● unlisted company – under the control of five, or fewer, people or its directors.
Most private companies will be close companies; or a
● listed company – here less than 35 per cent of the shares are held by the pub- lic. The Stock Exchange rules require listed companies to dis- close whether or not they are close companies.
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The prospectus
The information required in a company’s prospectus is detailed in the listing particulars (Chapter 6 in the Yellow Book). The prospectus has been designed to ensure that the public has sufficient information about the company before buying the shares. The information that is contained in a company’s prospectus is also very useful for the analysts, as it contains information about the company’s history, its current position and its future prospects.
A prospectus must include the following information:
● Details of the offer, the company’s share capital and its indebtedness.
● Details of the company’s directors, secretary, auditors, financial advisers, solicitors, bankers and stockbrokers.
● A general description of the company including:
– an introduction and brief history of the company;
– a comprehensive description of its business;
– information on both the management and the staff of the company;
– details of the company’s premises;
– what the proceeds of the share issue will be used for;
– a record of the earnings together with forecasted profit and dividends;
– the company’s future plans and prospects.
● The accountant’s report containing the last three years’ profit and loss accounts and bal- ance sheets.
● Additional statutory and general information:
– share capital and options;
– the Articles of Association;
– subsidiary and associated companies;
– directors’ interests and service agreements;
– material contracts;
– any pending litigation.
The Public Offers of Securities Regulations 1995 impose three prospectus requirements on companies offering their securities:
(1) when the securities are offered to the public for the first time, the published prospectus should be freely available to any member of the public, at a UK address during the period of the offer;
(2) before publishing this prospectus, it should be registered with the Registrar;
(3) any document, other than the prospectus, should state that a prospectus, if required, is, or will be, published.
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Continuing obligations
Once the shares have been listed, the company must ensure that the shareholders’ interests are protected and that they are kept informed of the company’s activities and progress. Con- sequently, listed companies have to comply with the Continuing Obligations. (These are detailed in Chapters 9–16 in the Yellow Book.)
Companies are required to submit, for approval, to the Stock Exchange:
● all circulars to holders of securities
● notices of meetings
3 Getting a listing on the Stock Exchange
● forms of proxy
● advertisement notices to holders of bearer securities.
Companies are also required to notify the Exchange if any of the following occur:
● changes in directors
● dividend declarations
● material acquisitions
● profit announcements
● proposed changes in the nature of the business.
Companies are also required to disclose any information that is necessary to enable people to judge the position of the company and to avoid a false market in its listed securities. If there is any information that would lead to substantial price movements, and it is likely that secrecy cannot be maintained, the company must warn the Company Announcements Office and disclose this information.
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Additional accounting requirements for listed companies
As the shares are now in the hands of the general public, companies need to disclose more information about their financial position. Listed companies are expected to issue their accounts within six months of their year end, although they may apply for an extension if they have significant overseas interests. However, most listed companies will report within three months of their year end.
Listed companies are required to disclose the following additional information in their accounts:
● borrowings:details of bank loans, overdrafts and other borrowings;
● Cadbury Committee Code of Best Practice:(this applies only to companies incorpo- rated in the UK) statement of whether the company complies with the requirements of the Cadbury Committee’s Code of Best Practice, together with a review by the auditors and any reasons for non-compliance;
● capitalised interest:the amount of any interest capitalised;
● close company:a statement of whether or not the company is a close company;
● contracts:
– details of any significant contract in which any director had, or has, a material interest;
– details of any contract with, or for the provision of services by, any shareholder with 30 per cent, or more of the voting power (a substantial shareholder);
● directors:
– details of the waiving of any emoluments by a director;
– the identity of each independent non-executive director, together with their brief bio- graphical details;
– details of each director’s beneficial and non-beneficial interests in the company’s shares and options;
● inaccurate profit forecasts:if the period’s results differ by 10 per cent or more from any published forecast and the reason for the difference;
● investments:
– the principal country in which each subsidiary operates;
– details of each associated undertaking;
● non-compliance with relevant accounting standards: any departures from UK Accounting Standards, US Accounting Standards, or International Accounting Standards,
as applicable to the company. This must be accompanied by a statement by the directors about the reasons for non-compliance;
● shares and shareholders:
– details of the waiving of any dividends by a shareholder;
– information on shareholdings of 3 per cent or more of any class of voting shares, that are not owned by the directors;
– details of any authority for the purchase by the company of its own shares, and details of any purchases that were not made through the market;
– details of shares that were issued for cash, unless this issue was in the form of a rights issue;
– if the company has listed shares in issue and is the subsidiary of another company, it must disclose the parent’s participation in any placing of its shares.
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How companies can get a listing
There are three ways that a company can get a listing on a stock exchange:
(1) an offer for sale or subscription (2) a placing
(3) an introduction.
We will look at each in turn.
The offer for sale
This is the most common way of getting a listing. The shares are offered to the public, usu- ally through a newspaper advertisement, containing both the prospectus and an application form for the shares. Either existing shares or new shares are offered for sale. We are obviously interested in who will be receiving the cash from the share issue: the existing shareholders or the company itself.
The shares must be sponsored; either by a merchant bank and a broker, or just by a bro- ker. The sale could be effected either through a direct invitation to the public (an offer for sub- scription) or via an intermediary. The issuing house, or sponsoring broker, buys the shares and offers them to the public at a slightly higher price. The offer for sale will be either a fixed- price offer or a tender offer.
A fixed price offer
The sponsors will look at the historical financial performance and the profit forecasts and compare these to other companies in the sector. They will be able to consider the superior, or otherwise, growth prospects and indicated dividend policy of the company and use these to determine the price for the offer. It is always worth remembering two things:
(1) The company almost invariably is cautious in its profit forecast for the year. The last thing that it wants to have to do is to explain to shareholders, in its first year as a quoted company, why the company did not achieve the forecasts. Over-achievement, on the other hand, can always be put down to good management!
(2) The sponsors will want to make sure that the issue is successful, and preferably the share price following flotation (in the aftermarket) should be above the flotation price.
Consequently, all things being equal, with good management, sponsors and no market crash there should be money to be made on a flotation!
3 Getting a listing on the Stock Exchange
A tender offer
An offer by tender would be used when the company is very difficult to value. Investors are invited to subscribe for the shares and asked to state what price they are prepared to pay.
(This will be a price above a stated minimum.) Assuming that all the shares can be sold (the issue is fully subscribed) the sponsors then work out at what price all the shares can be sold.
This price is then referred to as the striking price, and anyone who has tendered at this price, or above it, has a chance of getting some shares. The striking price may not necessarily be the highest price, as the sponsors will want an aftermarket in the shares. Any one bidding below the striking price will not get any shares.
Even if your bid was at the striking price, you may not get all of the shares that you asked for, as the issue can be over-subscribed. In a tender offer this may be done to create an after- market.
Any issue can be oversubscribed be it via a fixed-price offer or a tender. The sponsors have then to decide who will get the shares, and how many each bidder will get. This process is referred to as allotment. This happened in 1997 with the Norwich Union flotation, when a lot of small investors were disappointed. The allotment can either be achieved through a bal- lot, where if you are lucky you get what you asked for, or the applications can be scaled down, according to a formula. Sometimes companies want to favour small investors, and they get a larger percentage of their applications.
A placement
In this case the company gets an initial spread of shares by arranging privately to sell shares to a range of investors. The placing is usually arranged by the company’s broker and most of the shares will probably be placed with his clients. Therefore, there is no offer to the public, or general offer to the existing shareholders. After the placing, permission is given for the shares to be traded on the stock market, and anyone can buy the shares in the normal way.
A variant on a placing is an intermediaries offer. The shares are offered to intermediaries, who then allocate them to their own clients. Many AIM issues, which tend to be smaller, are made via a placing.
An introduction
This is the rarest way of obtaining a listing, as the company does not raise any additional capital. It tends to happen where a company already has a large spread of shareholders, and is simply looking for permission for its shares to be traded in the stockmarket.
Introductions are common in two situations:
(1) the company is already listed on an overseas stock exchange;
(2) where a UK company has been financed by institutional investors in a management buy out.
It is the cheapest way of getting a listing.
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Subsequent share issues
Small quantities of shares can be directly placed in the market. The rules of the Stock Exchange require, in a rights issue, that the company offer its existing shareholders the opportunity to buy new shares at a discounted price. The shareholders then have three alter- natives:
(1) they can exercise their right to buy the share;
(2) they can sell their rights to buy the share (in practice this option is only available to large shareholders, the smaller shareholders’ profit will be wiped out by dealing fees);
(3) they can do nothing.
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Underwriting
Most share issues are ‘underwritten’. This is a form of insurance, provided by banks and insti- tutions, where the underwriters agree to buy the shares if no one else wants to buy them.
This ensures that the company will receive some cash from the rights issue. The underwrit- ers were forced to buy the shares in the BP privatisation in 1987. The stock market crash put the offer price above the market price, so that most of the shares were left with the under- writers.
3 Getting a listing on the Stock Exchange
Marketability criteria
To qualify for a listing on the Stock Exchange, companies must meet the Exchange’s marketability criteria. The minimum market capitalisation for share issues is £700 000 (£200 000 for debt issues) and at least 25 per cent of the shares should be in the hands of the general public.
The prospectus
To obtain a listing companies must issue a prospectus giving detailed information about the company, its advisers, its history, its current position and its prospects. Profit and loss accounts and balance sheets should be provided for the last three years. The prospectus enables the investing public to make an informed investment decision.
Obtaining a listing
There are several different ways that companies can obtain a listing. The commonest one is where the shares are offered for sale by an intermediary. The issuing house, or spon- soring broker, buys the shares and offers them to the public at a slightly higher price. This is called an offer for sale. Alternatively, the shares could be offered directly to the public.
The price of the shares may be fixed (a fixed-price offer), or applicants could be invited to bid for the shares (a tender offer). In an offer for sale by tender, the price is determined by the market, rather than by the company’s advisers.
A listing can also be obtained through a placing. Shares are privately sold to investors, usually by the company’s broker placing the shares directly with his clients.
Most share issues are underwritten, where institutions have promised to buy the shares if no one else wants them.
If the company does not want to issue any additional shares as it already has a large spread of shareholders, it could have an introduction to the stock market. Introductions are used where the company is simply looking for permission for its shares to be traded in the stock market.
Continuing obligations
Once a company has obtained a listing, it must meet the stock market’s continuing oblig- ations. It must disclose additional financial information in its accounts and disclose whether or not it complies with the Cadbury Committee’s requirements on corporate governance, and explain any non-compliance. Circulars and notices to shareholders should be approved by the Exchange prior to their issue. The company should also notify SUMMARY