The Float Guide
How to float a company on the London
Stock Exchange
Contact:
Alan Kartashkin
Moscow
[email protected]
James C Scoville
London
[email protected]
INTRODUCTION
T
his guide gives an overview of what is
involved in listing a company on the London Stock
Exchange. It is a practical manual covering all aspects
of a float from prerequisites through to life after the
float.
Contents
Executive summary……………………………
3
Prerequisite to floating……………………….
6
Float team………………………………………
8
Preparing the company.................................
11
The prospectus…………………………………
14
Dealing with regulators..................................
20
Due diligence and verification......................
22
Marketing the float…………………………….
24
Pricing...............................................................
26
Life after the float……………………………...
27
Float timetable…………………………………
30
EXECUTIVE SUMMARY
Legal framework
In order to float a company on the main securities market in the United Kingdom, it is
necessary for the company to apply to have its securities: (1) admitted to listing on the Official
List; and (2) admitted to trading on the Main Market of the London Stock Exchange. The UK
Listing Authority (UKLA), a division of the UK Financial Services Authority, regulates the
Official List (and oversees the Prospectus Rules, Listing Rules and Disclosure Rules and
Transparency Rules, which govern admission criteria and continuing obligations) and the
London Stock Exchange regulates the Main Market (and oversees the Admission and
Disclosure Standards). As a result, companies must deal with both, although the UKLA will
exercise the more substantive degree of oversight over the application process.
Why float?
The following are the most common reasons for floating a company:
access to capital both at the time of the initial listing and in the future through further
capital raisings;
opportunity for existing shareholders to realise the value of their investment, in whole
or in part, in the company;
creation of a market for the company’s shares, with improved valuation that a London
listing generally brings; and
ability to make acquisitions by offering listed securities rather than, or in addition to,
cash as consideration.
Does my company qualify?
There are a number of eligibility requirements which any company seeking to be admitted to
listing on the Official List must satisfy, including:
the expected aggregate market value of the securities to be listed must be at least
£700,000 in the case of shares and depositary receipts;
the securities must be freely transferable, and in the case of shares, fully paid;
the securities must be admitted to trading on the Main Market of the London Stock
Exchange; and
the company must publish a prospectus approved by the UKLA.
If the company is seeking to list shares, it may apply for either a ‘Premium Listing’ or a
‘Standard Listing’. A Premium Listing imposes stricter eligibility criteria and more extensive
post-listing obligations. Other securities, such as depositary receipts, may only be listed on
the Standard Listing segment.
What will it cost?
At present there is an application fee payable to the UKLA of £225 plus an additional £100
per each additional issue of securities with its own International Securities Identification
Number. In addition, there is a vetting fee payable to the UKLA, which for a prospectus is
currently £6,270, along with a new applicant fee of £1,430. For particularly large or complex
offerings, an additional vetting fee may become payable. An admission fee is also payable to
the London Stock Exchange, which is calculated by reference to the market capitalisation of
the Company. The maximum fee payable in 2011 is £388,173. In addition, fees will be
payable to the various members of the float team (see below).
How long will it take?
The entire process from initiating the IPO process through to trading on the LSE commencing
is approximately four to six months. However, it may well be the case that the company will
need to implement necessary corporate restructurings or enhance its board and corporate
governance prior to listing, which may add to the timetable.
Who is on the float team?
The float team is made up of a sponsor, underwriters, accountants, lawyers and others, such
as PR consultants, printers, a share registrar and various experts who have been engaged to
produce any necessary reports in connection with the prospectus.
Is my company ready?
Assuming that the company satisfies the eligibility requirements, it will need to review its
corporate structure (including the composition of its board, its articles of association and
capital structure), corporate governance procedures and any other issues which could affect
the UKLA’s eligibility criteria, the valuation of the company in the IPO or its ability to meet the
continuing obligations imposed on it once listed.
What goes in the prospectus?
A company must publish a prospectus which has been approved by the UKLA whenever a
company either offers transferable securities to the public in the UK or requests the admission
of transferable securities to trading on a regulated market (for example, the Main Market of
the London Stock Exchange), subject to certain limited exemptions.
Under the UK Prospectus Rules – which implement the requirements of the EU Prospectus
Directive applicable across the EU – a prospectus must contain all information necessary to
enable investors to make an informed assessment of:
the assets and liabilities, financial position, profits and losses, and prospects of the
issuer of the company’s securities and of any guarantor; and
the rights attaching to such securities.
The Prospectus Rules also contain specific requirements that depend on the type of
securities being listed. In practice, the prospectus must include extensive information on,
among other things, the company (including its business, board of directors and
management, principal shareholders and capital structure); an operating and financial review
of its financial performance; financial statements (for the last three financial years and, if the
Prospectus is dated more than nine months after the end of the financial year, an interim
period) prepared in accordance with International Financial Accounting Standards or another
permitted standard; the industry in which the company operates; the offer itself and
associated risk factors.
The prospectus must be submitted for review and approval by the UKLA. They will typically
have extensive comments, leading to revision of the document. Usually, several drafts must
be submitted before the UKLA approves (‘stamps’) the prospectus.
What is due diligence?
When a prospectus is required it is advisable for the company’s advisers to carry out a
comprehensive due diligence exercise in order to ensure that the prospectus complies with
the relevant legal requirements and to protect the persons responsible (including the
company and, in the case of share prospectuses, its directors) from any liability arising from a
failure to satisfy such legal requirements.
The due diligence exercise is usually carried out by the company’s internal personnel,
investment banks, accountants and lawyers, although the final responsibility for the content of
the prospectus is the company’s and (in the case of share prospectuses) its directors.
How will the float be marketed?
Typically, marketing of an IPO is carried out through an extensive process that includes a premarketing period targeting potential institutional investors and more formal management roadshows following the publication of a preliminary prospectus. Publicity regarding the marketing
will be allowed, so long as it meets restrictions under applicable securities laws.
What else is involved?
The company’s applications will be reviewed by the UKLA and the London Stock Exchange.
Once approved, the company’s securities will be admitted to listing and trading following
announcements via a regulated information service.
A listed company must comply with extensive continuing obligations.
The Alternative Investment Market (AIM)
As an alternative to applying for admission to the main market of the London Stock Exchange,
a company may instead elect to list on the Alternative Investment Market of the London Stock
Exchange (AIM). Since AIM does not prescribe a minimum trading record or market
capitalisation, it may be suitable for companies with lower capitalisations or start-up entities.
Admissions to AIM are subject to the AIM Admissions Standards of the London Stock
Exchange rather than requirements of the EU Prospectus Directive and do not involve an
application to the Official List.
PREREQUISITES TO FLOATING
Companies may choose between a Premium Listing or Standard Listing on the Main
Market of the London Stock Exchange, or listing on the Alternative Investment Market,
with different requirements for listing and continuing obligations imposed depending
on which type of listing is selected.
Companies seeking to have their securities listed on the Official List of the UKLA and
admitted to trading on the Main Market of the London Stock Exchange have two options: a
Premium Listing and a Standard Listing.
CHOOSING BETWEEN A PREMIUM LISTING OR STANDARD LISTING
There are a number of similarities and differences between a Premium Listing and a Standard
Listing. In general terms, a Standard Listing is more straightforward to apply for and once
achieved, a company with a Standard Listing will have to adhere to fewer continuing
obligations (see this guide’s chapter on ‘Life after the float’). Moreover, a company with a
Standard Listing is subject to much less extensive mandatory corporate governance
standards. In order to be eligible to apply for a Standard Listing, a company must satisfy the
following requirements:
the expected aggregate market value of the securities to be listed must be at least
£700,000 in the case of shares and depositary receipts;
the securities must be admitted to trading on the Main Market of the London Stock
Exchange;
at least 25 per cent of the shares or depositary receipts must be held in public hands
in the European Economic Area (EEA) at the time of admission; and
the company must publish ap approved by the UKLA (unless an exemption applies).
In order to be eligible to apply for a Premium Listing, a company must meet the Standard
Listing criteria and, in addition:
appoint a sponsor;
prepare audited consolidated accounts for the last three years ending not more than
six months before the date of the prospectus;
demonstrate that it has a track record of at least three years of trading covering 75
per cent of the business of the company (subject to exemptions for certain
specialised issuers such as mineral companies) and that it controls the majority of the
company’s assets for such period;
have sufficient working capital available for the next 12 months from the date of
publication of its prospectus;
comply with the Listing Principles (six fundamental principles that are designed to
ensure market confidence and fair and orderly markets); and
establish and maintain adequate financial reporting procedures.
A company with a Premium Listing must meet these and other ‘super-equivalent rules’, which
are higher than the EU minimum standard. As such, Premium Listings may be considered to
be more difficult to achieve owing to more stringent transparency rules and higher regulation
but the benefit is that a Premium Listing engenders greater investor confidence. In addition, it
is generally a condition to inclusion in the most prominent indices that the shares be admitted
with a Premium Listing.
Only equity shares may be admitted with a Premium Listing. Other securities, including
depositary receipts representing shares, may only be admitted with a Standard Listing.
ALTERNATIVE INVESTMENT MARKET
In addition to its Main Market, the London Stock Exchange also operates the Alternative
Investment Market (AIM) which, since it does not prescribe a minimum trading record or
market capitalisation, may be suitable for companies with lower capitalisations or start-up
entities. Admissions to AIM are subject to the AIM Admissions Standards of the London Stock
Exchange rather than requirements of the EU Prospectus Directive.
SHARES OR DEPOSITARY RECEIPTS
One question to be considered by a non-UK company is whether to offer and list its shares
directly or instead use a Depositary Receipt (DR) structure. A DR is a negotiable receipt
issued by a depositary bank, which represents a specified number of underlying shares which
have been deposited with a custodian. Under the deposit agreement for a DR facility
sponsored by the company, the depositary accepts deposited shares, issues DRs evidencing
such shares, registers transfers of DRs, converts dividends into the nominal currency of the
DRs and distributes them to DR holders, and mails to DR holders annual reports and proxy
materials which the company furnishes to its shareholders. DRs have been developed
primarily to provide a more efficient settlement and clearance process than would otherwise
be available for the underlying securities. As DRs may only be admitted with a Standard
Listing, the regulatory regime for DRs listed on the London Stock Exchange is less extensive
than compared with a Premium Listing of shares or even a Standard Listing of shares.
FLOAT TEAM
In order to run the listing process efficiently, a company applying for listing should
appoint a float team of experienced professional advisers and service providers.
SPONSOR
The Listing Rules provide that a company applying for a Premium Listing of its shares must
appoint a sponsor. A sponsor is usually an investment bank, and is typically one of the lead
underwriters. The entity acting as sponsor must be approved by the Financial Services
Authority. The sponsor’s main responsibilities are:
to assess the suitability of the company for listing, including whether the company has
satisfied, and is capable of satisfying on an ongoing basis, the relevant requirements
of the Listing Rules, Prospectus Rules and Disclosure Rules and Transparency
Rules;
to provide guidance and advice to the company in connection with its application for
listing; and
to act as the main point of contact with the UKLA in the listing process.
The sponsor owes to both the company and the UKLA various duties, such as the duty to act
with due care and skill in relation to any act connected with the listing application and the duty
to deal with the UKLA in an open and cooperative way.
A full list of sponsors which have been approved by the UKLA and their contact details is
available on the Financial Services Authority’s website: www.fsa.gov.uk.
A sponsor is not required for a Standard Listing.
UNDERWRITER
The underwriter agrees to subscribe for any securities which are not taken up by investors in
return for a fee, which is typically up to five per cent of the amount underwritten. This in effect
guarantees the number of securities to be issued and the amount of money to be raised
thereby, the underwriter having assumed the risk of the offer being undersubscribed. The
underwriter may allocate some or all of this risk to sub-underwriters, although the company is
not a party to such arrangements. However, where an offer is made on a book-built basis
(see ‘Pricing’), the underwriter does not assume the risk until all of the bids have been
received.
THE NOMINATED ADVISER (NOMAD) (FOR AN AIM LISTING ONLY)
For AIM listings, the NOMAD is responsible for guiding the company through the listing
process, conducting due diligence on the company and ensuring that it is suitable for
admission to AIM. The NOMAD may be one of the underwriting banks. If listing on AIM, the
company is required to maintain a NOMAD for so long as its securities remain listed on AIM.
LAWYERS
The company’s lawyers will:
prepare the company for listing, including assisting with the implementation of the
necessary procedures to enable the company to comply with the continuing
obligations;
advise the company on all legal matters relating to the application for listing;
carry out the legal due diligence and the verification of the Prospectus (see ‘Due
diligence and verification’ below); and
be principally responsible, with the company and the other advisors, for drafting of the
prospectus.
The lawyers will also be involved in the negotiation and drafting of all other documents
required in connection with the application for listing (for example, the underwriting agreement
and service contracts of any new directors).
AUDITORS
The company’s auditors work closely with the company’s management in auditing the
financial statements to be included in the prospectus, as well as preparing other financial
disclosure in the prospectus. In addition, the auditors deliver to the underwriters and the
company’s board of directors a ‘comfort letter’ confirming the accuracy of financial information
in the prospectus that ties to the accounting records of the company. If the company is listing
shares and seeks a Premium Listing, or in connection with an AIM listing, the company’s
auditor will also typically provide the sponsors/underwriters with a memorandum describing
the company’s internal control systems and a working capital statement supporting related
disclosures in the prospectus.
PUBLIC RELATIONS CONSULTANTS
Floats are significant events in a company’s history and often lead to substantial amounts of
publicity about the company. PR consultants can help manage this publicity and the
company’s outreach to the press during this period. Given the legal restrictions on
communications with the market by the company under many securities laws, the company’s
lawyers should carefully review all such communications.
REGISTRAR
When offering shares, the company should appoint a share registrar to: handle the receipt of
all applications (many of which are now electronic); send out share certificates once the
shares have been allocated and issued, manage the company’s share register on an ongoing
basis; and liaise with CREST regarding settlement (see ‘Electronic Settlement via CREST’).
DEPOSITARY
If the company is listing depositary receipts rather than shares, it will need to select a
Depositary that will issue the DRs representing shares in the company to investors in the IPO.
After the IPO, the depositary facilitates payment of dividends in US dollars or, in some cases,
Euros (v the home-country currency of the company) and coordinates delivery of
documentation (eg, annual reports, shareholder proxies) to depositary receipt holders.
OTHER EXPERTS
The company may also need to engage accountants, printers and potentially mineral experts
or other such experts depending on the company’s business. In particular, if the company is a
mineral company, the company will need to prepare a mineral expert’s report attesting to the
company’s reserves, which will be included in the Prospectus. The expert’s report must
satisfy specific requirements set out by the European Securities and Markets Authority
(ESMA), the European Supervisory Authority. Property companies must likewise include
valuation reports meeting ESMA standards.
PREPARING THE COMPANY
Before applying for listing on the Official List and admission to trading on the Main
Market of the London Stock Exchange, the company and its advisers will need to
ensure that the company complies with the eligibility requirements of the Listing Rules
and Admission and Disclosure Standards and is suitable for a listing, as well being an
attractive investment opportunity for potential investors.
ELIGIBILITY REQUIREMENTS
THE LISTING RULES
The Listing Rules require the company to meet various eligibility requirements. The main
requirements are set out below:
The company must be duly incorporated and operate in conformity with its
constitution.
The securities must be duly issued in accordance with the relevant national law and
the company’s constitution.
The securities must be admitted to trading on a regulated market (for example, the
Main Market of the London Stock Exchange).
The securities must be freely transferable, and in the case of shares, fully paid.
The expected aggregate market value of the securities must be at least £700,000 in
the case of shares and depositary receipts.
Following the admission to listing, at least 25 per cent of the securities must be in
public hands in the EEA.
A prospectus must be approved by the UKLA.
In addition, a company seeking a Premium Listing must also:
appoint a sponsor;
prepare independently audited consolidated accounts, prepared in accordance with
IFRS or an equivalent standard, for the last three years ending not more than six
months before the date of the Prospectus;
demonstrate that at least 75 per cent of the company’s business is supported by a
three-year trading record; it controls the majority of its assets and has done so for the
previous three years; and it will carry on an independent business as its main activity;
satisfy the UKLA that it and its subsidiaries (if any) have sufficient working capital
available for at least the next 12 months from the date of publication of its prospectus;
comply with the Listing Principles;
procure that the total number of all issued warrants and options to subscribe for
shares of the company does not exceed 20 per cent of the issued share capital as at
the time the warrants and options were issue; and
ensure that the shares are eligible for electronic settlement.
The UKLA may, in its sole discretion, waive certain requirements. It is usually advisable to
contact the UKLA in advance of the formal listing process to discuss any issues that are likely
to arise in connection with the company’s eligibility for listing and, if necessary, seek any
derogation from the listing requirements. The company should submit an eligibility letter to the
Financial Services Authority before submitting the prospectus, which should list any potential
eligibility issues and provide a detailed explanation of the company’s business model,
corporate structure and corporate history.
Where the company applying for listing is incorporated in a non-EEA State it may find it more
difficult to comply with these requirements. For example, if the company’s accounts have not
been prepared to IFRS or an accepted equivalent standard (such as US GAAP) the company
will have to prepare additional financial statements in accordance with such a standard.
ELECTRONIC SETTLEMENT VIA CREST
In the case of the Main Market of the London Stock Exchange, the requirement for electronic
settlement means that the shares must be capable of being admitted to the CREST System,
an electronic share settlement system operated by Euroclear UK and Ireland Limited on
which securities admitted to trading on the Main Market of the London Stock Exchange are
traded. Only shares of a UK, Irish or Channel Islands company can be admitted to the
CREST System. Therefore any other company must issue depositary certificates representing
the underlying shares and admit these to the CREST System, although the shares
themselves are listed on the Official List.
THE ADMISSION AND DISCLOSURE STANDARDS
The Admission and Disclosure Standards contain the eligibility requirements for an
application for admission to trading on the Main Market of the London Stock Exchange. The
Admission and Disclosure Standards require compliance with the Listing Rules, and also,
among other things, that the securities are capable of being traded in a fair, orderly and
efficient manner.
CORPORATE STRUCTURE
The company should carry out a preliminary due diligence exercise in order to determine
whether any changes to the corporate structure of the company and its group are necessary.
In particular, the company may need to appoint additional independent non-executive
directors to its board of directors or amend the provisions of its constitutional documents
relating to shareholder rights and the ability to transfer shares. It will also want to ensure that
the corporate structure is efficient from a tax standpoint, and consider disposing of any noncore assets or take other decisions so that the company is an attractive investment at the time
of float.
CORPORATE GOVERNANCE
Once a company’s securities are listed, the company may need to comply with the UK
Corporate Governance Code, particularly if it is offering shares (see ‘Life after the float’). In
preparation for this, the company should put in place, or at least plan to put in place
depending on the transaction involved, appropriate corporate governance procedures.
THE PROSPECTUS
A company applying for listing will be subject to the EU Prospectus Directive as
implemented in the UK, and as a result will need to publish a prospectus which will
enable investors to make an informed assessment of the financial position and
prospects of the company and the rights attaching to such securities.
WHY PUBLISH A PROSPECTUS?
In common with other European countries following implementation of the EU Prospectus
Directive in 2005, the UK Financial Services and Markets Act 2000 requires a company to
prepare a prospectus which has been approved by the UKLA when such company (1) offers
1
transferable securities to the public or (2) requests the admission of transferable securities to
trading on a regulated market situated or operating in the UK (such as the Main Market of the
London Stock Exchange), subject to certain limited exemptions. Failure to do so constitutes a
criminal offence. The definition of ‘offer to the public’ is broad, and includes any
communication presenting sufficient information on the terms of the offer and the securities to
be offered, so as to enable an investor to decide to purchase or subscribe to the securities. A
key exception is where offers are made solely to ‘qualified investors’ (as defined in the EU
Prospectus Directive as implemented in the UK); thus, if securities are only to be offered to
qualified investors and the securities will not be listed in the Main Market of the London Stock
Exchange or another regulated exchange (for instance, they will be listed on AIM instead),
then no prospectus is necessary. For this reason AIM listing offering documents are not
typically required to be reviewed and approved by the UKLA.
For a Premium or Standard Listing, the prospectus must be reviewed and approved by the
UKLA if the UK is the ‘home-Member State’ with respect to the company – generally, if the
company is located in the European Union, the country in which the issuer has its registered
office or, for non-EU issuers, the country where the securities are first offered to the public.
The determination of a company’s home Member State can be complex and should be
reviewed in advance of the listing process.
A supplementary prospectus may also be required if, between the date on which the original
prospectus is made available and the date that the offer closes or trading in the securities on
a regulated market begins, a significant new factor, a material mistake or inaccuracy relating
to the information included in the original Prospectus arises or is noted. Supplementary
Prospectuses also must be reviewed and approved by the UKLA, and should therefore be
promptly prepared for publication in a timely manner.
PROSPECTUS CONTENTS
General contents requirement
The content requirements for a prospectus are set out in the Prospectus Rules, which
implemented the EU Prospectus Directive in the UK. Under the Prospectus Rules, a
prospectus must contain the information necessary to enable investors to make an informed
assessment of:
the assets and liabilities, financial position, profits and losses, and prospects of the
issuer of the company’s securities and of any guarantor; and
the rights attaching to such securities.
In addition, this information must be presented in a form which is comprehensible and easy to
analyse and prepared having regard to the particular nature of the company’s securities and
the company itself.
Specific contents requirements
The Prospectus Rules, together with guidelines and recommendations published by ESMA,
provide more specific and detailed content requirements. The specific requirements vary
depending on the type of security offered but generally include information on the company
(including its business, board of directors and management, principal shareholders and
capital structure); an operating and financial review of its financial performance; financial
statements (for the last three financial years and, if the prospectus is dated more than nine
months after the end of the financial year, an interim period) prepared in accordance with
International Financial Accounting Standards or another permitted standard; the industry in
which the company operates; the offer itself and associated risk factors. As the Prospectus
Rules implement the EU Prospectus Directive, the content requirements are generally the
same for prospectuses used in UK listings as they are for listings in other EU Member States.
Omission of information
The UKLA has the discretion to authorise the omission of required information in certain very
limited circumstances (for example, where its disclosure would be contrary to the public
interest). The possible need for such derogation should be brought to the UKLA’s attention at
the time of discussion of the Eligibility Letter or early in the prospectus review process.
FORMAT
A prospectus may consist of separate documents (a summary, a registration document
containing prescribed information concerning the company and a securities note containing
prescribed information concerning the securities) or only one document; the latter being
common in the case of an initial public offering. Where the company prepares a single
document, the document must include the following parts in the following order:
a clear and detailed table of contents;
a summary;
a description of the risk factors linked to the company and the type of security to be
listed; and
all other information required by applicable rules (including all information which
would otherwise have been contained in the registration note and the securities note).
The summary should convey, briefly and in non-technical language, the essential
characteristics of, and any risks associated with, the company and the company’s securities.
It should not exceed 2,500 words and must contain a warning that, among other things, the
summary should be read as an introduction to the prospectus and any decision to invest in
the securities should be based on consideration of the prospectus as a whole by the investor.
INCORPORATION BY REFERENCE
It is possible for a company to incorporate certain information by reference into a prospectus
provided that such information has previously been approved by, filed with or notified to the
UKLA and is the latest available to the company. This option will therefore generally be
available only to companies that are already listed in the UK. If any information is
incorporated by reference, the prospectus must contain a cross-referenced list. This saves
the company the additional cost of reproducing and printing such information, for example, its
audited accounts and memorandum and articles of association that has previously been filed
with the UKLA).
TYPICAL CONTENTS OF A PROSPECTUS
A typical prospectus for an initial public offering will typically contain, among others, the
sections set out on this page.
1
2
3
Summary
Risk factors
Details of the offer
4
5
6
Information on the
company
Industry background
Company historical
financial information
7
8
9
Operating and
financial review
Regulation
Description of share
capital
10
11
12
Plan of distribution
Taxation
Additional information
13
Financial statements
RESPONSIBILITY AND LIABILITY
Persons responsible for the prospectus
Under the UK Prospectus Rules, the following persons are responsible for the prospectus in
respect of shares:
the company;
the directors of the company;
any person who has agreed to be named, and is named, in the prospectus as a
director or as having agreed to become a director of the company either immediately
or at a future time; and
any person who accepts, and is stated in the prospectus as accepting, responsibility
for the prospectus;
In the case of a company offering DRs, only the company and any other person who accepts
responsibility for the prospectus (but not the company’s directors) are responsible for the
prospectus.
A prospectus must contain a statement from each of the persons responsible to the effect
that, having taken all reasonable care to ensure that such is the case, the information
contained in the prospectus is, to the best of their knowledge, in accordance with the facts
and contains no omission likely to affect its import.
Liability
Persons responsible for the prospectus risk both civil and criminal liability if the contents of
the prospectus are in any way inaccurate or misleading. For this reason, it is crucial that the
company and its advisers carry out adequate due diligence and verify the prospectus (see
‘Due diligence and verification’).
The prospectus is typically the result of weeks of collaboration between representatives of the
company, its investment bank (and sponsor), its lawyers and accountants. Although the
directors of the company will be unlikely to attend the various drafting sessions, they should
be encouraged to review advanced copies of the document to ensure it is complete and
accurate since they will ultimately be responsible for it.
APPROVAL PROCESS
The UKLA is responsible for vetting and approving a prospectus. The approval process can
be quite lengthy and so an adequate time period for this to be accomplished should be
factored into the transaction timetable (see ‘Float timetable’). In general, the UKLA commits to
providing comments on the first submission of a draft prospectus within ten working days, and
within five working days on subsequent submissions.
The company should submit drafts of the prospectus and any accompanying documents
(such as documents incorporated by reference) to the UKLA using the ELS system, an
electronic submission system. Drafts must be annotated in the margins to indicate compliance
with the applicable rules. Once the prospectus is in final form, the following documents should
be submitted to the UKLA together with the relevant fee:
a completed Form A;
the final form prospectus;
a checklist stating on which page each of the applicable rules has been complied
with;
any document incorporated by reference;
the contact details of the company; and
a completed Document Publication Form.
FILING AND PUBLICATION
As soon as a prospectus has been approved by the UKLA, it must be filed with the Financial
Services Authority via the National Storage Mechanism, an online facility for the storage of
regulated information in the UK which can be accessed at: www.hemscott.com/nsm.do. It
must also be made available to the public as soon as practicable after such date and, in the
case of an initial public offer, at least six working days before the end of the offer. This is
generally achieved by making it available at the offices of the company and its financial
advisors, or by publishing it in electronic form on the company’s website, although particular
care should be taken to shield the prospectus from those in restricted jurisdictions being able
to access it. This is usually done by placing the prospectus (and any other marketing
materials) behind a click-through ‘screen’ where viewers must certify that they are not located
in a jurisdiction that prohibits distribution of the prospectus.
Securities laws of other jurisdictions
The company and its advisors will need to make sure that the offering and the prospectus
satisfy any applicable securities laws requirements in jurisdictions outside of the UK where
the offering is being made. In particular, most offerings typically include a tranche sold to
‘qualified institutional buyers’ (QIBs) in a private placement in the United States. Accordingly,
the publicity and other restrictions applicable to US private placements will need to be closely
followed, and offering participants will be subject to potential liability under the US securities
laws, in particular Rule 10b-5 under the US Securities Exchange Act of 1934. In order to
avoid any potential liability under those laws, the company and its advisors will want to carry
out an adequate due diligence process to ensure that the prospectus does not include a
misstatement or omission which is material to investors (see ‘Due diligence and verification’).
DEALING WITH THE REGULATORS
A company seeking admission to the Official List and the Main Market of the London
Stock Exchange will need to liaise with the UKLA and the London Stock Exchange
during the application process and beyond. As discussed above, a company seeking
to be listed on AIM is not required to have its listing approved by the UKLA, and thus
will primarily be engaged with the Nomad which will ensure that it has complied with
the AIM Rules prior to applying to the LSE.
APPLICATION FOR ADMISSION TO LISTING
The UKLA
The Financial Services Authority was nominated by the Financial Services and Markets Act
2000 as the competent authority for the purposes of the EU Prospectus and Transparency
Directives. This gives it the authority to, among other things, maintain the Official List and
regulate companies seeking to apply for admission to listing and their compliance with their
continuing obligations under the Listing Rules, Prospectus Rules and Disclosure Rules and
Transparency Rules (see ‘Life after the float’). The division of the Financial Services Authority
which undertakes these responsibilities is the UKLA.
The application
As described above, the company’s first contact with the UKLA is typically to confirm that it
will be eligible for listing and, then, in having its prospectus submitted and reviewed for
approval. In order to obtain a listing, the company must also formally apply for a listing and
arrange a listing hearing at which the UKLA will review its application and supporting
documents. This will need to be scheduled to occur following marketing of the offering and
pricing, so that the securities are admitted immediately following settlement of the offer. The
following must be submitted to the UKLA no later than 12pm at least two business days prior
to the listing hearing:
a completed Application for Admission of Securities to the Official List Form;
the prospectus as approved by the UKLA;
any circular that has been published in connection with the application (if applicable);
any approved supplementary prospectus or approved supplementary listing
particulars (if applicable);
written confirmation of the number of securities to be allotted pursuant to a resolution
of the company’s board of directors; and
the relevant listing fee (which, at the date of publication of this guide, is £225 plus
2
£100 for each additional issue of securities with its own ISIN).
In addition, by no later than one business day prior to the requested date of admission, the
company must submit a completed shareholder statement to the UKLA, certifying that the
company meets the requirement that at least 25 per cent of the securities are in public hands
at the time of listing.
Admission to the Official List takes effect immediately following an announcement of the
UKLA’s intention to list the company’s securities via a regulated information service.
APPLICATION FOR ADMISSION TO TRADING
The application
The company should inform the London Stock Exchange of its intention to apply for
admission to trading to the London Stock Exchange at the same time as it first informs the
UKLA. When the company is ready to apply for admission to trading, it should (a) make a
provisional application (including a Form 1 and a draft copy of the prospectus) to the London
Stock Exchange by no later than 12 pm at least ten business days prior to the date on which
the company requests the London Stock Exchange to consider its application for admission to
trading; and (b) submit the following documents to the London Stock Exchange by no later
than 12pm at least two business days prior to such date:
a completed Form 1;
an electronic copy of the prospectus;
an electronic copy any circular, announcement or other document relating to the
issue of shares;
an electronic copy of any notice of meeting referred to in any of the documents listed
above;
written confirmation of the number of securities to be allotted pursuant to a resolution
of the company’s board of directors; and
a copy of the regulatory information service announcement relating to the admission
to trading.
Admission to trading on the Main Market of the London Stock Exchange becomes effective
when the London Stock Exchange’s decision to admit the company’s securities to trading has
been announced via a regulated information service. Admission fees are invoiced by the LSE
following admission.
DUE DILIGENCE AND VERIFICATION
Due diligence and verification must be undertaken to ensure that the prospectus is
accurate and not misleading to investors and to protect those who are responsible and
have liability for the contents of the prospectus.
DUE DILIGENCE
Due diligence involves a comprehensive investigation of all information relating to the
company. It is intended to ensure the accuracy, truthfulness and completeness of a
company’s prospectus, and to ensure that such company has complied with the relevant
requirements of the Prospectus Rules and the Financial Services and Markets Act 2000, as
well as the anti-fraud requirements of Rule 10b-5 of the US Securities Exchange Act and the
securities laws of other jurisdictions.
Why is due diligence necessary?
The due diligence exercise is necessary in order to protect the persons who are responsible
for the prospectus (including, among others, the company, its directors and the underwriters)
from the risk of incurring civil and/or criminal liability in the event that the prospectus is
inaccurate or incomplete.
Additional reasons for carrying out due diligence are that it:
enables the company’s advisers to accurately value the company;
helps to establish what needs to be done in order to ready the company for listing;
and
allows the company’s lawyers to satisfy themselves that the prospectus complies with
the requirements of the Prospectus Rules.
The due diligence process
The due diligence exercise is normally broken down into business (ie, business strategy and
potential for future growth), financial and accounting (ie, historical financial results and
operational and financial operations, including adequacy of internal controls) and legal (ie,
legal records, material contracts and litigation) due diligence. Each of these is carried out by
different advisers of the company. For instance, the accountants will typically participate in a
due diligence session with the underwriters and lawyers, in which they respond to questions
on the company’s accounting controls and systems. They will also provide a ‘comfort letter’
confirming the accuracy of financial information in the prospectus that ties to the accounting
records of the company and, in a Premium Listing or AIM listing, provide the
sponsors/underwriters with a memorandum describing the company’s internal control systems
and a working capital statement supporting related disclosures in the prospectus. The lawyers
will be principally responsible for the legal review of material documents and records at the
company, and will also prepare and distribute a questionnaire to directors and senior
management asking them to confirm information relevant to the preparation of the
prospectus. Finally, the underwriters and lawyers will participate in due diligence sessions
with senior management in which they question management on matters relating to the
company. It is, therefore, important that this process is adequately coordinated and that there
are clear lines of communication between each of the different advisers and the company.
VERIFICATION
Verification is the process of checking that all statements in the prospectus are accurate, true
and complete. As with due diligence, the primary purpose of this exercise is to protect the
company’s directors and other offering participants from liability. The process usually involves
the company’s lawyers seeking confirmation from the company or from external documents
on key items of disclosure in the prospectus.
MARKETING THE FLOAT
Marketing is crucial to ensure the success of the initial public offerings, including premarketing meetings with investors; the preparation and dissemination of analyst
research reports; and management road-shows in the book-building process.
GENERAL PRE-IPO PUBLICITY
It is advisable for the company’s lawyers to put in place approval procedures for any
information to be made public in the period prior to listing. In particular, the restrictions should
ensure that there is no heightened level of publicity during this period that may violate the
private placement requirements in the US and in other jurisdictions where a private placement
is being contemplated.
PRE-MARKETING
In advance of the publication of the preliminary prospectus and the formal management roadshows, the lead investment banks will contact a limited number of institutional investors in
order to familiarise them with the company, generate investor interest and identify any
concerns which should be addressed by the company’s management on the road-show. This
is called ‘pre-marketing ’. Once contact has been made and interest garnered, the investment
banks will organise preliminary meetings with the company’s senior management at which
they will be given information on the company and the proposed offering.
Any information provided to such investors during the pre-marketing must be accurate,
consistent with the prospectus and not misleading, and include appropriate legends.
RESEARCH REPORTS
It is common for analysts connected to the underwriter to prepare an independent and
objective research report (or a series of such reports) based on publicly available information
and information provided by the company. This report is then made available to the analyst’s
institutional clients.
Preparation
Any such report must be prepared in accordance with the Financial Services Authority’s
Conduct of Business Sourcebook. This requires, among other things, that where a report
constitutes non-independent research (as it will in most cases), the report must (i) be clearly
identified as a marketing communication; and (ii) contain a clear and prominent statement that
it has not been prepared in accordance with legal requirements designed to promote the
independence of investment research and is not subject to any prohibition on dealing ahead
of the dissemination of investment research.
Distribution
Any such research report will constitute a financial promotion under the Financial Services
and Markets Act 2000. The making of all such financial promotions is prohibited subject to
certain limited exceptions. In order to qualify for an exception, either (i) the report must be
have been distributed by someone who is authorised by the Financial Services Authority;
(ii) the content of the report must be approved by such a person; or (iii) the report should only
be distributed to a very limited range of recipients (for example, investment professionals,
sophisticated investors, high-net-worth companies and overseas recipients) and contain
appropriate legends.
Liability
In order to protect the company and its directors from liability in connection with analyst
research reports, it is advisable that the following precautions be taken:
analysts should only be provided with information that is expected to be in the
prospectus and is verifiable;
a prominent disclaimer should be included stating that any investment decision is
based solely on the contents of the prospectus and not the research report and the
research is the author’s work and has not been authorised or approved by the
company;
a blackout should be imposed ahead of publication of the preliminary (sometimes
called ‘pathfinder’) prospectus (if applicable) and beyond during which period the
research report should not be distributed;
the author(s) of the report should comply with the Financial Services Authority’s
Conduct of Business Sourcebook; and
distribution of the report should be restricted to institutional investors and other such
market professionals.
ANNOUNCEMENT OF INTENTION TO FLOAT
Once the prospectus is essentially completed, the company will typically issue a press
announcement of its intention to float. This is the first opportunity that the company has to
announce publicly its upcoming float. Typically after the ITF announcement is issued a ‘premarketing’ exercise is carried out, where selected investors are approached to discuss their
appetite to participate in the offering.
MANAGEMENT ROAD-SHOWS
This is the final stage of the marketing exercise. These presentations allow the company’s
management to market the company’s securities directly to select institutional investors. As
well as benefiting the company, road-shows also offer the investors an opportunity to meet
with the company’s management face-to-face and ask them any questions they may have.
The company may simultaneously also organise various one-on-ones with key investors.
Typically, a preliminary prospectus, containing the same information as will be in the final
prospectus except for pricing terms, will be provided to investors at the outset of the roadshows. In order to be sure that the prospectus is complete, subject to pricing terms, the UKLA
review process should be substantially complete by this time.
The aim of these meetings is to generate top quality investor demand and to help the
company to determine at what price the offer should be made.
PRICING
There are various pricing methods which a company can employ when offering
securities to be listed on the Official List and admitted to trading on the Main Market of
the London Stock Exchange. The two most common methods are the fixed price offer
and the book-build.
Fixed price offer
Under this method, the price of the securities is fixed in the prospectus. Such offers are
typically fully underwritten.
In the UK, it is more common for offers to be made on a book-built basis.
Book-build
Book-building is a process whereby potential institutional investors are invited to bid for the
securities before the price and size of the offer have been determined. Although the price has
yet to be determined at this stage of the offer, a price range is typically included in the
preliminary prospectus issued to potential investors at the commencement of the
management road shows. Careful consideration should be given to this price range. The
traditional approach is to set the bottom of the range where there is significant investor ‘buyin’ (based on prior investor feedback), thereby enabling sufficient demand for the securities to
be generated as quickly as possible and so competition between the bidders. Each bidder
specifies a price, or a range of prices, and the number of securities it would be willing to buy.
The bids are non-binding. Once all such bids have been received, the company and its
advisers can assess the level of demand for the securities (and the quality of demand) and
with this information set an appropriate price and allocate the securities.
LIFE AFTER THE FLOAT
As soon as a company has applied to have any of its securities listed on the Official List and
admitted to trading on the Main Market of the London Stock Exchange, the company becomes
subject to various continuing obligations imposed by the Listing Rules, the Prospectus Rules
and the Disclosure Rules and Transparency Rules, as well as the LSE’s Admission and
Disclosure Standards. The purpose of the continuing obligations is to protect investors and to
ensure that that there is an orderly market in securities and that all market participants have
access to the same information at the same time.
GENERAL DISCLOSURE
A company with listed securities, or which has applied to have any of its securities listed, must (among
other things):
disclose the occurrence of certain corporate actions (such as a proposed change to the capital
structure of the company or any change to the board of directors or the company’s name,
accounting reference date or constitutional documents);
for a company with a listing of shares, disclose certain information relating to the company’s
listed securities, including dealings in such securities by persons discharging managerial
responsibility (ie, directors and senior management) and certain changes to the percentages
of major shareholdings;
upload a copy of each circular, notice, report to which the Listing Rules apply and shareholder
resolution (unless such resolutions relate to ordinary business conducted at the company’s
annual general meeting) on the Financial Services Authority’s online document storage facility
(the National Storage Mechanism); and
where the company’s home Member State is the UK, publish each year an annual financial
report and, in the case of companies with Premium Listings, a half-yearly report and an interim
management statement, each of which must contain extensive information about the
company’s finances.
DISCLOSURE OF INSIDE INFORMATION
Generally, a company with listed securities, or which has applied to have any of its securities listed,
must disclose all inside information relating to the company to the market as soon as possible. There
is a limited number of situations in which disclosure may be delayed (for example, if such a delay
would serve the legitimate interests of the company and the company is able to maintain the
confidentiality of the information until release).
Inside information is defined in the Disclosure Rules and Transparency Rules as information of a
precise nature which (i) is not generally available to the public; (ii) relates directly or indirectly to the
company or its securities; and (iii) is price sensitive with regard to the company’s securities.
Information must be disclosed without delay on a regulated information service (an information service
provider authorised by the FSA).
The company is also required to keep an up-to-date list of those persons (internal and external) who
have access to inside information relating to the company.
It is advisable for the company to put in place measures to deal with the control, gathering and
evaluation of potential inside information relating to the company. Such measures may include
restricting access to inside information, giving the responsibility of all external communication on
behalf of the company to one or more specified individuals, providing training on the disclosure
requirements to all relevant individuals and streamlining the company’s internal reporting and decisionmaking procedures.
OTHER CONTINUING OBLIGATIONS
There are various additional continuing obligations, some of which relate only to companies with a
Premium Listing, including:
Admission to trading
The listed securities must at all times be admitted to trading on a regulated market, such as the Main
Market of the London Stock Exchange.
Annual fee
An annual fee must be paid to the London Stock Exchange for any securities admitted to trading on
any market thereof. The amount of the fee is determined by reference to the market capitalisation of
the company at close of trading on 30 November in the preceding year.
The UKLA also charges any company listed on the Official List an annual fee.
Securities in public hands
At least 25 per cent of the class of securities listed on the Official List must at all times remain in public
hands.
Compliance with the Model Code
A company with a Premium Listing must require every person discharging managerial responsibility to
comply with the Model Code and take all possible steps to secure their compliance.
Subject to various limited exceptions, the Model Code prohibits persons discharging managerial
responsibility and their connected persons from dealing in the company’s listed securities, or any listed
securities of any member of the company’s group, unless such persons have obtained clearance in
advance.
Note that these restrictions on dealings in a company’s listed securities are in addition to all other such
restrictions under UK law (for example, the directors’ duties under the Companies Act 2006, the
insider dealing regime under the Criminal Justice Act 1993 and insider dealing restrictions under the
Market Abuse rules).
Appointment of a sponsor
A company with a Premium Listing must appoint a sponsor in certain circumstances specified in the
Listing Rules (for example, where the company makes an additional application for admission of
shares to the Official List which requires the publication of a prospectus) to advise it and act as the
main point of contact with the UKLA.
Significant transactions
A company with a Premium Listing is required to disclose the details of certain transactions which
constitute ‘significant transactions’ under the Listing Rules, and also in some circumstances to publish
a shareholder circular and obtain shareholder approval of the transaction.
Related party transactions
Subject to various limited exceptions, if a company with a Premium Listing enters into a transaction
with a related party (such as a director, a shareholder holding at least ten per cent of the voting rights
of the company or an associate of either), the company must (i) disclose certain details about the
transaction and the related party; (ii) publish a shareholder circular; and (iii) obtain the approval of a
majority of the shareholders for the transaction.
Corporate Governance
A company with a Premium Listing must state in its annual report whether or not the company has
complied with the main principles of the UK Corporate Governance Code, and where it has not
complied it must also justify any such non-compliance.
The UK Corporate Governance Code contains provisions on, among other things, the role of nonexecutive directors, the composition of the board of directors, appointments to the board of directors,
risk management, the establishment and role of an audit committee and remuneration of directors.
All listed companies must include a corporate governance statement in their annual report detailing,
among other things, which corporate governance the company applies or is subject to.
MARKET ABUSE
The Financial Services and Markets Act 2000 introduced the civil offence of market abuse to
supplement the criminal offences under the Criminal Justice Act. Market abuse encompasses any one
or more of seven types of behaviour set out in the legislation, specifically:
insider dealing;
improper disclosure of inside information;
misuse of information;
manipulating transactions;
manipulating devices;
disseminating information likely to give a false or misleading impression; and
misleading behaviour or distortion.
Broadly speaking, if any of these behaviours are undertaken in relation to a qualifying investment
which is already admitted (or in respect of which a request has been made for admission) to trading on
a prescribed market (such as a security admitted to trading on the London Stock Exchange) then an
offence is committed for which civil penalties may apply.
FLOAT TIMETABLE
No.
Date
Action Item
4
Appointment of
sponsors and other
institutional advisors
Due diligence, incl.
long form and
working capital
reports
Preparation of
audited financial
statements
Draft Prospectus
5
Valuation discussion
6
Capital structure
discussions
Preparation of
underwriting
agreement
Filing the Prospectus
with the UKLA
UKLA review of
Prospectus
Analysts
presentations
Prepare and rehearse
road-show
Announce intention to
float
Publish preliminary
Prospectus
Book-building and
road-shows
Publish final
Prospectus
Pricing allocation
1
2
3
7
8
9
10
11
12
13
14
15
16
17
Settlement of
securities in holder’s
CREST
account/securities
admitted to
listing/admitted to
trading/ trading
begins
Week
1
Week
2
Week
3
Week
4
Week
5
Week
6
Week
7
Week
8
Week
9
Week
10
Week
11
Week
12
Week
13
Week
14
Week
15
Week
16
Week
17
X
X
X
X
X
X
X
1
This is defined by reference to the Markets in Financial Instruments Directive 2004/39/EC and
includes, among other things, shares and partnership interests, depositary receipts representing
shares, bonds and other forms of securitised debt, and other securities giving the holder the right to
subscribe for or sell transferable securities.
2
Note that the exact items required by the UKLA vary according to which type of security is being
listed. The items listed above relate to a listing of equity shares.