Advantages and Disadvantages to Listing

Question 1

Advantages

Answer 1

1. Access to capital to fund growth and/or reduce debt
   A flotation is a way of gaining an injection of cash into a company. This cash can be used by the company to expand, either through acquisitions of other businesses or organic growth, or to pay off existing debt. Generally, a company will gain many new shareholders as a result of a flotation, and these new shareholders will be a potential source of future funding for the company.
2. Providing a market
   One of the main disadvantages of being an unlisted company is the lack of a market in which shareholders can trade their shares. In obtaining admission to trading on the LSE, shareholders can take advantage of a ready-made public market. As the demand for shares in a company traded on the LSE grows, it will be easier for subsequent share issues to be made to raise further finance. The lack of a market for the shares can also be a problem for unlisted companies with large numbers of shares held by employees: a listing will enable employees either to realise gains by selling their shares at the time of the flotation, or provide an opportunity for them to invest in further shares, perhaps as part of an incentive plan.
3. Public profile
   Companies often list to a fanfare of publicity in the business world. Publicity created by a flotation is usually good for business. In addition, a listed company must keep its investors informed of its financial performance. This means that its progress can be closely monitored, enabling a company to gain the confidence of its investors.

Question 2

Disadvantages

Answer 2

1. Burden of disclosure and reporting requirements
   Companies listed on the Official List must comply with a large number of regulatory requirements. The LPDT Rules, MAR and the LSE’s Admission and Disclosure Standards must be observed post-listing and failure to comply can lead to penalties, censure or even the suspension of trading and listing of a company’s shares.
2. Management time
   The listing process is a complex and time-consuming task and will involve a significant investment of management time. Company directors can expect to dedicate a substantial amount of their time to a flotation for a number of months. In addition, they need to continue to run the business effectively.
3. Changes to the board
   The company will want to ensure that all the directors have appropriate experience and expertise as this will be an important consideration for potential investors. A listed company’s directors are potentially more exposed to the risk of being sued in their personal capacity than other company directors. A listed company should also aim to comply with the UK Corporate Governance Code which stipulates how the board of the company should be constituted. This may result in board changes and new directors being appointed. Finding nonexecutive directors with the right experience may be difficult and costly.
4. Costs and fees
   The expense involved in floating a company is significant, usually around 7-8% of the amoun raised. The various advisers involved all need to be paid and a substantial proportion of the cash raised through a flotation will be used to meet these costs.
5. Loss of control
   The directors of a listed company need to accept that they will be subject to additional influences and pressures on the way that they run the company. Institutional investors that have significant shareholdings may be in a position to block resolutions that they do not approve of. Listed companies should also follow the guidelines issued by the Investment Association and the Pre-Emption Group. Although such guidelines do not have statutory force, breaching them would risk incurring the displeasure of institutional investors.
6. Greater exposure to commercial and market conditions