Introduction – general role 105; The special role of legal advisers 106; Due diligence 108; Documentation 109; Continuing Obligations 110. Classroom tests for purposes of AIM Rules 203; Other rules and regulations for listed companies and AIM 204; Summary 205.
Contributors’ notes
Bevan Brittan LLP
Charles Stanley Securities
CMS Cameron McKenna LLP
Corfin Communications
Ernst & Young
Freeth Cartwright LLP
Grant Thornton
Hazlewoods LLP
Hoare Govett Limited
H W Fisher & Company
The Irish Enterprise Exchange
KBC Peel Hunt
Lawrence Graham LLP
The London Stock Exchange
Pinsent Masons
Rob Hutching is a corporate partner at Pinsent Masons with extensive experience in both national and international corporate work. Robert Moiris is a corporate partner at Pinsent Masons, with significant experience in a wide range of corporate transactions, including mergers and acquisitions, initial public offerings (IPOs), fundraising, joint ventures and reorganisations.
PLUS Markets Group
He has particular expertise in public and private mergers and acquisitions, stock exchange matters, venture capital investments and joint ventures. Martin Shawis is a partner at Pinsent Masons and Head of Corporate Europe, with a wealth of experience in corporate finance.
PricewaterhouseCoopers LLP
He acts for a wide variety of public and private companies across a number of sectors, with a particular focus on manufacturing and engineering, energy and real estate. He acts for a number of major UK clients and has extensive experience of transactions in Europe and the United States.
Punter Southall Transaction Services
Simon Boadle is a partner in PricewaterhouseCoopers' corporate finance business, with more than twenty years of experience in mergers and acquisitions (M&A) and equity capital markets in investment banking and at PwC. He currently leads PwC's national M&A team in the UK and its listed company advisory team, which focuses on mid-market transactions.
ShareMark
But just as there are many forms of financing, there is no single route to accessing a public market. So if you're looking for a growth market that meets all your needs, there's no market like AIM.
Introduction
It is important for directors to understand what they and the company will be 'in' for when the company is launched and to make the most of the company's listed status. Each chapter in the book is written by an experienced professional practitioner from a leading company in the relevant field.
To float or not to float – planning your
The equity environment
Summary
The period from 1982 to 2000, and in particular the 1990s, were particularly favorable for raising money in the City and other financial markets. It wasn't an entirely smooth ride for investors, with the overall trend line punctuated by setbacks in specific market sectors and the market as a whole.
The exuberant 1980s
Investment banking became more global and overseas financial institutions moved to London to take advantage of the new opportunities. Like his counterpart in Washington, the finance minister cut interest rates in an attempt to support demand.
The benign environment
Stock prices had indeed reached a level at which a correction was in order, but the extent of the adjustment was unprecedented and unforeseen in terms of its speed and magnitude; an adjustment that would previously have taken two years took place in the space of less than four weeks. As it happened, they got even better - so much so that 1987 represented one of the greatest investment opportunities in history.
The end of the bull market
Until the collapse of the tech bubble in 2000, private investors were among the most enthusiastic investors in AIM companies. While AIM will continue to attract Main Market companies, the number of net transfers is likely to be reduced simply because of the smaller number of companies listed on the Main Market.
Looking forward
Many already believe that a UK company with a market capitalization of less than £100m (or even more) should be listed on AIM rather than the main market. However, the size of the business floating on AIM is likely to continue to increase as larger companies, no longer large enough for the Main Market, apply for admission.
Conclusion
Some businesses will also prefer to float on AIM due to tax benefits and the lower cost of entry. Smaller companies already on the Main Market are considering transferring to AIM to benefit from better coverage in investment publications and by brokers and analysts, different rules for announcing and approving deals and lower ongoing costs.
Notes
The exchanges themselves are becoming increasingly integrated, and the likely result is that the interest of institutional investors will focus primarily on giant pan-European companies listed on pan-European exchanges.
Necessary and sufficient conditions
The main market is regulated by the Financial Services Authority (FSA), which in this capacity is sometimes referred to as the UK Listing Authority (UKLA). AIM is managed and regulated by a stock exchange and is not a regulated market for the purposes of EU law.
Types of company whose shares can be admitted
They are the Main Market – intended for established companies – and the Alternative Investment Market (AIM) of the London Stock Exchange (the “Stock Exchange”), designed primarily for emerging or smaller companies. The Official List is a regulated market for the purposes of EU legislation and the listed shares are traded on the Stock Exchange.
Minimum assets, equity and/or working capital
Management quality and continuity
Corporate governance
The company should consider what systems need to be put in place in light of the flotation. It is also important for the company's directors to obtain adequate directors' and officers' liability insurance, as the chances of directors being sued increases significantly when the company goes public.
Minimum public float
Another proposal is to create new board committees, such as an audit committee that oversees compliance with various regulations and laws, a remuneration committee that is in charge of senior management salaries and benefits, and a nominating committee to create a system for appointing and general of directors, which is open to scrutiny. Additionally, it is worth considering aiming for best practice as a standard rather than settling for minimum requirements.
Track record
Financial information
Restrictions on shareholdings
Independence from controlling shareholders
Lock-in requirements
Sponsor or other financial adviser
Market maker or broker
Is flotation the right financial strategy?
Issues to consider Access to capital
Flotation brings all the pros and cons of being in the public eye. A listing provides greater visibility for the company and can certainly improve its public image, the benefits of which can flow through in a number of ways.
Alternative sources of finance
The usual route to finding a source of funds suitable for the specific needs of the business is through an accountant or other adviser, although a company can also identify potential investors through the British Venture Capital Association (BVCA) to contact. However, it is important that the participant considers the long-term implications of the association.
Exiting the business
Alternative sources of finance
Alternative routes to raising cash Trade sale
One of the most common misconceptions about PE is that these investors will completely take over the company. However, one cannot overlook the fact that the equity of the original owners will be diluted.
The multi-track process
There are also rights issues, where a company offers existing shareholders the right to buy, in proportion to the shares they already own. Both of these routes can be complicated and the amount of funds available will be less than if the company had chosen to go public.
Case study: Land of Leather
The market was growing, leather was still a popular product and we had a very simple plan to open a store. The first thing we had to do in every presentation was explain why we were coming to market a year after the MBO and in a depressed retail environment.
Alternative markets
The regulatory framework
Introduction – basic choices
The London markets have many advantages for companies over the alternative European markets – notably a higher profile (especially in the United States), a proven track record of attracting companies and investors, critical mass, a concentrated pool of investors in the Square Mile, and investor confidence created by a well-regulated market.
London Stock Exchange plc
AIM has been developed to meet the needs of smaller, growing companies that may not meet all the criteria for listing on the main market or for which a more flexible regulatory environment is more appropriate. The choice between the main market and AIM largely depends on the size of the company and the stage of its cycle.
Legal framework
For eligible securities to be officially listed under the Listing Rules, an application must first be made to the FSA through the UKLA. Second, an application must be made to the LSE for the admission of the relevant listed securities to trading on its listed securities market.
Admission criteria Main Market
Certain other criteria regarding market capitalization and information to be included in the prospectus, as well as ongoing liabilities (including quarterly financial reporting) must also be met. Assuming these conditions are in place, the company can then proceed to prepare the prospectus or listing details necessary for the listing to take effect, providing the very detailed information set out in the Listing Rules and Prospectus Rules about the company, its business, management , capital. structure and ownership and listed shares.
Alternative stock exchanges
This realization may have contributed to NASDAQ's decision to acquire Easdaq, a Belgium-based pan-European exchange, in 2001. The Main Market or even AIM may not be suitable, or the listing costs may simply be deemed unacceptable or unnecessary.
The success of AIM
As discussed elsewhere in this book, institutional investors are increasingly thinking in pan-European terms, and national markets are combining to reflect this trend. Euronext was the result of the mergers of the French, Dutch and Belgian markets, and the London Stock Exchange was seen by some as a potential merger partner for a number of overseas exchanges.
AIM or PLUS?
Overseas alternatives
This problem is most likely to occur when the two markets are in significantly different time zones, such as Sydney and London. There are over 30 new markets around the world, half of which are in Europe, while most of the rest are in Asia Pacific.
Admission requirements
Initial capital No minimum 0–30 million USD, No minimum No minimum requirement depending on application requirement. Market No minimum US$0–75 million, No minimum No minimum capitalization requirement subject to demand requirement.
Why a public flotation?
Easier takeover rules make growth through acquisition quicker and less expensive, and AIM's unquoted status for tax purposes can be an advantage for some companies. The main differences between AIM and the Main Market of the London Stock Exchange are as shown in Table 7.1.
AIM: an international market
In 2005, a new FTSE AIM index series was launched, comprising the FTSE AIM UK 50 Index, FTSE AIM 100 Index and FTSE AIM All Share Index. This was joined in May 2006 by the FTSE AIM All-Share Supersector Indices, which are derived from the FTSE AIM All-Share Index and based on the Industry Classification Benchmark (ICB).
AIM’s regulatory approach and joining AIM
Improvements to the AIM Disciplinary Procedures and Appeals Manual were also introduced, providing clearer guidance on the Exchange's approach to dealing with breaches of the AIM Rules. ឣ confirmation that the company has complied with the legal and regulatory requirements of the relevant AIM designated market;.
Day one of trading – and beyond
ឣ a description of significant changes in the company's financial or trading position since the date of the preparation of the last audited accounts. The company's close engagement with the investment community during the listing process is to continue after its shares have been listed on AIM.
The outlook for AIM
Once a company has joined AIM, it becomes subject to new and clear disciplines, designed to keep shareholders fully informed of the company's development. The company's directors and employees must also comply with certain restrictions on their freedom to trade in the company's shares while in possession of unpublished information.
PLUS Markets Group
Overview
Reasons for floating your company
Reasons for choosing PLUS
ឣ Clear and simple admission process where the PLUS regulatory team works together with the company's advisors during flotation. ឣ The PLUS regulatory team that enforces the rules has focused on investor protection through meticulous regulation with an uncomplicated, straightforward approach.
When a company is ready for PLUS
Investors will consider the company's financial performance before making an investment decision and will want a detailed analysis of growth prospects. Essentially, the non-executive director's role is 'to make a creative contribution to the board by providing objective criticism'.
Seeking admission to PLUS
The PLUS business advisor will submit an admission notice, along with completed application forms and supporting documentation, to PLUS. PLUS's corporate advisor files a private placement memorandum for the admission of the shares to trading.
The PLUS advisory team The PLUS corporate adviser
This is a private document and is a statement of the financial projections prepared by the company for the period following admission to trading. The registrar has input for the application part of the prospectus and draws up the share register.
Life as a public company: continuing obligations
Illustrates the effect of a takeover or restructuring on the assets and liabilities of the new group. When a company enters the market, the registrar keeps a permanent record of the share book.
How ShareMark works
If orders are entered at the same price, the earliest order will take priority. Unfilled buy orders are carried over to the next auction, and unfilled sell orders can be resubmitted.
Regulatory status
Only those who were willing to buy at or above, and sell at or below the final price will stand a chance of successfully completing their order.
Advisers
The ShareMark admission process
ឣ Register. Companies applying for ShareMark must have at least one year of audited accounts, with no statement of fundamental uncertainty. However, the ShareMark Admissions Committee will review the company's accounts prior to admission and will expect that there will be sufficient working capital for the company to continue operating at current levels for at least one year.
Information required
This is to ensure that existing shareholders and potential investors can make an informed assessment of the company's assets and liabilities, financial position, profits and losses and prospects. It should also include reference to any controls regarding who can and cannot purchase the company's securities and any limits regarding purchases.
The ShareMark Admission Committee
Costs and time involved
Shareholder communication and meeting ongoing shareholder requirements
ShareMark publishes a monthly e-mail bulletin that can help shareholders and potential investors stay up to date with company news and price movements. ShareMark prices can also be monitored through the Share Center dealer team or on the website at www.sharemark.co.uk.
Ongoing requirements
If this scenario describes you and your company, you should consider the Irish Enterprise Exchange. Launched by the Irish Stock Exchange in 2005, the Irish Enterprise Exchange (IEX) combines the benefits of a public market quotation with a regulatory regime specifically tailored to meet the needs of small to medium-sized companies.
Market performance
Your company is small to medium and needs funds to expand and develop its business, now and in the future. You have decided that a public market listing is the best option for your company.
The benefits of an IEX quotation
Key features of the IEX regime Admission
The admission process
- Appoint an IEX adviser
- Submit a pre-admission announcement
- Submit an admission document
- Submit supporting documents
A new company seeking admission to IEX must prepare an admission document that discloses information required by the IEX Corporate Rules and submit this to the exchange at least three business days before the expected admission date. At least three working days before the expected admission date, the company must submit the IEX fee and a completed IEX application form to the Exchange.
The fast-track route to IEX
At least 10 business days before the expected date of admission to the IEX, an applicant company must provide the Exchange with a 'pre-admission' announcement, which sets out the company's intention to join the IEX and includes information about the company and its securities. directors and major shareholders. The admission document must remain publicly available free of charge for at least one month from the date of admission to IEX.
Admission countdown
ឣ a description of any significant change in the financial or trading position of the company that has occurred since the end of the last financial period for which audited accounts were prepared;. Companies following the fast track must appoint an IEX advisor and submit the appropriate forms to the Exchange.
Life after admission
An IEX company must publish half-yearly and annual accounts within certain deadlines: within three months after each half-year end and within six months after each financial year end. Further information about IEX, including the IEX Rules for Companies and application forms, is available on the Irish Stock Exchange website, www.ise.ie.
The flotation process
Selection of advisers
The company's existing lawyers and accountants may already have the necessary expertise, experience and resources to act for it in the float. Directors should also investigate possible scope for negotiation on costs and areas of responsibility.
Advisers’ roles The sponsor
First and foremost, the sponsor will assess the company's general suitability for an IPO in light of its organizational structure and capital requirements. The board may also want to be sure that its chosen broker appears in the league tables of leading research houses for the company's particular sector.
Appendix: List of documents for a flotation
The role of the nomad
Rules as they apply to nomads, new guidelines are included on the responsibilities of nomads and the work they must undertake to fulfill those responsibilities (especially in relation to due diligence on the company and its management), together with the review and disciplinary procedures available to the London Stock Exchange in the event of rule violations by the nomad. As a result of these recent developments, new companies applying to AIM, as well as existing AIM companies, should expect much greater scrutiny and oversight by their nomads than has sometimes been the case in the past.
Who may act as a nomad?
What a company should expect from its nomad
The AIM rules for companies apply at all times and the nomad should act as the primary advisor to the company and its board, guiding them on the application of these rules together with related disclosure requirements and developments in best market practice. However, regular dialogue between the company and its nomad should become part of both parties' normal working week.
What the London Stock Exchange expects from a nomad
The London Stock Exchange considers this work to be an important responsibility of a nomad and will hold the nomad responsible for the actions (or inactions) of its clients. The nomads' responsibilities, contained in Schedule Three of the AIM Rules for Nominated Advisers, consist of a number of principles, together with related actions, which nomads are now expected to follow in determining the suitability (or otherwise ) of a company to be traded on. PURPOSE.
Choosing the right nomad
The role of the lawyers
Introduction – general role
ឣ the suitability of the company's articles of association for IPO and the extent to which the company meets the listing requirements; There are a large number of factors involved in determining this but essentially it is a balance between two factors, which are not necessarily mutually exclusive, namely firstly the need to select and instruct an experienced and competent legal advisor who is able to undertake the wider range of complex legal work required, and secondly, ensuring that the legal advisor provides good value for money.
The particular role of the legal advisers
ឣ shareholders of the company who may be selling shares in the sale in order to realize all or part of their investment;. ឣ cooperation with the company in checking the tender documentation and ensuring that (where possible) statements are substantiated by referring to objective sources;.
Due diligence
The company's solicitors will generally advise the company in setting up such a scheme. The company's lawyers will prepare a detailed series of questions seeking objective evidence of the accuracy of each statement in the listing document.
Documentation
In addition to gathering the information required for the prospectus, the company's legal advisors must ensure that the company has proper title to the key assets of the business. Through this process, directors can gain comfort that every statement made by them in the offer document can be independently verified.
Continuing obligations
Sanctions for negligent or unfair acquisition of funds through the issuance of shares are high, so extreme caution is required when preparing all the above-mentioned documentation.
The role of the reporting
Recent changes
Are you ready for flotation?
ឣ Financial resources. The company will need to ensure that it will have sufficient financial resources after the IPO. ឣ Re-registration as a public limited company (plc). The company must be registered as a plc.
Financial due diligence
Working capital requirements
Other comfort letters
ឣ Tax disclosures. The circular will include a summary of the tax legislation that will apply to investors in the company. Reporting accountants usually provide a letter to confirm that this provides a fair summary of the relevant legislation.
Published historical financial information
However, reporting accountants are permitted to use audit evidence obtained by the auditors of the company's annual financial statements. Such access would normally be granted on the basis that the auditors assume no responsibility or liability to the reporting accountants.
Pro forma financial information
If the reporting accountants determine that the auditors' work is inadequate, if they do not have access to the auditors' working papers, or if the audit has not yet been completed, the reporting accountants must implement procedures to compensate for this. If the auditors are from a firm other than the reporting accountants, the auditors will normally make their working papers available to the reporting accountants in accordance with appropriate professional guidance.
The role of the broker
Definition
Nomad/broker relationship
Typical structure
Areas of responsibility – summary
Role in preparing for the IPO
After this part of the process, the broker will also arrive at a likely valuation range, which will help determine both the viability of the IPO and its timing.
Preparation for IPO
It usually contains warranties and indemnities to protect the broker in relation to the information in the acceptance document and other information that will have been provided by the company's management.
Role during IPO
Role post-IPO – the secondary market
As a basis for this, the broker will assist the company in formulating an ongoing investor relations program. The broker will also work with the company and its financial PR advisors to ensure it remains visible between results announcements.
Key issues for the company, the nomad
Responsibilities
An integrated broker and nomad?
What a company should look for from its broker and nomad
For the IPO, the nomad will set up a corporate finance team to work on the float, usually consisting of director, assistant director, manager and executive officer. The intense work will be led by the corporate finance team, which acts as ringmaster to coordinate the IPO process, with the fundraising the responsibility of the brokerage team.
The IPO timetable and responsibilities
Post-IPO
Pitching process
Take advice
Potential problem areas
A valuation indication on a given day for a float six months in the future may prove inaccurate (especially if the valuation or the broker's ability to attract money is exaggerated). Such events may change the willingness of the company or the advisor (or both) to proceed with the transaction, and the IPO may be postponed until more positive market conditions exist.
Golden rules for companies when dealing with advisers
This does not mean that a float is impossible, but it does mean that the tentative valuation that was originally given may be wrong.
What the nomad is looking for
What the broker is looking for
Is there a due diligence strategy that can satisfy the rigor requirements without jeopardizing the deal and costing too much money. Professional advisors sometimes complain that their due diligence guidelines are too vague and lack precision.
The vendor’s perspective
However, if the due diligence investigations are such that staff begin to suspect that something is afoot, they may well become uneasy about their jobs. Accordingly, any potential purchasers presented with a supplier's due diligence report will want to ascertain the nature of the order that gave rise to it.
What due diligence should cover
Later in this chapter I will provide a checklist of the main issues that a proper financial audit should consider. Due diligence should determine what type of pension schemes, if any, exist and what their costs will be in the future.
The checklist
It should also be noted that the process will become more difficult and less reliable if performed under severe time constraints. Therefore, it is important to agree the timing with the target company at an early stage.
Valuing the company’s shares
Owners will want the highest possible price to recognize the value they have created in the company and minimize dilution. The owners of the company will generally prefer a higher price, to maximize the value of the company and minimize dilution.
The principles of valuation
Valuing a company
Turnover multiples that estimate the value of the business relative to turnover can also be considered. A company's WACC is the result of applying the company's optimal gearing structure to the above cost of equity and cost of debt.
Valuation in practice
A business can be viewed as a collection of assets whose value is based on the company's audited balance sheet. A company's assets are valuable to the extent that they enable the company to trade and generate profits.
Indemnities and warranties from
Function of warranties and indemnities
An alternative possibility is for the issuing house to argue that, since the guarantee holders would always have foreseen that any loss would be suffered by third parties to whom securities were underwritten, the issuing house should be able to cover the loss of that third party to recover parties. Unlike a guarantee, an indemnity is an express agreement that, should the issuing house suffer loss of a specified nature, the indemnified will cover those losses.
Sponsor’s indemnity
The issuer may prefer to simply ensure that the underwriting agreement includes a well-drafted indemnity in favor of the issuer so that the issuer can recover losses arising from claims brought against it by third parties, including sub-insureds. In the context of most insurance contracts, the more important purpose of guarantees is to provide a mechanism to allow the issuing house to terminate its underwriting obligations and to focus the minds of those making the guarantees (probably more so than verifying the note) and thus act as an additional means of due diligence /checks to ensure that the prospectus complies with legal requirements.
Who gives the warranties and the sponsor’s indemnity?
Tax indemnity
Regardless of the type of compensation that is provided, it will normally cover all relevant obligations up to and including admission to listing of the company's shares. The issuing house will normally be a party to the indemnification in addition to the company in order to be able to claim the compensation in favor of the company.
Limitation on liabilities
The reason for this is that a higher standard of care should not be imposed on a director than that required by law.
Rights of contribution
The role of public relations
Hiring a PR company
They have to think about all the things that people will ask you or may ask you, good or bad. And then they should advise you on how best to convey your story to the markets.
Whom should you be talking to?
Your PR people will advise on what to show (and what not!) and how to structure the day. Your PR company should be able to talk you through the business sections of the national dailies and those of the weekend press.
How your PR company will help you prepare
Brainstorm with your PR people ways you can use your listing to promote your business to your suppliers. You don't want false or misleading information to be relayed from the web to the press, so check with your PR people if there might be a problem.
Hitting the news
This should be supported by fact sheets that can be distributed to the media, photographs (see page 161) and links to the website (see page 162). Additionally, before speaking with a reporter, you should be familiar with the nature of the publication you will be speaking with, some background on the reporter, and the rationale for the approach.
Living with the listing
It then briefly reviews the differences in the obligations imposed on AIM listed companies in these areas. ឣ restrictions on directors and others in leading positions in the company with regard to trading in the company's shares.
Main Market
This upper limit may not exceed an amount equal to 25 percent of the company's average profit for. ឣ Additional information section: a miscellaneous collection of other required information, again prepared primarily by the company's legal advisors and subject to verification.
The Listing Rules state that, unless a circular to shareholders is of a specified nature or meets certain requirements, the prior approval of the FSA is required. The details of the specific requirements for these entities are beyond the scope of this book.
