Equity capital markets in UK (England and Wales): regulatory overview
A Q&A guide to equity capital markets law in UK (England and Wales).
The Q&A gives an overview of main equity markets/exchanges, regulators and legislation, listing requirements, offering structures, advisers, prospectus/offer document, marketing, bookbuilding, underwriting, timetables, stabilisation, tax, continuing obligations and de-listing.
To compare answers across multiple jurisdictions visit the Equity capital markets country Q&A tool.
This Q&A is part of the global guide to equity capital markets law. For a full list of jurisdictional Q&As visit www.practicallaw.com/equitycapitalmarkets-guide.
Main equity markets/exchanges
Main equity markets/exchanges
There are four principal markets in the UK, each of which is operated by the London Stock Exchange (LSE).
Main Market. The Main Market is the flagship market for larger, more established companies. It is a European Economic Area (EEA) regulated market and falls within the ambit of Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading (EU Prospectus Directive). It is also subject to other EU Directives, such as Directive 2003/6/EC on insider dealing and market manipulation (market abuse) (Market Abuse Directive) and Directive 2004/109/EC on transparency requirements for securities admitted to trading on a regulated market and amending Directive 2001/34/EC (Transparency Directive). The Main Market has three different segments:
The Premium segment that forms part of the Financial Conduct Authority's Official List (Official List). This segment is home to some of the world's largest companies that are subject to the highest standards of regulation and governance.
The Standard segment that is subject to EU minimum standards (less rigorous than those of the premium segment) and is part of the Official List.
The High Growth segment that is a recent addition to the Main Market. This segment is designed for equity securities of high growth, revenue generating businesses that are, over time, seeking to become Premium listed companies.
AIM. AIM is a market for:
Growing companies that might not meet the full criteria for admission to the Main Market.
Growing companies for whom a more flexible regulatory environment is more appropriate.
AIM operates, and is regulated, separately from the Main Market. AIM is not a regulated market for the purposes of the EU Prospectus Directive, although it is a multilateral trading facility (MTF).
Professional Securities Market (PSM). The Professional Securities Market is an exchange-regulated market for listed depositary receipts and debt targeted at professional investors. It is a listed market and PSM securities are admitted to the Official List. However, it is not a regulated market for the purposes of the EU Prospectus Directive although it is a MTF.
Specialist Funds Market. This is a market for issuers of specialist funds, open to both UK and international funds. It is an EU regulated market and, because securities do not have to be on the Official List, an unlisted market.
Market activity and deals
There were 68 IPOs on the Main Market in 2015 and 61 on AIM, which together raised GB£8 billion, compared to 144 IPOs the previous year, which raised GB£11.9 billion.
Secondary issues raised approximately GB£9.6 billion on the Main Market compared to approximately GB£8 billion in 2014. On AIM, secondary issues raised GB£5.5 billion compared to GB£3.1 billion in 2014.
The Financial Conduct Authority (FCA) acting in its capacity as the UK's competent authority for the purposes of Part VI of the UK Financial Services and Markets Act 2000 (FSMA) sets and administers the criteria governing admission to the Official List. The UK Listing Authority (UKLA) is the name given to the FCA when acting in its capacity as the competent authority. The UKLA maintains the Financial Conduct Authority's Official List. The UKLA forms part of the Markets Division of the Conduct Business Unit of the FCA.
The primary legislation pursuant to which equity offerings are made is the FSMA and the statutory instruments implemented under this. The relevant rules are the:
Disclosure and Transparency Rules.
The LSE's admission and disclosure standards also apply. For UK incorporated companies, the Companies Act 2006 also applies.
Issuers that want their securities admitted to the London Stock Exchange's (LSE) main market for listed securities must follow a two-stage process:
An application must be made to the UK Listing Authority (UKLA) so that the company's securities can be admitted to the Financial Conduct Authority's Official List.
An application has to be made to a recognised investment exchange such as the LSE so the securities can be admitted to trading.
Only when both of these processes have been completed will the securities be officially listed on the LSE. As a result, there are two sets of fees payable and two sets of continuing obligations applicable. Trading is a requirement for listing and vice versa, so that a suspension from trading leads to a suspension of listing by the UKLA. In practice, admission to trading and admission to listing is simultaneous.
The Main Market is divided into a number of segments. The main ones addressed in this chapter are:
Premium listing (equity shares or commercial company).
Standard listing (shares).
Standard listing (certificates representing securities, that is, depositary receipts).
There is also a "high growth segment" that was launched in March 2013, which has different requirements, although only two companies have listed on this segment since it was launched. The main advantage of listing on the high growth segment is that it has a 10% free float requirement compared to a 25% requirement for premium or standard listing. This route is only available for European Economic Area (EEA) incorporated companies.
An issuer of equity shares usually (depending on whether it satisfies the premium listing eligibility requirements) elects for a premium listing or a standard listing. A standard listing is the EU minimum, whereas a premium listing has more onerous eligibility requirements and continuing obligations. Issuers with a premium listing are eligible for inclusion in the FTSE indices, subject to fulfilling a 25% free float requirement.
A prospectus containing the requirements set out in Annexes I and Annex III of Regulation (EC) 809/2004 implementing Directive 2003/71/EC as regards prospectuses and dissemination of advertisements (Prospectuses Regulation) must be drawn up, approved by the UKLA, filed and published unless an exemption applies (see Questions 10 and 11).
Minimum size requirements
The expected aggregate value of the shares (excluding treasury shares) for which a listing is to be sought must be at least GB£700,000 (unless securities of the same class are already listed). The UKLA has the discretion to permit a lower threshold if satisfied there will be a market for the shares.
Trading record and accounts
A new applicant for the admission of equity shares to the premium listing segment must have published or filed historical financial information that:
Covers at least three years.
Has a latest balance sheet that is not more than six months before the date of the prospectus and not more than nine months before the date the shares are admitted to listing.
Includes consolidated accounts for the applicant and all its subsidiary undertakings.
Has been audited or reported on in accordance with the standards acceptable under item 20.1 of Annex I of the Prospectuses Regulation.
Is not subject to a modified report, except for certain exceptions.
The historic financial information must both:
Represent at least 75% of the new applicant's business for the full three-year period.
Put prospective investors in a position to make an informed assessment of the business for which admission is sought.
The new applicant must demonstrate that it will be carrying on an independent business as it main activity.
The requirement for a three-year financial track record can be modified for mineral companies and scientific research based companies, or where the FCA is satisfied that it is desirable in the interests of investors and that investors have the necessary information available to arrive at an informed judgment about the applicant and the securities.
An applicant for premium listing must show that it has sufficient working capital for the group's requirements for at least the next 12 months from the date of the prospectus, although the FCA can dispense with this requirement if certain conditions are met (for example, if the applicant's business is that of banking or insurance).
Minimum shares in public hands
At the time of admission to listing, at least 25% of each class of shares being listed must be in the hands of the public in one or more EEA States. Shares are not regarded as being held in public hands where they are locked up for more than 180 days or held directly or indirectly by, for example:
The directors of the company.
Any of its subsidiaries.
By a person connected with such a director.
By a person holding 5% or more of the shares.
The FCA may approve a percentage that is lower than 25% if it considers that the market will operate properly with a lower percentage in view of the large number of shares of the same class and the extent of their distribution to the public.
In order to be eligible for listing, a premium-listed company which has a controlling shareholder must have a relationship agreement in place with the controlling shareholder at the time of listing. A controlling shareholder is a person who controls, together with any concert parties, 30% or more of the voting rights attached to the company's shares. The agreement must contain independence provisions as prescribed by the Listing Rules.
A secondary listing is known as a standard listing. All commercial companies applying for a listing of shares (whether premium or standard) are required to comply with the requirements in Chapter 2 of the Listing Rules (see Question 3). An applicant for admission of shares to a standard listing must comply with the requirements in Chapter 14 of the Listing Rules. The Financial Conduct Authority (FCA) will not admit shares of a company incorporated in a non-European Economic Area (EEA) state that are not listed either in its country of incorporation or in the country in which a majority of its shares are held unless the FCA is satisfied that the absence of the listing is not due to the need to protect investors.
Minimum size requirements
See Question 3.
Trading record and accounts
While there are no specific Listing Rule eligibility requirements in this regard, for a standard listing of shares and GDRs, the company must have audited historical financial information under the International Financial Reporting Standards (IFRS) or certain other Generally Accepted Accounting Principles (GAAPs) deemed "equivalent" to IFRS covering the latest three financial years (or such shorter period that the issuer has been in operation). It must also contain a statement that in the issuer's opinion the working capital is sufficient for the issuer's present requirements (or, if not, how it proposes to provide the additional working capital needed) for a listing of shares (but not GDRs).
Minimum shares in public hands
See Question 3.
The following are the methods by which a company can structure an IPO on the London Stock Exchange's Main Market.
An offer for subscription or sale
An offer for:
Subscription is an invitation to subscribe for new shares in the company and raises money for the company itself to fund the activities set out in the prospectus.
Sale is an invitation to purchase existing shares in the issuer and raises money for existing shareholders rather than the company itself.
An IPO can consist of both an offer for subscription and an offer for sale. These methods are commonly seen on large retail IPOs, such as the Royal Mail.
A placing involves the offer of shares (that can be new shares offered by the company or existing shares offered by a selling shareholder) to a specifically chosen set of institutional investors. This is often a cheaper method of raising capital than the offer for subscription or sale. However, it can result in a narrower shareholder base than a public offer.
An introduction is where a company joins the market without raising capital. Generally, a company can use this method if over 25% of its shares are in public hands and there is already a good, diversified shareholder base, for example, if the company is:
Already listed in another jurisdiction.
The subject of a demerger from an existing listed business.
Most large IPOs are "underwritten" by one or more investment banks. This means that any shares not bought are purchased by such banks for a fee. This provides the selling shareholders or the issuer with certainty as to the funds that will be raised.
Subsequent equity offerings are commonly referred to as "secondary" offerings. In broad terms, there are two types:
A pre-emptive offering is an offering made to existing shareholders pro rata to their existing holdings, usually requiring a prospectus.
Non pre-emptive offerings are offers of shares to either existing or potential new shareholders that do not relate to the number of shares already held, often made without a prospectus.
Pre-emptive offerings consist of:
Rights issues that are an offering of shares to existing shareholders where the right to acquire the new shares is tradeable in itself. Shareholders that choose not to take up their entitlement are compensated to the extent that if the shares not taken up can be sold in the market at a premium to the offer price, they get the benefit of the premium.
Open offers that are similar to rights issues, except that the right is not tradeable and there is no sale of rights. Open offers are often combined with a non pre-emptive placing.
A placing is a non pre-emptive offering where new shares are offered to existing or potential new shareholders. Placings can be combined with both rights issues and open offers.
Rights issues and open offers are public offers for which there is typically no exemption from the requirement to produce a Prospectus Directive compliant prospectus. This requirement makes the deals more public and also materially lengthens the timetable, as it can take several months to draft a prospectus and receive approval from the Financial Conduct Authority (FCA). The prospectus approval process takes the form of a series of private filings with the FCA, reviewing and dealing with FCA comments before approval is granted. There is a "proportionate disclosure regime" for rights issues which can be used if certain conditions are met, which means that a shorter prospectus with substantially reduced content requirements is published, but this has not been widely used in the UK.
Both rights issues and open offers can also require shareholder consents and therefore require a general meeting to be convened and held, which will lengthen the timetable by at least 17 days. However, as rights issues give existing shareholders the rights to participate in a new issue of shares on a pro rata basis and to obtain the benefit of any premium if they decide not to take up their rights, they are particularly favoured by investor bodies. A further point worth noting is that the open offer period of ten business days prescribed by the Listing Rules can run concurrently with the notice period for the general meeting. This is in contrast to the rights issue period of ten business days prescribed by the Listing Rules, which starts after shareholder approval is obtained at the general meeting (as nil paid rights are admitted to listing and cannot therefore have any conditionality attached to them).
Placings can be done much more quickly and are often done in just one day (via an accelerated bookbuild transaction), though they cannot be used for bigger capital raisings where the size of the issue is more than 10% of the existing share capital as this would also require a prospectus (see Question 11). Shareholder approval is usually not required, as it is common practice at annual general meetings of shareholders to seek authority to issue shares up to specified limits during the year.
Procedure for a primary listing
The principal steps for a company applying for a premium listing are as follows:
Preparation of reporting accountant and specialist reports.
Negotiating legal documentation such as the underwriting agreement and agreeing comfort packages.
Drafting marketing presentations, marketing and bookbuilding.
Pricing and allocation of shares.
Admission to the Official List and to trading on the Main Market.
Exercise of any over allotment option/stabilisation.
Procedure for a foreign company
The procedure is the same for a non-UK incorporated company. The eligibility requirements for a standard listing (whether for equity or GDRs) are less onerous than for a premium listing, but only companies with a premium listing are eligible for inclusion in the FTSE indices. If the non-UK company is incorporated in a jurisdiction where settlement in the UK is not easy (for example, because its securities are not admissible to the UK's electronic settlement system, known as CREST), then they are likely to seek a listing for depositary receipts.
Advisers: equity offering
The main advisers in an IPO are as follows.
The investment bank is primarily responsible for managing the IPO process and for co-ordinating the company's other advisers. The investment bank typically has several roles:
Sponsor. A company seeking a listing for its shares must appoint a sponsor. The sponsor must be an "authorised person" under the Financial Services and Markets Act 2000 (FSMA) and be registered on the UK Listing Authority's (UKLA) register of sponsors. The sponsor assesses the suitability of the company for listing. It advises on the:
structure and composition of the board and management team;
the best method of bringing the company to the market;
the IPO timetable.
It will act as the conduit for communications between the company and the UKLA. The sponsor also undertakes certain responsibilities to the UKLA in respect of the company that are set out in detail in the Listing Rules.
Underwriter. To the extent that shares are being sold by an existing shareholder or new shares are being issued by the company, these are usually underwritten by the investment bank. If the IPO is large, there will be a syndicate of underwriters, with one or more acting as the "lead" (often known as the global co-ordinator).
Financial adviser. The investment bank provides advice on issues such as:
Research analyst. Research on the company is published through the bank's research function.
For an IPO, legal advisers must advise the company, selling shareholders (if any) and the underwriters.
The role of the company's legal advisers is to:
Advise on the legal aspects of preparing the company for listing.
Carry out the legal due diligence.
Assist the company in the preparation of the prospectus (including verifying the accuracy of every statement of fact in the prospectus).
Negotiate the agreement the company enters into with the underwriters, accountants, registrars and others.
The role of the underwriter's legal advisers is to:
Advise on any legal agreements to which the underwriters are a party.
Assist the sponsor in the preparation of the prospectus.
Advise the sponsor in relation to its obligations.
The reporting accountant is distinct from the company's own auditors (though the role can be fulfilled by a separate team in the same firm). Its main function is to review the company's financial record for the benefit of potential investors. The accountants prepare an opinion of the company's three-year financials as well as a long form due diligence report.
The long form report provides a detailed financial and management history of the business and much of this information is used in the preparation of the prospectus even though the report itself is not published. The opinion is published in the prospectus and confirms that the historical financial information, as presented in the prospectus, gives a true and fair view.
The reporting accountant also prepares a report for the sponsor and the company on the company's projected working capital position over the 12 to 24 months following the IPO. The accountants must also provide various comfort letters to the sponsor and the company.
Public relations consultants
PR consultants can generate press interest and publicity for the company prior to the IPO, as well as helping to monitor public statements and press releases during the IPO process. After the IPO, ongoing press interest in the company can help sustain awareness of the company and liquidity in its shares.
The registrars deal with applications for shares and setting up and maintaining the share register of the company. They also deal with arrangements relating to CREST (the UK's electronic share settlement system).
A receiving bank is usually required if there is a retail offering in order to receive funds from retail investors.
Depending on the nature of the company, tax specialists (if this function is not being undertaken by the accountancy firm), actuaries, patent and trade mark experts, technical experts, or other experts may need to be involved in the IPO process, or a "competent person's report" may be required for an oil and gas or mineral company.
The main documents used in an equity offering are as follows:
Intention to float announcement.
Prospectus (unless there is an exemption, see Question 11) and verification notes.
Reporting accountants' documents such as long form report, opinions and comfort letters.
Ancillary issuer documents such as board minutes, responsibility statements and board memoranda.
Shareholder relationship agreement.
Bank comfort package, consisting of letters and confirmations from the issuer and reporting accountants plus opinions from the issuer's and bank's lawyers.
Equity prospectus/main offering document
Unless there is an applicable exemption (see Question 11), a prospectus is required for the issue of equity securities in the UK where:
There is an offer of securities to the public.
There is an application for admission to trading on a regulated market (that is, the Main Market).
The UK Listing Authority's (UKLA), as the competent authority, can approve the prospectus of any UK company, or the prospectus of any company that wishes to list its securities on the Main Market or offer them to the UK public.
The issuer must file the approved prospectus with the UKLA, through the National Storage Mechanism portal, via the Morningstar website (www.morningstar.co.uk/uk/NSM) and make it available to the public by:
Publication in a newspaper.
Making it available in printed form at the offices of the issuer and any financial intermediaries (such as the paying agents or the fiscal agent).
Publication on the issuer's website.
Publication on the London Stock Exchange's (LSE) website, through the publication of an announcement on the LSE's Regulatory News Service.
If the issuer publishes the prospectus in a newspaper or makes it available at its offices, it must also publish the prospectus on its website. If one of the electronic publication methods is chosen, the issuer must also make hard copies available on request, without charge.
Each element of the prospectus publication requirement has separate exemptions and where an offer is an offer to the public as well as an admission to trading on a regulated market, there must be an appropriate exemption for each element if the prospectus obligation is to be avoided.
Offer to the public
An offer to the public is exempt provided that:
It is an offer to qualified investors only.
It is made to less than 150 persons (other than qualified investors) per European Economic Area (EEA) state.
The minimum consideration that may be paid by any person is at least EUR100,000.
The securities are denominated in amounts of at least EUR100,000.
The total consideration cannot exceed EUR100,000.
Separately, the prohibition does not apply to offers where the total consideration for securities offered in the EEA is less than GB£5 million.
There are also exemptions for certain types of offer, such as shares:
Issued in connection with a takeover offer where a prospectus equivalent document is made available.
Allotted to employees (if certain conditions are met).
Admission to trading
There are exemptions for certain exempt securities. The main categories are as follows:
Securities representing less than 10% of the number of shares of the same class already admitted to trading over a period of 12 months.
Securities issued in connection with a takeover offer if a prospectus equivalent document is made available.
Securities offered to existing shareholders free of charge, or through a dividend, or to employees, or on conversion of other securities, or where shares are already admitted to trading on another regulated market.
The exemptions are wider than those for an offer to the public.
It must contain information necessary to enable investors to make an informed assessment of assets and liabilities, financial position, profits and losses, and prospects of the issuer and the rights attaching to the securities (necessary information). Necessary information must be presented in a form which is comprehensive and easy to analyse, and must be prepared having regard to the particular nature of the securities and the issuer.
The company and its directors (including proposed directors) have primary legal responsibility for the prospectus. Any person that has authorised any part of the contents of the prospectus will incur liability for that part of the prospectus (this includes the reporting accountants for their reports included in the prospectus and often also the sponsor).
The prospectus can be drawn up either as a single document or three separate documents known as the:
Registration document, which must contain information relating to the company.
Securities note, which contains information concerning the shares for which admission is being sought.
Summary, which must be in non-technical language and convey the essential characteristics and risks associated with the company and the shares. The whole summary should not exceed the longer of 7% of the length of the prospectus or 15 pages.
The Prospectus Rules specify the minimum disclosure requirements for the prospectus and set out the information that must be included in each of the registration document and the securities note.
In summary, the registration document must include details of:
The persons responsible for the document.
The auditors and other experts.
The company and its capital.
The group's operations and interests.
The operating and financial review (which is a description of the company's financial position, changes in financial condition and results of operations for each financial year and interim period reported on in the prospectus).
Recent developments and prospects.
The assets, liabilities, financial position and profits and losses (the prospectus must contain audited historical financial information on the group covering three financial years and the respective audit reports). For EU issuers this must be prepared in accordance with IFRS. For non-EU issuers the accounts must be prepared in accordance with IFRS or with that country's national accounting standards provided these have been accepted as equivalent to IFRS.
The securities note must include:
Details of working capital and indebtedness.
Information concerning the shares and the offer.
A supplementary prospectus is required if a significant new factor arises during the period between the later of either:
Approval of the prospectus by the Financial Conduct Authority.
Closure of the offer or admission to trading starts.
The prospectus is prepared by the issuer and its advisers, such as lawyers and specialist experts, with other advisers such as the banks' lawyers inputting into the process. A formal verification exercise is undertaken to test the accuracy of key statements in the prospectus.
The following persons are responsible for a prospectus and therefore may have statutory liability:
The directors of the issuer plus those who have agreed to act as directors and are named as such in the prospectus.
In the case of an issuer with an external management company, each person who is a senior executive of that company.
Each person who accepts, and is stated in the prospectus as accepting, responsibility for the prospectus.
The offeror (where it is not the issuer, for example, a selling shareholder) and each director of the offeror if it is a company.
Each person (not being one of the above) who has authorised the contents of the prospectus.
An issuer can also be liable to investors in contract or tort. Sponsors and other banks involved in an equity offering may also, in certain circumstances, be liable. In relation to the statutory regime, any person who has acquired securities to which the prospectus relates can claim compensation from those responsible for the prospectus if they have suffered loss as a result of the prospectus either:
Containing any untrue or misleading information.
Failing to disclose a matter required under section 87A of the Financial Services and Markets Act 2000 (FSMA) or a matter requiring a supplementary prospectus.
There are a number of statutory defences (for example, due diligence) (Schedule 10, FSMA). A claim can also be brought by those that have acquired shares in the market.
Marketing equity offerings
IPOs are typically marketed by the following methods:
Pre-marketing. This is done at an early stage and is done by a series of meetings with potential investors that the lead banks have identified. The rationale for the meetings is to introduce management and the company, and to identify any possible issues at an early stage.
Roadshows. These are more formal presentations by management to potential investors once the intention to float announcement (and the prospectus) has been published.
"One on ones". Specified targeted meetings with individual investors.
Advertising/other publicity. Advertising is only relevant for retail offers and can be an effective means of generating additional demand.
Participating brokers/dealers may be liable to investors in the following ways.
Sections 89 and 90 of the Financial Services Act 2012 (misleading statements and impressions).
Section 118, Financial Services and Markets Act 2000 (market abuse and insider dealing).
Section 52, Criminal Justice Act 1993 (insider dealing) (see Question 24).
Contract law. If there is a contract between the investor and the broker, the investor may be able to claim for contractual damages against the broker, using normal contractual principles.
Tort. The investor may be able to claim tortious damages against the broker if he can prove that the broker owed him a duty of care, that the duty was breached and that he suffered a loss as a result.
Financial Conduct Authority (FCA) Rulebook. Participating brokers/dealers will produce non-independent research. Non-independent research must be correctly labelled as such. Brokers/dealers must:
Take reasonable steps to identify and manage conflicts of interest which may arise in producing the research.
Must fairly present their non-independent research (including the identity of the author of the research).
Must disclose any relevant conflicts of interest and other information (see Chapters 12.3 and 12.4, FCA Conduct of Business Sourcebook for further information).
Breaches of the above may result in disciplinary proceedings by the FCA and in certain cases, civil claims.
Brokers can minimise their liability in the following ways:
Disclaimers. Disclaimers should be used that, for example, state that any investment should only be made on the basis of the information contained in the prospectus.
Verification. It is common for issuers to check the draft research for factual accuracy.
Research blackout. A blackout for a period prior to publication of the prospectus helps to distance research from the prospectus.
Management of conflicts of interest. Issuers should not be promised favourable coverage by analysts, analysts should not participate in roadshows and their reporting and remuneration arrangements should be structured to avoid conflicts (see Chapter 12 of the FCA Conduct of Business Sourcebook and Chapter 10 of the Systems and Controls Sourcebook for further information).
Forecasts and projections. These should be avoided.
Independence. The analyst writing the report should be independent of others in the same organisation selling the securities.
Distribution. Distribution should be limited to professionals.
Prospectus. The recipients of the research report should be sent the prospectus.
Bookbuilding is used on many securities offerings, whether an IPO or a secondary offering. The book is built after publication of the prospectus when the banks running the book receive indications of size of demand and at what price. In an institutional offer, the prospectus is sometimes in draft form (that is a pathfinder) and the final prospectus confirming the price for the shares and the number to be offered is only published once the bookbuild has taken place. Alternatively, a "price range" prospectus is produced (see below).
In a retail offer, the prospectus is likely to be a "price range" and, therefore, retail investors can be asked to indicate a total amount that they would be willing to invest or a maximum price per share or both. If the price is fixed outside the range set out in the prospectus, this is considered a "material new matter" and a supplementary prospectus is required.
Underwriting: equity offering
An IPO or secondary offering, which is a rights issue or open offer, is likely to be fully underwritten, that is, the underwriters will agree in the underwriting agreement to procure subscribers for the new or sale shares and if any shares are not taken up, to subscribe for those shares themselves in agreed proportions. It is less common for a placing to be underwritten and the banks may only agree to use "reasonable endeavours to procure subscribers". The underwriting agreement will contain the following key terms:
Conditions precedent/termination rights.
Indemnity from the issuer to the bank.
Warranties from the issuer (and the directors on an IPO).
Over allotment (on an IPO).
Post-admission undertakings from the issuer.
Commission, usually expressed to be between 2% and 5% of the total amount raised. Sometimes a discretionary separate success fee is payable.
Timetable: equity offerings
Set out below is an indicative timetable for an institutional bookbuilt IPO ("T" is the date of pricing):
T minus 6 months to T minus 3 months. Preparatory work, for example, advisers are appointed, eligibility for listing is discussed and due diligence is started. Banks submit eligibility letter to the Financial Conduct Authority (FCA) and prospectus drafting commences.
T minus 3 months. First submission of the prospectus to the FCA.
T minus 2 months to T minus 1 month. First draft reports circulated and announcement of intention to float.
T minus 1 month. Connected brokers' research is published. Research blackout period starts.
T minus 14 days. Pathfinder prospectus is published (or price range approved prospectus if retail offer). Underwriting agreement signed (if retail offer). Roadshows and bookbuilding start.
T. Offer is priced and shares are issued and allotted subject to admission. Approved prospectus is published (or pricing statement if retail offer) and underwriting agreement is signed (if institutional offer). Conditional dealings and stabilisation begin.
T plus 3 days. Shares are admitted to trading and to listing. Unconditional dealings begin.
T plus 30 days. End of stabilisation.
The timetable for a secondary offering by way of a rights issue or open offer will differ from the above as it may be necessary to convene a shareholder meeting to obtain consents for the issue and allotment of the new shares.
Stabilisation ostensibly breaches UK rules on insider dealing and market abuse. However, the Financial Conduct Authority (FCA) recognises the need for stabilisation to allow the market to operate more efficiently. Stabilisation must take place under Regulation (EC) 2273/2003 implementing Directive 2003/6/EC as regards exemptions for buyback programmes and stabilisation of financial instruments (Buyback and Stabilisation Regulation) or the FCA Price Stabilisation Rules (Stabilisation Rules) which, among other things, prescribe that:
Only prescribed stabilising action is permitted.
Only specified securities can be stabilised on a specified exchange within specified time limits.
Stabilising transactions must only take place within specified price limits.
Adequate prior disclosure and records of stabilising activities must be maintained by the stabilising manager.
Breaches of the Stabilisation Rules can result in the FCA bringing disciplinary proceedings and proceedings for injunctions and restitution.
Tax: equity issues
A number of tax issues can arise on an equity issue, requiring specialist tax advice. It is important to seek, and follow, expert tax advice at an early stage in the IPO process.
Tax issues can arise in the context of an IPO as a result of:
Existing shareholders disposing of shares.
The company being floated leaving a capital gains group.
The unwinding of employee share schemes.
Shareholders disposing of shares in the company realising a chargeable gain on the sale of their shares are liable to capital gains tax (individuals) or corporation tax (corporates). It may be possible to reduce this gain by pre-IPO planning to increase the base cost of the shares. The substantial shareholding exemption (SSE) (for companies) or entrepreneurs' relief (for individuals) may be available to mitigate these gains. The new investors' relief, due to be introduced in 2016, may also be available to reduce the tax chargeable on gains realised by individuals in the future.
Any pre-IPO restructuring involving UK intra-group transfers of assets into the company (or group) to be floated creates the potential for de-grouping tax charges. Provided certain conditions are met, any de-grouping tax charges are borne by the company (or companies) making the disposal of the company being floated. This may allow the company (or companies) making the disposal to shelter the charge within the SSE.
On a rights issue of ordinary shares, it is generally accepted that the company does not make an income distribution on the issue of either:
The provisional allotment letter (PAL) (if applicable).
The shares that are eventually issued after the end of the issue period.
However, there are two main exceptions to this treatment:
The issue of redeemable share capital or any security in respect of shares or other securities, except the amount of the issue that is equal in amount or value to the consideration received by the company for the issue.
A bonus issue of shares following a previous repayment of share capital.
Unless certain secondary issues of shares are structured as a reorganisation of the share capital of the issuing company, existing UK shareholders can be treated as though they have made a part disposal of their existing holdings.
If the issuer is raising capital through a rights issue or open offer in a currency other than its accounting currency, any foreign exchange gains or losses on currency hedging instruments are disregarded for tax purposes provided that, in particular, a person unconnected with the issuing company bears the risk of exchange rate fluctuations.
VAT on fees
The issue of shares is a non-supply for VAT purposes. If the capital raised is used for the purposes of a fully taxable or partially exempt business (for the purposes of VAT), the VAT incurred by a UK issuer on supplies made to it in connection with the share issue should be recoverable, either in full or in part.
Stamp duty/stamp duty reserve tax
Transfers of shares in UK companies generally give rise to a charge to stamp duty reserve tax (SDRT) or stamp duty, subject to applicable exemptions. The intermediary exemption and stock lending exemption may be available for stamp duty and SDRT that would arise for stabilisation, stock lending and greenshoe option transfers.
The issue of shares (not being a transfer) to persons including places (or to brokers as agent for the places) should not generally give rise to stamp duty or SDRT. A 1.5% SDRT charge previously arose on the issue of shares to persons providing depositary receipt or clearance services. However, following litigation, that charge is no longer applied, provided that such arrangements form an integral part of an issue of share capital.
To ensure that PALs are exempt from stamp duty, rights under a PAL or fully paid letter of allotment are only renounceable within six months from issue. No SDRT is generally payable on the issue of PALs. No stamp duty is payable on the renunciation of a PAL or a fully paid letter of allotment. However, SDRT is generally payable at the rate of 0.5% of the consideration on any renunciation or other dealings.
A company with a premium listing must comply with continuing obligations set out in the Listing Rules. The main areas relate to the following:
Transactions. Certain transactions, depending on size, require either prior shareholder approval or disclosure to the market.
Related party transactions. Transactions with related parties may require prior independent shareholder approval and disclosure.
Share dealing. All persons discharging managerial responsibility (PDMRs) must comply with the Model Code (set out in the Listing Rules) or a share dealing code with equivalent restrictions on when such a person may deal in the company's securities.
Corporate governance. A UK incorporated issuer is expected to "comply or explain" in relation to the Corporate Governance Code and must explain the extent to which it does so in its report and accounts.
A company with a premium listing must also comply with the following:
Disclosure and Transparency Rules (DTRs). The main areas relate to the:
disclosure of inside information;
periodic financial reporting;
notification of major shareholdings;
disclosure of dealings by PDMRs.
LSE Admission and Disclosure Standards. These impose some minor obligations in relation to certain corporate actions (for example, declaration of dividends).
The Listing Rules impose some further requirements if a listed company has a controlling shareholder, namely that the company must have in place at all times:
A written and legally binding agreement between the company and the controlling shareholder to ensure that the controlling shareholder complies with the Listing Rule independence provisions.
A constitution that allows the election and re-election of independent directors to be conducted in accordance with the Listing Rule election provisions.
A dual voting structure applies to the election or re-election of any independent directors of a premium listed company with a controlling shareholder. This means that such appointments need to be approved both by the shareholders as a whole and also by the independent shareholders (that is, any person entitled to vote on the election of directors of a listed company that is not a controlling shareholder of the listed company). If the election (or re-election) is not approved by both the shareholders and the independent shareholders and the company would still like to propose the director's appointment, it must propose a shareholder resolution to be tabled at a meeting to be held at least 90 but not more than 120 days after the original vote. To address concerns that there may be uncertainty regarding the status of the director during this period, guidance clarifies that a director that has been appointed can remain in office until the second vote.
The dual voting structure must be permitted by the company's constitution when it seeks a premium listing but transitional provisions mean that the dual voting requirement does not apply until the next annual general meeting for which notice has not already been given. A similar transitional period applies for the dual election process in the situation where a premium listed company gains a controlling shareholder.
The FCA will put in place an "enhanced oversight" regime in certain circumstances including where the controlling shareholder has not complied with the relationship agreement, and where the company is unable to include a statement in its annual report and account concerning the existence of the relationship agreement and compliance with its independence provisions. During the time that these measures are in place, any transaction or arrangement between the company and the controlling shareholder will be treated as a related party transaction to which the normal exemptions do not apply. The enhanced oversight regime will continue until the company publishes an annual report containing the appropriate statement.
A non-UK incorporated company is subject to the Financial Conduct Authority Rules in the same way as a UK incorporated company except that:
There are exemptions from certain Disclosure and Transparency Rules (DTRs) for issuers incorporated in certain countries and issuers incorporated elsewhere in the European Economic Area (EEA).
An issuer of depositary receipts on the Professional Securities Market is subject only to Chapter 2 of the DTRs and Chapter 18 of the Listing Rules.
An issuer of a depositary receipt on the London Stock Exchange's Main Market is subject to Chapter 18 of the Listing Rules, but is not subject to the major shareholding notification regime or the requirement to produce half-yearly or interim management statements.
If an issuer or any of its directors (or both) breaches the continuing obligations set out in the Financial Conduct Authority (FCA) Rules, the FCA can:
Issue a private censure.
Issue a public censure.
Suspend or cancel the company's listing.
Impose a penalty on the company and the director (if he was knowingly concerned in the contravention).
FCA guidance on how it applies these powers is found in the Decision Procedure and Penalties Manual.
Market abuse and insider dealing
Restrictions on market abuse/insider dealing
While the UK has implemented Directive 2003/6/EC on insider dealing and market manipulation (market abuse) (Market Abuse Directive), certain elements of the previous regime remain and as a result the UK currently has a wider definition of what constitutes market abuse than under the Market Abuse Directive. Market abuse as defined in section 118 of the Financial Services and Markets Act 2000 is behaviour in relation to qualifying instruments admitted to trading on a regulated market (or in respect of which a request has been made for admission) that falls within any one or more of six types of behaviour as set out below:
Improper disclosure of inside information (tipping off).
Dissemination of false or misleading information.
Misleading behaviour and market distortion.
The Financial Conduct Authority (FCA) has published the Code of Market Conduct that gives guidance to market participants as to what may or may not constitute market abuse.
The Market Abuse Directive will be repealed on 3 July 2016 when the Market Abuse Regulation (2014/596/EU) (MAR) comes into force. As MAR will have direct effect in the UK, there will be changes to FSMA to repeal certain sections. The basic market abuse offences are set out in Articles 14 and 15 of MAR, which provide that a person must not:
Engage, or attempt to engage, in insider dealing.
Recommend that another person engages in insider dealing, or induce another person to engage in insider dealing.
Unlawfully disclose inside information (Article 14, MAR).
Engage, or attempt to engage, in market manipulation (Article 15, MAR).
The Code of Market Conduct will be substantially amended as a result of MAR coming into force.
Penalties for market abuse/insider dealing
The civil market abuse regime allows the FCA to impose unlimited fines.
There are also separate criminal offences in relation to misleading statements and market manipulation. The maximum penalties are seven years' imprisonment or an unlimited fine or both.
There is also a separate criminal regime for insider dealing where the penalties are the same as for the above criminal offences (Part V, Criminal Justice Act 1993).
An issuer with a premium listing can only cancel its listing if it has obtained the consent of a majority of not less than 75% of shareholders. It must also send a circular, approved by the Financial Conduct Authority (FCA), to shareholders that gives the anticipated date of cancellation, which must not be less than 20 business days following the passing of the resolution.
Shareholder approval is not required where the issuer notifies the market that:
The financial position of the issuer is so precarious that, but for the de-listing, there is no reasonable prospect that the issuer will avoid formal insolvency proceedings.
There is a proposal for a reconstruction that would ensure the survival of the issuer and the continued listing would jeopardise this.
Cancellation is in the best interests of those to whom the issuer has responsibilities. The issuer must provide an explanation describing why shareholder approval is not being sought.
In any event, the issuer must give at least 20 business days' notice of the intended cancellation.
The FCA can cancel a listing if it is satisfied that there are special circumstances that preclude normal regular dealings in them (for example, the percentage of shares in public hands falls below 25%, or when the issuer completes a reverse takeover). Special rules apply in relation to takeover offers.
There were 59 de-listings from the Main Market in 2015, compared to 74 in 2014.
The FCA can suspend, from a time it may determine, the listing of any securities if the smooth operation of the market is, or may be, temporarily jeopardised or it is necessary to protect investors. The Listing Rules sets out a non-exhaustive list of examples of when the FCA can suspend listings, for example:
A failure to meet its continuing obligations.
The failure to publish financial information in accordance with the Listing Rules.
If the issuer is unable to assess accurately its financial position and inform the market accordingly.
An issuer that has the listing of any of its securities suspended must continue to comply with all the listing rules applicable to it. Further, if the FCA suspends the listing of any securities it can impose such conditions on the procedure for lifting the suspension as it considers appropriate.
An issuer can request a suspension and must give a clear explanation of the background and reasons for the request. The FCA will not suspend a listing if it is not satisfied that the circumstances justify the suspension.
The Capital Markets Union (CMU) is a flagship initiative of the 2014-19 European Commission that is intended to strengthen EU capital markets.
The Commission launched the CMU initiative because of concerns that, compared to other jurisdictions, capital market-based financing in the EU is relatively underdeveloped and businesses in the EU remain heavily reliant on banks as a source of funding.
The three main objectives of the CMU are to:
Broaden the sources of financing in Europe towards non-bank financing by giving a stronger role to capital markets. Borrowers and investors should be offered a broader set of financial instruments to meet their respective needs.
Deepen the single market for financial services. Capital markets should benefit from the size effects of the single market and become deeper, more liquid and more competitive, for the benefit of both borrowers and investors.
Promote growth and financial stability. The CMU should support growth and the creation of jobs by improving companies' access to finance, in particular small and medium-sized enterprises (SMEs). The CMU should also address possible risks stemming from the over-reliance on bank lending and intermediation in the financial system by promoting more diversified funding channels to the economy.
The Commission intends to deliver the CMU by a range of initiatives, rather than attempting to establish it through a single measure. These measures are a mixture of reforms targeted at specific sectors and more general reforms of the EU supervisory structure. The purpose of each of these measures is to remove barriers between investors' money and investment opportunities, and to overcome the obstacles that prevent businesses from reaching investors. The Commission's September 2015 action plan on building the CMU (COM (2015) 468 final) sets out the full range of initiatives that the Commission is currently contemplating and its anticipated timings for delivering them.
The Commission's aim is to put in place the building blocks for a fully-functioning CMU by 2019.
New Prospectus Regulation
One of the key elements of CMU is a Commission proposal (published in November 2015) to repeal and replace the Prospectus Directive with a new Prospectus Regulation to update its provisions relating to the scope of the requirement to prepare a prospectus, the contents of a prospectus and the approval process for prospectuses. The aim is to make it easier for companies to draw up a prospectus and access capital markets.
In its current form the proposed new Prospectus Regulation would trigger the following key changes to the Prospectus Directive regime for offering equity securities.
Admission to trading exemption. The threshold will be raised from 10% to 20% (see paragraph 10).
Minimum disclosure regime. A "minimum disclosure" regime which will benefit issuers whose securities have been admitted to trading on a regulated market or an SME growth market for at least 18 months and who issue more securities of the same class, issuers whose equity securities have been admitted to trading on a regulated market or an SME growth market for at least 18 months and who issue non-equity securities, and offerors of a class of securities admitted to trading on a regulated market or an SME growth market for at least 18 months. There will also be a separate minimum disclosure regime for certain small or medium-sized enterprises making public offers.
Universal registration document. A "universal registration document" is a registration document drawn up by an EEA issuer (it is not available to non- EEA issuers) which already has securities admitted to trading on a regulated market or a multilateral trading facility in a member state. Such an issuer will in certain circumstances be able to utilise a fast track procedure for approval of its prospectuses, and also use its universal registration document to satisfy its Transparency Directive obligations to file and publish annual and half-yearly reports.
The proposed new Prospectus Regulation is now being considered by the European Parliament and the Council for adoption. As an EU regulation, it will be legally binding in all EU member states without transposition into national law. The current proposal is that it will apply from the date which is 12 months after the date on which it enters into force. Consequently it is not expected to take effect before late 2017.
Market Abuse Regulation
The main changes for listed issuers arising from MAR relate to the following:
Delay in disclosing inside information: increased record keeping regarding the reasons for delay and requirement to notify the FCA once an announcement of inside information which has been previously been delayed is made.
PDMR notifications: there will be a threshold of EUR5,000 before PDMRs need to notify dealings, and the obligation will extend to dealings in debt as well as shares and financial instruments relating to shares. Notification must be made to the FCA as well as to the issuer, and must be done within a period of three business days after the transaction. The issuer must also notify the market within the same three business days period (it is not clear how this will work in practice). Notifications must be made on a prescribed template.
PDMR dealings: MAR sets out a closed period of 30 days prior to announcement of results required by the rules of a trading venue where the issuer's shares are admitted to trading or national law. As a result, the Model Code will be deleted.
Insider lists: a prescribed template must be used and additional content is required, for example, work and personal telephone numbers.
We are awaiting guidance from both the European Securities and Markets Authority and the FCA in a number of areas.
Financial Conduct Authority
Description. Website of the Financial Conduct Authority.
London Stock Exchange
Description. Website of the London Stock Exchange.
Description. The official home of UK legislation, managed by The National Archives on behalf of H M Government (note that this website includes legislation that may have been amended by subsequent legislation).
Nicholas Holmes, Partner
Professional qualifications. England and Wales, 1994
Areas of practice. Capital markets; securities; M&A; corporate.
Kennedy Wilson Europe Real Estate on its GB£910 million IPO.
J P Morgan Cazenove, Jefferies, Barclays and HSBC on the GB£1.1 billion rights issue of Babcock International.
Merlin Entertainments on its GB£3.3 billion IPO.
Goldman Sachs, J P Morgan Cazenove, Deutsche Bank and Morgan Stanley on the US$1.23 billion IPO of Riverstone Energy.
Languages. English, German (fluent)
Professional associations/memberships. Member of the Company Law Committee of the City of London Law Society.
Caroline Chambers, Counsel
Professional qualifications. England and Wales, 1996
Areas of practice. Capital markets; securities; corporate.