1) Flotations 1: Preparation for Listing

Question 1

Are a companies articles likely to already be in an appropriate form for a listed company?

Answer 1

• Table a (pre ca 2006 companies)
• Or model articles - after ca 2006
• Unlikely to be appropriate for listed plc
• Firms usually have precedent set of articles = more appropriate
• Will accommodate particular requirements of plc.

Question 2

What might need to be altered re pre emption rights in the preparation for listing?

Answer 2

• LR 2.2.4 - shares have to be freely transferable
• New set of articles suitable for listed companies should be adopted
• Would not include PE rights on transfer of shares
• Look at terms of shareholders agreement also in place
• s/hs can agree to remove PE rights on transfer
• But likely to just have to terminate the shareholders agreement

Question 3

What is the opinion of institutional investors re shareholders agreements?

Answer 3

• They are unlikely to want to invest in a company that is subject to shareholders agreement.

Question 4

What is eligibility for CREST?

Answer 4

• Important issue for company before listing is the settlement and transfer of its shares once it is listed
• For listed companies - constitution of the company and the terms of equity shares need to be compatible with electronic settlement through CREST.

Question 5

Which amendments will need to be made to company articles in relation to CREST?

Answer 5

• Need to amend articles to reflect the fact that some company shares will be held in electronic form.
• Should be nothing inherent within constitution that prevents electronic settlement
• Requirements are in central securities depository regulation (CSD)

Question 6

What changes should a board make to its CORPORATE PROCEDURES before applying to the Main market?

Answer 6

• Compliance with Listing Rules
• • Premium Listing Principles
• In Chapter 7 of the Listing Rules - LR 7.1.2 G

Question 7

What will need to be done with a companys reporting procedures ahead of listing?

Answer 7

• Formalise any informal reporting systems
• Put procedures in place so that potential price sensitive information, both positive and negative (positive is like marketing information)
• Is communicated to the market through an announcement before it is disseminated informally to the shareholders

Question 8

How, practically should the board ensure that they put PLP 5 and 6 into practice?

Answer 8

• Need to treat all shareholders of the same class of shares in the same way
• Need to make sure that it has procedures in place to make sure that all price sensitive information - both positive and negative
• Is communicated to the market via an announcement before it is disseminated informally to shareholders / suppliers / journalists.

Question 9

Why is it generally advisable for an applicant to comply with the UK corporate Governance Code?

Answer 9

• Institutional investors are more likely to invest in a company that follows principles of good corporate governance.

Question 10

What are the 3 types of committee required in the preparation for listing?

Answer 10

1. Remuneration committee
2. Nomination committee
3. Audit committee
   Purple polka dot tabs

Question 11

What is advised re the contracts of executive directors?

Answer 11

• Advisable for company to enter into service contracts with all exec directors
• So there is continuity of company successful management, and this is guaranteed for a long time.
• May be good that for existing employees, the notice periods cannot be changed without their consent.

Question 12

If shares need to be admitted to trading on an RIE to be listed, then what must the company ensure?

Answer 12

• That it submits an application for the admission of its shares to trading on the Main Market of the LSE
• To coincide with its application for listing.

Question 13

Explain the principle of capital reorganisation - the sub division of share capital?

Answer 13

• Value of each share might be really high like at £200 per share
• This is unrealistic price for share being traded on LSE
• Financial advisors say that shares should be priced between £2-5.
• Need to carry out a CAPITAL REORGANISATION before flotation which involves subdivision of the shares
• Passing an OR
• To make the trading price of the shares more acceptable
• s618(1) CA

Question 14

Why cant a company rely on s550 ca when it issues the shares?

Answer 14

• Because it will not be a private company anymore - will become a plc.

Question 15

What is the formula for the value of market capitalisation?

Answer 15

• Number of shares issued x market price per share.
• This needs to be at least £700,000 bc of LR 2.2.7R(1)(a)
• Apply to the facts on whether this has been achieved by the company

Question 16

List the advantages of a float?

Answer 16

A PIMP
1. ACCESS to capital from a wider group of investors.
2. PROFILE of the company improved amongst investors / customers / JV partners.
3. INCENTIVISE current employees by involving them in the float and introducing share option schemes
4. MARKET for shares - need a market, because it is not likely that there will be a private buyer available and other shareholders are not likely to be able to get the shares
PRICE for shares - sellers get higher price for shares if they are traded on a liquid market. Current shareholders can buy / sell shares more easily.

Question 17

List out all of the disadvantages of a float?

Answer 17

CCC MT

1. COST in region of 7-8% of the issue value. Advisers fees / underwriting costs
2. CHANGES to board may be required because of corporate governance rules
3. CONTROL lost - interferences from institutional investors who want short and long term returns on their investments.
4. MANAGEMENT time - required to work on it for long period of time
5. TARGET for a takeover potentially, listed companies are vulnerable to hostile takeovers by competitors.

Question 18

what colours are the tabs for preparation for listing steps?

Answer 18

on top row across all books: there are 6. 
blue - shares 
yellow - shareholders 
pink - financial and business 
purple - management and governance 
purple polka dot - committees 
pink (bottom) - definitions

Question 19

If a private equity investor is mentioned in the question, what should I immediately think of?

Answer 19

• Shareholders agreement
• The shares need to be freely transferable under LR 2.2.4(1)R
• so will need to terminate the shareholders agreement because not likely that institutional investors will want to be involved if shareholders have rights of PE.
• Capable of electronic transfer under CREST

Question 20

What should be done if there are not enough shares in public hands?

Answer 20

• Do an offer for subscription (offer of new share to the public) as well as an offer for sale (offer of existing shares to the public)
• (part of a retail issue)

Question 21

What point must I remember to make when discussing the requirement for committees in the question about changes that need to be made

Answer 21

• 3 committees: audit / nomination / remuneration
• Over over from CgovCode to DTRs in white file.
• DTRs - polka dot tab on the inside
• “there is an overlap between the requirements of the listing rules and the DTRs. Under the listing rules section the companies are required to ‘comply or explain’, which leaves open the option to not have a remuneration committee for reasons decided by the company. However, where the DTRs require something, that is compulsory. DTR 7.1.1R re audit committee MUST be complied with, there is no explaining away non compliance.”

Question 22

What is the key thing that I must ALWAYS remember to put at the beginning of question 1

Answer 22

• Introduction that says
• ” [company name] should comply with the Corporate Governance Code
• Compliance = not compulsory
• Institutional investors are more likely to invest in a compliant company
• Comply or explain - LR 9.8.5R(5)(6) in annual reports and documents”

Question 23

explain the pre float preparation that should be done 36 – 24 months ahead of the float? good general introduction for the very first question in the paper.

Answer 23

• Develop robust business plan and detailed review of ownership / tax issues, customers/supplier contracts, management information systems and operational and compliance controls.