Chapter 6

Question 1

Prospectus Rules

Answer 1

FCA responsible for supervision and enforcement
Required for all public offers for securities where capital is raised including rights issues
If securities not available to the public, a prospectus is not required
Other exemptions:
- To qualified investors only
- To fewer than 150 natural persons
- For offers less than a total consideration of EUR 1m over 12M
- Where investors acquire at least EUR 100k each
- Bonus or scrip issue
- Non-transferrable securities

Question 2

Listing Regulations (Official List)

Answer 2

FCA responsible for supervision and enforcement
Applications to join the LSE go to the UKLA who approve and then the LSE will then admit the company
Either premium or standard listing, where premium listings have higher regualtory thresholds but opens broader market with greater liquidity
Premium listing (^ for standard):
- Public company (plc)
- 3 years trading history (audited statements)
- 12 months working capital (solvent)
- Equity market value of £30m^ or debt market value of £200k^
- Management with sufficient experience and expertise^
- Sponsors
- Share ownership with 10% in public hands (free float)^

Question 3

Listing Regulations (Alternative Investment Market)

Answer 3

FCA responsible for supervision and enforcement
Applications go to the LSE
AIM does not stipulate any company size / trading record / free float requirements
- Company requires a nominated advisor (NOMAD) which is a financial services firm responsible for the application
- Broker, that may be the same firm as the NOMAD, they have an obligation to provide liquidity
Conditions for entry:
- Public company (plc)
- Accounts must be IAS compliant
- Admissions document submission and approval

Question 4

Listing Regulations (AQSE)

Answer 4

FCA responsible for supervision and enforcement
Formerly NEX, a competitor to the LSE
AQSE Exchange Main Board
- Similar to joining the LSE official list
- Same conditions for entry to the LSE official list
AQSE Exchange Growth Market, apply directly to AQSE
- Similar to AIM
- Appoint and retain an AQSE corporate adviser (NOMAD equivalent)
- 24 months audited accounts
- 10% free float
- 12 months working capital
- Demonstrate corporate governance

Question 5

Disclosure Rules

Answer 5

FCA responsible for supervision and enforcement

Question 6

Flotation

Answer 6

Simultaneous IPO and listing on a regulated exchange

Question 7

UKLA

Answer 7

United Kingdom Listing Authority, or the FCA

Question 8

Introduction

Answer 8

Company places securities for trading onto a recognised investment exchange (RIE), e.g.:
- LSE by either an official list (main market), “listed companies”, for well established companies or AIM (junior market), “quoted companies” for smaller businesses
- AQUIS, “quoted companies”

Question 9

Principal-Agent Problem

Answer 9

Problem is self-interest
Company shareholders (principals) are investors looking for the best return
Company directors (agents) are advisers or managers looking for salary, fees or commission

Question 10

Conflict of Interest Solutions

Answer 10

• UK Code of Corporate Governance
• Stewardship Code (e.g. shareholder activism)
• Retail Distribution Review (RDR)
• CFA Code of Professional Practice

Question 11

UK Code of Corporate Governance

Answer 11

Encourages directors to run companies in an ethical/responsible manner
Complied with by all companies with premium listing on LSE
and all companies regulated by SYSC
1. Board Leadership & Company Purpose
- Responsible for long-term success
- Encourage participation from all stakeholders
2. Division of Responsibilities
- Chair leads with appropriate non-execs/execs and should not be the CEO
- Appropriate processes and policies
- Appropriate balance of skills
3. Composition, Succession & Evaluation
- Meritocratic and objective criteria to promote diversity#
- Annually reviewed
4. Audit, Risk & Internal Control
- Formal and transparent procedures
- Fair, balanced, understandable assessments
5. Remuneration
- Support strategy and long-term success
- Directors should exercise independent judgement

Question 12

AGM

Answer 12

Annual General Meetings
Can be called by the board with minimum 21 calendar days notice

Question 13

EGM

Answer 13

Extraordinary General Meetings
Can be called by the board or 5% of voting shares with minimum 14 days notice

Question 14

Resolutions

Answer 14

Motion brought to AGM or EGM
Ordinary resolutions need >50% of votes recorded at meeting
- e.g. annual statements, board appointments, dividends
Special resolutions need >=75% of votes recorded at meeting
- e.g. company name, memorandum of association changes

Question 15

Voting

Answer 15

• Show of hands, for likely to pass items
• Written ballot, where there is some controvery
  Proxies can be appointed at least 48 hours before meeting via proxy form
  Special proxy is directed by the shareholder
  General proxy uses their discretion to decide which way to vote (shareholder trusts the proxy’s judgement)

Question 16

Notifiable Interests

Answer 16

Significant shareholders to make identity known to the business and investors in the business and size of stake
Includes connected parties who own a combined significant stake, e.g. a company and its director both own 2% the combined investment is then 4% which will need disclosing
Within 2 business days of breach:
- Reaches 3%
- Each whole point above 3% (in either direction)
- Falls below 3%
The company then discloses it to the market

Question 17

Concert Party

Answer 17

Agreement between shareholders that they’ll vote in the same direction which would need to be shared with the company

Question 18

Enterprise & Regulatory Reform Act 2013

Answer 18

Empowers the CMA
Two phase test to assess the takeover / merger

Question 19

CMA

Answer 19

Competition & Markets Authority
Division of the UK government
Government can block the merger before the takeover can take place

Question 20

Qualifying Merger

Answer 20

If transaction meeets any of the three tests then it is qualifying merger then government moves to phase 2 which can take months / years

Question 21

Takeover Panel

Answer 21

Independent statury body who write the takeover code (also City Code)
Its chairperson is appointed by the Bank of England
Funded by takeover panel levy, dunded by levies on LSE transactions

Question 22

Takeover Code

Answer 22

Protects shareholders in both organisations
Listed and unlisted public companies resident in the UK, Channel Islands or Isle of Man
Complies with the EU takeover directive
- All shareholders must be treated equally (by classes) and protected until after takeover complete
- Shareholders must be given sufficient time and information to reach a decision on the bid

Question 23

Compulsory Bid

Answer 23

Hostile bid must be bid if acquirer buys 30% of more of the voting rights in the target company which breaches threshold for “effective control”
Required to make an offer for all remaining shares
Offer must be in cash or cash alternative of the highest price paid by the acquirer in the last 12M leading to bid
Offer must remain open for at least 21 days
Unconditional once acquirer gains >50% (“legal control” of the target

Question 24

Squeeze-out

Answer 24

Any takeover bid, either mandatory or voluntary where 90% have accepted, all remaining shareholders have to sell shares to acquirer at the latest offer price

Question 25

Phase 1

Answer 25

CMA have up to 40 days to determine if transaction is a qualifying merger:
- Share of supply test, combined entity does not create a monopoly (>25% of good/service)
- Turnover test, entity acquired revenues >£100m
- Acquirer test, acquirer does not already supply 33% in the UK and revenues of £350m
If none are met then the takeover can proceed