating to disclosure of inside
info are set out in MAR Art 7)
 PLP 5 = requires all holders of same class of shares in same position to be treated equally
 PLP 6 = requires listed cos to promptly communicate information to avoid creation or continuation of a false market

[Advantages of AIM vs advantages of the Main Market] (no need to know anything further for AIM)
AIM Main Market
 Listing generally: gets a market so that the existing shareholder can sell its shares
 MUST BE PUBLIC CO
 [MUST BE Freely transferable shares] (don’t confuse with PE rights on allotment
 [Sanctions] If co contravenes its continuing obligations, may be fined or censured and/or the admission of its securities may be
cancelled/suspended

= ‘RIARTS’ = ‘LIF’

Less regulation Greater liquidity
 LRs don’t apply (cf. Main Market – applicants must compLY with LSE  Can get higher price and raise more money.
2

, Admission & Disclosure Standards, Listing Rules, Prospectus Rules, Ties in with next point
Disclosure Guidance + Transparency Rules; Class 1 transactions require  Bigger market than AIM + higher initial share
sh approval). NB. AIM do have to state whether they comply with a prices generally
corporate governance code, but in practice they comply with much
shorter codes Attracts investment
 Class 1 transactions are large transactions such that it needs SH  Regulated market status  reputation and
approval. On AIM = just disclose you’re doing this, no need for public profile better = attractive to more
shareholder approval potential buyer, attracts investment (cf. AIM
– market does not have regulated market
Fewer initial requirements status)
 As no market cap – can have small companies listed (cf. Main Market –  More people likely to sell shares due to 25%
min market cap of £700,000; 25% of applicant’s shares must be held in requirement of shares being held by public
public hands at time of admission; don’t necessarily need a prospectus)  Less risk to investors due to higher
 No ‘free float’ requirement regulatory hurdles and thus more stability

Less onerous accounting requirements FTSE benefits
 Less onerous accounting requirements (Main Market – must publish  Can be premium  FTSE which benefits
annual audited accounts no later than 4 months after end of financial from tracker funds who have to buy shares in
period to which they relate; AIM 6 months) them = ready-made market and share price
up
Less onerous ongoing reporting requirements
 Disclosure reqs. But NB. AIM companies do have to comply with MAR No broker/nominated adviser required
 inside information have to disclose.  Only have to have a sponsor (no
 Unlikely to need prospectus; easier to fall within exemptions broker/nominated adviser)

Tax reliefs Employee stock options
 No stamp duty payable on trading and other tax reliefs
Disadvantage:
No need to have a sponsor  More rules, min 700k share cap
 Don’t need to have a sponsor – statutory obligation to disclose to FCA  More onerous accounting
 But requires adviser + broker

[The process for listing]
 procedure for private co  need to follow this, before offering shares to the public

[Preparation for listing]
[Re-registration as a public co: ss.90-96 CA 2006]
 Private co cannot offer shares to public: s.755 CA
 So must re-register as plc under s 90 CA
o  Requires SR: s.90(1)
o Change NAME and ARTICLES as necessary (SR to affect changes) – ss 21 + 77(1)
 Model articles are not suitable for listed PLC, need to adapt precedent AoA for LSE MM
 listed shares must be freely transferable (see below requirement in LR 2.2.4R)
 shares must be comparable with CREST
 Minimum share cap requirements – when co is public, must have:
o minimum allotted share cap of £50,000 to satisfy s.91(1)(a) & s.763 CA
o the co’s allotted shares must be paid up to at least ¼ of their nominal value and the whole of any premium in order to
satisfy s.91(1)(b) & s.586 CA
 Documents that MP will need to submit to CH to complete this procedure:
o Application for re-registration (s.90(1)(c)) in prescribed form
 (see s.94(1) – proposed name on re-registration + proposed secretary if there is going to be one)
o statement of compliance: s.90(1)(c)(ii) (i.e. that reqs of Pt 7 CA as to re-registration have been complied with)
o Application to be accompanied by certain documents: see s.94(2)(a)-(c) including:
 Copy of SR that co should re-register as PLC
 Copy of articles as proposed to be amended
 Copy of balance sheet req under s. 92
 Corporate governance procedures must be addressed prior to admission e.g. board composition under DTR 7

[Company secretary required: ss.271-3 CA 2006]
 S.271 public co must have one
 S.273: company secretary needs certain qualifications (this is a requirement, can’t comply + explain)

[Share capital] – OR to subdivide, OR to authority to allot, SR to disapply pre-emption, BR to allot
 [Share capital reorganisation: s.618 CA 2006]



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, o Share cap of £1 shares may not work well if market value of each share is particularly high, so may to reorganise down to
1p shares (s.618(1)(a) CA 2006) by OR (s.618(3) CA 2006) – more liquidity, makes the shares more tradeable (provides for
private co to do this)  typically £2-£5!
 10,000 shares in a co worth 2m would be £200 per share  you take each £1 share and subdivide it by 100 x 1 p
shares  each 1p share is now £2, more marketable!
o May also need to pass necessary resolutions to issue new shares if doing so along with listing
 [Authority to allot]
o s.551 CA 2006: need OR
o Alloting 50 million new shares means cannot rely on s. 550
 [Disapplication of pre-emption rights]
o s.561 CA 2006: existing shareholders have right of pre-emption
o s.570(1) CA 2006: to disapply need SR/change articles
 And see below conditions under LR 2 relating to shares to be listed

[Corporate governance procedures]
 Co should ensure that it complies with the spirit of the Listing Principles and Premium Listing Principles contained in Chap 7 LRs
 Their purpose: to ensure that listed co’s ‘pay due regard to the fundamental role they play in maintaining market confidence and
ensuring fair and orderly markets’: LR 7.1.2G
 Should particularly consider the following principles:
o LP 1
 Listed co must take reasonable steps to establish and maintain adequate procedures, systems, controls to enable
it to comply with its obligations under LR/DTRs
  Further guidance in LR 7.2.2G + LR 7.2.3G:
 The co needs to have such systems and controls:
o Where it can properly identify info req disclosure in timely manner
o Any info identified is properly considered by directors + such a consideration encompasses
whether info should be disclosed
 So informal reporting systems must be formalized and procedures put in place to enable potential price
sensitive info for board to consider ASAP
o PLPs 5 & 6
 Communicate info to holders in a way to avoid the creation and continuation of false markets
 All holders of the same class of shares to be treated equally
 So need procedures ensuring:
o All inside info communicated to market FIRST before it’s disseminated informally to SH, suppliers, journalists

[Conditions for listing]
 Co and shares both must follow requirements

[Conditions relating to shares to be listed (LR 2)]
If articles are not appropriate for PLCs, it must address the following and terminate current shareholder agreements:
 (i) Must be admitted to trading on a regulated market: LR 2.2.3R
o Must be admitted to listing + trading at the same time so need both applications to be submitted together
 (ii) Must be freely transferable: LR 2.2.4R
o All transfer restrictions must be removed from AoAsand any related shareholding agreements
 (iii) Whole class to be listed: LR 2.2.9R
o So if you’ve got 2 classes, can list one class at one point and another class later on – no requirement to list all (e.g.
preference shares remain unlisted), but always list ordinary shares as a whole – cant list e.g. 50%
 (iv) Minimum market capitalisation of £700,000: LR 2.2.7R
o Shares issued x market price per share = market cap (aggregate market value of all securities exc treasury shares)
o But no need to calculate in exam – just why you do it + how!
 (v) Requirement that shares have to be compatible with settlement in dematerialized form (CREST)
 TTCCC (CLASS/CAP/CREST)

[Conditions relating to applicant (LR 6)]
 3 years of historical financial info: LR 6.2.1R(1) + (3)
o 6 months before date of prospectus
o 9 months before date of shares being admitted to listing
 31 Dec 2019 accounts are not sufficient for a proposed float in Sept 2020, need interim accounts to 30 June 2020
o (Unless app for admission follows a reverse takeover: LR 5.6.21R)
o Accounts must be consolidated for co and subsidiaries: LR 6.2.1R(4)
 Audited/reported with standards in S. 18 Annex 1, PR Regulation – LR 6.2.4R
 This opinion must be independent – LR 6.2.6, taking all reasonable steps to secure independence
 25% of shares must be in public hands: LR 6.14.2R (promotes liquidity of co)
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