Main Market A guide to isting on London Stock Exchange Pubished by White Page Ltd in association with London Stock Exchange, with contributions from:
Pubishing editor: Nige Page Pubisher: Tim Dempsey Design: London Stock Exchange pc Printing and binding: Argent Litho Ltd A guide to isting on the London Stock Exchange is pubished by: White Page Ltd, 17 Boton Street London W1J 8BH United Kingdom Phone: + 44 20 7408 0268 Fax: + 44 20 7408 0168 Emai: mai@whitepage.co.uk Web: www.whitepage.co.uk white page First pubished: November 2010 ISBN: 978-0-9565842-1-2 A guide to isting on the London Stock Exchange 2010 London Stock Exchange pc and White Page Ltd Copyright in individua chapters rests with the authors. No photocopying: copyright icences do not appy. This guide is written as a genera guide ony. It shoud not be reied upon as a substitute for specific ega or financia advice. Professiona advice shoud aways be sought before taking any action based on the information provided. Every effort has been made to ensure that the information in this guide is correct at the time of pubication. The views expressed in the artices contained in this guide are those of the authors. London Stock Exchange, AIM and the coat of arms device are registered trademarks of London Stock Exchange pc. The pubishers and authors stress that this pubication does not purport to provide investment advice, nor do they bear the responsibiity for any errors or omissions contained herein.
A guide to isting on the London Stock Exchange Contents 3 Foreword London Stock Exchange 5 The Main Market the standard for exceence London Stock Exchange 13 The roe of the UKLA The United Kingdom Listing Authority 19 Preparing for an IPO UBS Investment Bank 31 The ega framework for an IPO Freshfieds Bruckhaus Deringer LLP 43 Accounting requirements and advice through the IPO process Ernst & Young LLP 57 Generating and capturing investor demand during an IPO UBS Investment Bank 69 Managing the company s profie Fishburn Hedges 81 The roe of the registrar in an IPO Capita Registrars 87 London: a unique investment opportunity FTSE Group 91 Preparing to ist depositary receipts Ceary Gottieb Steen & Hamiton LLP 105 Estabishing a depositary receipt programme J.P. Morgan 116 Usefu contacts
The Main Market the standard for exceence London Stock Exchange
The word s capita market The Main Market is London s fagship market heping arger and more estabished companies access the deepest poo of capita in Europe. www.seg.com October 2014 London Stock Exchange pc. London Stock Exchange and the coat of arms device are registered trademarks of the London Stock Exchange pc.
The Main Market the standard for exceence Estabished in 1698, the London Stock Exchange s (the Exchange ) Main Market has ong been home to some of the UK s, and indeed the word s, argest and best-known companies. There are over 1,400 companies on the Main Market with a combined market capitaisation of 3.7 triion. Companies of a types, nationaities and sizes together represent some 40 sectors. As we as sectora and geographica diversity, the Main Market accommodates the admission to trading of companies with a Premium Listing or a Standard Listing. The FSA s isting categories are described in detai in the chapter The roe of the UK Listing Authority on page 13. A isting on the Main Market demonstrates a commitment to high standards and provides companies with the means to access capita from the widest set of investors. Over the ast 10 years, 366 biion has been raised through new and further issues by Main Market companies capita that has seen companies through the good times and the bad. Why join a pubic market? Joining a pubic market the Main Market or AIM (our market for smaer, growing companies) is a way to grow and enhance your business. When considering the avaiabe financing options, the foowing factors are frequenty cited as the key benefits of admission to a pubic market: providing access to capita for growth, enabing companies to raise finance for further deveopment, both at the time of admission and through further capita raisings creating a market for the company s shares, broadening the sharehoder base pacing an objective market vaue on the company s business encouraging empoyees commitment and incentivising their ong-term motivation and performance, by making share schemes more attractive increasing the company s abiity to make acquisitions, using quoted shares as currency Joining the Main Market Responsibiity for the approva of prospectuses and admission of companies to the Officia List ies with the UK Listing Authority (UKLA). The Exchange is responsibe for the admission to trading of companies to the Main Market. Joining the Main Market consequenty invoves two appications: one to the UKLA and one to the Exchange. UKLA admits securities to the Officia List London Stock Exchange admits securities to trading on the Main Market Officia List notice issued to the market Admission to trading notice issued to the market The Main Market the standard for exceence Page 7
creating a heightened pubic profie stemming from increased press coverage and anaysts reports heping to maintain iquidity in the company s shares enhancing the company s status with customers and suppiers. Companies that choose to seek admission to a pubic market in London have a range of options depending on their size, stage of deveopment and capita-raising requirements. The options open to companies shoud be discussed in detai with their team of advisers. Companies which are successfu on AIM and reach a certain size and stage of deveopment, may seek to transfer their securities from AIM to the Main Market, provided that they meet the eigibiity criteria. Whie a move to the Main Market may subject the company to increased reguatory requirements, it can bring benefits in terms of a heightened profie and attracting different investors. and why the Main Market? The success of the Main Market is buit on a wide range of factors: a respected and baanced reguatory environment choice access to capita from a broad and knowedgeabe investor base expert advisory community enhanced profie and status. The Main Market has attracted companies of a sizes and from a sectors over many years. Irrespective of their sector, origin or strategic direction, they have a sought to take advantage of the range of benefits a isting on the Main Market affords. Those benefits incude: A respected and baanced reguatory environment The UKLA s isting framework underpins London s reputation for baanced and gobay-respected standards of reguation and corporate governance. Reguatory requirements in London are principesbased and provide an appropriate baance of investor protection, practitioner certainty and fexibiity. The Exchange aims to be invoved in a reevant processes where amendments or additions to the reguatory framework are considered. This is to ensure that London s competitive advantage remains undiminished; that istings and subsequent capita raisings are costeffective and efficient for our companies; and that investors have the appropriate amount of information to make informed investment decisions. Choice Companies with either a Premium or a Standard Listing can choose to admit to trading on the Main Market. A Premium Listing means that a company must meet standards that are over and above (often described as super-equivaent ) those set forth in the EU egisation, incuding the UK s corporate governance code. Investors trust the superequivaent standards as they provide them with additiona protections. By virtue of these higher standards, companies may have access to a broader range of investors and may enjoy a ower cost of capita owing to heightened sharehoder confidence. A Premium Listing is ony avaiabe to equity shares issued by commercia trading companies. With a Standard Listing, a company has to meet the requirements aid down by EU egisation. This means that their overa compiance burden wi be ighter, both in terms of preparing for isting and on an ongoing basis. Standard Listings cover the issuance of shares and Depositary Receipts Page 8 The Main Market the standard for exceence
( DRs ) as we as a range of other securities, incuding fixed-income. Large companies from emerging markets may wish to ist their DRs, thus attracting investment from the significant internationa poo of capita avaiabe in London. (A tabe showing the key differences between a Premium Listing and a Standard Listing can be found in the chapter The roe of the UK Listing Authority on page 18). In this guide, the chapters Preparing to ist depositary receipts and Estabishing a depositary receipt programme are dedicated to the isting and admission to trading of DRs on both the Main Market and the Professiona Securities Market ( PSM ). The PSM provides an aternative route to a isting on the Exchange for issuers of DRs. Access to capita We provide access to the argest poo of internationa equity assets in the word. This cuture is embedded in London s investment management community, which understands companies from home and abroad and wants to invest in the goba economy. Once they are isted and admitted to trading on the Main Market, companies shoud not underestimate the vaue of being abe to return to the market to raise funds through further issues. Even during the recent difficut market conditions, the Exchange successfuy faciitated significant eves of capita raising. Further issues by Main Market companies provided capita injections that were used to pay off debt, rebuid baance sheets and fund further growth. Expert advisory community The decision to join the Main Market is a pivota one. To achieve a successfu isting and admission to trading, companies must deiberate over many considerations. Underpinning the Main Market is a network of experienced advisers who wi guide you on the journey to an initia pubic offering ( IPO ) and provide ongoing advice once your company is isted. Seecting the right advisers for you and your company is vita. Getting it right eary on wi hep ensure that disruptions to the process are minimised and you are abe to get on with the task at hand. Factors to consider when appointing advisers incude the firm s reevant and recent experience in reation to your business and the sector you operate in, as we as the persona rapport you deveop with the individuas with whom you wi be working. The diagram on page 10 beow shows the different advisers typicay invoved in a fotation on the Main Market and briefy highights their varying roes and responsibiities. Profie Foating a company on the Main Market raises your company s profie and heps you to meet your strategic objectives. You wi have the opportunity to project your company onto a goba stage with increased media coverage, investor interest and broad anayst coverage. With a Premium Listing comes the potentia for incusion in the FTSE UK series of indices which incudes the FTSE 100, FTSE 250 and FTSE Sma Cap indices. Access to these indices is often seen as one of the key benefits of achieving a Premium Listing since so many investment mandates particuary in respect of the vast amount of capita represented by tracker funds are driven by FTSE indexation. For more information see chapter London: a unique investment opportunity on page 87. Our commitment to the primary markets There is a continuous stream of proposed reguatory The Main Market the standard for exceence Page 9
Advisers roes and responsibiities Sponsor Overa co-ordination and project management of IPO process Co-ordination of due diigence and prospectus Ensure compiance with appicabe rues Deveop investment case, vauation and offer structure Manage communication with LSE and UKLA Act as adviser to the company s board Ongoing support/advice after fotation Bookrunner Prepare company for roadshow Faciitate research Buid the book pre-foat Marketing and distribution Pricing and aocation Other advisers Registrars Financia printers Remuneration consutants THE COMPANY Lawyers Lega due diigence Draft and verification of prospectus Corporate restructuring Provide ega opinions Financia PR Reporting accountant Deveop communication strategy Review financias assess company s to support pre-ipo process readiness for IPO Enhance market perceptions to Tax structuring deveop iquidity and support Financia due diigence - ong form, share price short form and working capita reports Pre- and post-ipo press reeases changes affecting companies on our markets, with egisation stemming from changes here in the UK and in Brusses. With companies best interests front of mind, we continue to obby on their behaf to ensure our markets are fit for purpose. It is crucia that through our obbying we continue to promote a reguatory regime based on principes, seeking to imit disproportionate egisation appicabe to issuers that are admitted to trading on our markets, whie ensuring sufficient investor protection. Once you are isted on the market, we are committed to heping you raise your profie and keeping you abreast of market deveopments. We hep to do this through the provision of brand marks (see page 11); a dedicated page on our website specific to your company (incuding atest news and pricing information on the trading of your securities); educationa initiatives, such as seminars and practica guides; and investor-focused events such as capita markets days that bring companies and investors together. Page 10 The Main Market the standard for exceence
Main Market brand marks L I S T E D S T A N D A R D SHARES L I S T E D P R E M I U M L I S T E D S T A N D A R D DEPOSITARY RECEIPTS These brand marks are provided excusivey to companies isted on the Main Market. Companies may use the brand mark across corporate and investor reations materias to showcase their association with the London Stock Exchange and provide information as to their isting status. More information is avaiabe on the Exchange s website: www.ondonstockexchange.com/brandmarks And finay Listing and admission to trading on the Main Market is an efficient way for companies to access capita to fund their growth, whie simutaneousy benefiting from enhanced profie and iquidity within a we-governed and reguated market structure. As an ambitious company with pans to take your business to the next eve, joining the Main Market is an idea way to assist you in reaising your goba aspirations. The Main Market the standard for exceence Page 11
The roe of the UK Listing Authority UKLA
The roe of the UK Listing Authority The UK Listing Authority ( UKLA ) is the name used by the Financia Services Authority ( FSA ) when it acts as competent authority for isting, as competent authority for the purposes of the European Prospectus and Transparency Directives, and as competent authority for certain aspects of the Market Abuse Directive. These roes have a statutory basis in Part VI of the Financia Services and Markets Act 2000 ( FSMA ). Three sourcebooks in the FSA Handbook impement the reevant rues. These are: Listing Rues these rues incude the eigibiity requirements for admission to the Officia List (or isting ) and the continuing obigations that appy thereafter. They come party from the European Consoidated Admissions and Reporting Directive, but aso incude a significant body of rues that are super-equivaent or additiona to the European minimum requirements. These additiona requirements incude substantive eigibiity requirements such as the need for a three-year track record, the cass test and reated party regimes, and the requirement for a sponsor in reation to a Premium Listing. Prospectus Rues these rues stem primariy from the enactment of the European Prospectus Directive and detai the circumstances when a prospectus is required and the discosures a prospectus shoud incude. Discosure and Transparency Rues ( DTRs ) these rues govern the periodic and ad hoc discosure of information by isted companies. Periodic information incudes interim and annua accounts, and ad hoc discosures, incuding major sharehoding notifications and detais of significant deveopments that might affect the price of the securities. These rues originate from the Transparency Directive and part of the Market Abuse Directive, and aso from the 4th/7th Company Law Directives. As a consequence, when a company wishes to make an initia pubic offering ( IPO ) of its securities onto a reguated market such as the Main Market of the London Stock Exchange, the UKLA has two principa roes to perform: to review and approve the issuer s prospectus, and to admit those securities to isting once it is happy that the issuer compies with a reevant eigibiity criteria. Listing categories The term isted is used in a number of different contexts, but in the UK this technicay means admitted to the Officia List of the UKLA. The UKLA has created a number of different isting categories which determine the eigibiity criteria and continuing obigations that appy to the issuer and its securities. The UKLA introduced the isting categories to hep carify that isting refers to admission to the Officia List of the UKLA, and does not reate to the market to which a security is admitted to trading. Listing categories are aso intended to carify the reguatory standards that appy to different types of isting. A Standard Listing requires compiance ony with EU minimum standards, whist a Premium Listing aso requires compiance with the more stringent superequivaent standards. Note that ony equity shares may be admitted to a Premium Listing; issuers of other securities may ony seek a Standard Listing for their securities. A tabe showing the key differences between Premium and Standard Listings can be found on page 18. Eigibiity An issuer wi generay seect its preferred market and isting category in consutation with its advisers prior to engagement with the UKLA. For issuers requesting a Premium Listing of their equity shares, contact with the UKLA wi be undertaken by the issuer s appointed sponsor firm. The roe of a sponsor is to guide the issuer on the appication of the Listing Rues and the Prospectus Page 14 The roe of the UKLA
Listing segment Premium Standard Listing category Equity shares Equity shares Equity shares Shares GDRs Debt & debt-ike Securitised derivatives Misc. securities Exampes of types of companies/ securities Commercia companies Cosedended investment funds Openended investment companies Equity shares* Non-equity shares Debt securities Asset-backed securities Convertibe securities Options Subscription warrants - Preference shares (speciaist securities) Listing Rue chapter LR6 LR15 LR16 LR14 LR18 LR17 LR19 LR20 * an investment entity wi ony be abe to benefit from this Standard Listing category for a further cass of equity shares if it aready has (and ony for so ong as it maintains) a Premium Listing of a cass of its equity shares Rues. This incudes iaison with the UKLA on behaf of the issuer, and to provide certain decarations to the UKLA that provide comfort that the reevant rues have been compied with and the issuer has estabished appropriate procedures. The UKLA maintains a ist of approved sponsors and conducts supervisory activities in order to ensure that the ist of sponsors contains ony those firms that meet the eigibiity criteria for a sponsor. For issuers that are seeking a Standard Listing, the UKLA has no preference as to whom the main point of contact shoud be, athough it shoud be someone that is reasonaby knowedgeabe about the UKLA and its processes. To start the eigibiity process, the UKLA generay expects that a etter is submitted detaiing the issuer s compiance with the appicabe eigibiity requirements. The UKLA suggests that such etters are sent in as eary as possibe in the IPO process and that they are as detaied as possibe, incuding reevant background information on the nature of the issuer s business. This is because unnecessary deay can be caused to the timetabe where significant eigibiity concerns arise ate in the IPO process. Issuers seeking a Premium Listing of equity shares wi be required to compy with the more substantive eigibiity requirements that are imposed by the super-equivaent parts of the Listing Rues, in addition to those requirements in the Listing Rues based entirey on EU aw. For commercia companies, these additiona requirements incude the requirement for a cean three-year track record of operations, and the requirement for a cean working capita statement for at east the next 12 months. For investment The roe of the UKLA Page 15
entities, these requirements incude an additiona degree of reguation in reation to the corporate governance of the issuer. Overseas issuers wishing to compy ony with the minimum standards appied by the EU Directives can appy for a Standard Listing of either equity shares or GDRs. The UKLA has recenty aso extended the Standard Listing category to UK issuers of equity shares which coud previousy ony have had a Premium (formery Primary ) Listing. Prospectus review and approva An admission of securities onto the Officia List and the Main Market of the London Stock Exchange requires the production of an approved prospectus. As the UKLA is the UK s competent authority for the purposes of the Prospectus Directive, it typicay approves prospectuses produced during an IPO. Athough fina confirmation of an issuer s eigibiity can ony be given once its prospectus has been approved, the UKLA wi generay try to resove any major eigibiity issues prior to starting its review of an issuer s prospectus. This review invoves an iterative process of reviewing and commenting on drafts of the prospectus unti the UKLA is satisfied that a appicabe rues have been compied with. The number of drafts necessary to reach this point wi depend on the compexity of the issues and the quaity of the submissions. By way of exampe, many arge IPOs can invove the review of five or more substantive drafts for one reason or another. The UKLA seeks to compy with its pubished service standards for the document review and approva process, and aims to provide comments on an initia draft of a new appicant prospectus within 10 working days, and comments on each subsequent draft within five working days. On average, the review and approva of a prospectus takes around 6-8 weeks for an IPO. The prospectus can be pubished once it has been formay approved by the UKLA. The actua timing of that approva wi depend on the issuer s choice of issuance method for exampe, if the issuance invoves a retai offering then approva and pubication must occur sufficienty in advance of the beginning of the offer. A prospectus reating ony to an introduction where no offer to the pubic is made may be approved as itte as 48 hours prior to admission to isting. Listing Particuars Athough no prospectus is required for the admission of securities to unreguated markets such as the Professiona Securities Market (the PSM ), the UKLA does require Listing Particuars for the admission of those securities to isting on the Officia List. In these cases, the process for reviewing the document, and the content requirements, are very simiar to the requirements for a prospectus. The principa difference is that the financia information in a prospectus must be prepared in accordance with IFRS or an equivaent GAAP. In the case of Listing Particuars where securities are to be admitted to the PSM, the financia information can be prepared in accordance with oca standards. Passporting An overseas issuer may aso seek to passport onto a UK-reguated market, using a prospectus that has been approved by another competent authority. Athough in these circumstances the UKLA wi rey upon the passport to satisfy the requirement for an approved prospectus, it wi sti separatey assess the issuer against the reevant eigibiity requirements. As part of this process, the UKLA reviews the issuer s proposed prospectus to hep in its assessment of eigibiity, so again the UKLA recommends that an issuer makes contact sufficienty eary in the process, and certainy before the prospectus has been approved by the home competent authority. Page 16 The roe of the UKLA
Post-IPO interaction with the UKLA DTRs a isted issuer must compy with the DTRs on an ongoing basis, as faiure to compy with these rues may resut in the suspension of the isting of its securities. The UKLA has a team dedicated to monitoring issuers compiance with the DTRs, and to providing guidance on these rues on a reatime basis. Prospectus requirements if the issuer seeks admission of further securities of the same cass it wi be required to produce a prospectus, uness an exemption appies. Exemptions incude, among other things, the issue of shares under empoyee share schemes and bonus issues. The UKLA woud typicay be required to approve any future prospectus. Significant transactions if the issuer has a Premium Listing of its equity shares, it wi be required to consider whether any significant transaction that it undertakes wi need announcement or, if it is of sufficient size, sharehoder approva. Lower size threshods are appied if the transaction is being undertaken with a reated party such as a director or substantia sharehoder. The Listing Rues incude rues governing the discosure requirements in circuars where sharehoder approva is sought, and aso carify which circuars require UKLA approva. Timetabes the UKLA staff (or readers ) aocated to a particuar case wi typicay be working on a arge number of transactions at any one time. Whist the UKLA makes every effort to accommodate tight timetabes it cannot dea with every issue immediatey or meet unreaistic timetabes. Compex issues wi need time for proper consideration prior to resoution and therefore the UKLA aways advises that such issues shoud be brought to its attention as eary as possibe. Hepdesks the UKLA offers severa different hepdesks to provide guidance on the Listing Rues, Prospectus Rues, and the DTRs. This enabes compex issues to be discussed and agreed prior to the submission of documents, or in reation to significant transactions (Te: +44 (0)20 7066 8333). The roe of the UKLA Page 17
A summary of the key differences between Premium and Standard istings Key eigibiity criteria Premium Equity Shares Standard Shares Standard Depositary Receipts Free foat 25% 25% 25% Audited historica financia information Three years Three years or such shorter period Three years or such shorter period 75 per cent of appicant s business supported by revenueearning record for the three-year period Contro over majority of the assets for the three-year period Requirement for cean working capita statement Required n/a n/a Required n/a n/a Required n/a n/a Sponsor Required n/a n/a Key continuing obigations Free foat 25% 25% 25% Annua financia report Required Required Required Haf-yeary financia report Required Required n/a Interim management statements Required Required n/a EU-IFRS or equivaent Required Required Required UK Corporate Governance Code Compy or expain n/a n/a Mode Code Appies n/a n/a Pre-emption rights Required Significant transaction ( Cass tests ) As required by reevant company aw n/a Rues appy n/a n/a Reated-party transactions Rues appy n/a n/a Canceation 75 per cent sharehoder approva required No sharehoder approva required No sharehoder approva required This ist is not exhaustive and shoud be read in conjunction with the FSA Handbook (Listing Rues, Prospectus Rues and Discosure & Transparency Rues). Page 18 The roe of the UKLA
Preparing for an IPO John Wooand and David Sea UBS Investment Bank
Advertisement Persona weath management At UBS Weath Management we Most peope who IPO a business want to reaise part of the vaue in cash. A higher proportion of their assets may now be in stocks or shares. Eary weath management advice can hep the owners extract and maximise the vaue of the investments they have buit up. Drawing on the expertise of the UBS opportunities, bending traditiona asset casses with private equity, hedge funds, commodities and rea estate (where suitabe to the cient). UBS provides brokerage services, foreign exchange execution and strategy, coatera backed ending and whoe-ofmarket advice. Where there is a need for provides advice on structuring persona and corporate assets, pensions options and succession panning, with fu backup at every stage of ife. For more information about UBS Weath Management pease contact Michae Bishop on +44-20-7568 9587. www.ubs.com/uk
Preparing for an IPO Initia pubic offerings ( IPOs ) are among the most chaenging transactions that a business can undertake. The decision on whether to ist a company s shares on a pubic market is a significant one; obtaining a pubic quote is a major miestone in any company s ife. The process of going pubic is time-consuming, but it is an opportunity for a company to criticay examine itsef. A company, its management and its owners are ikey to be in the pubic eye to a much greater extent than before. A company s decision to aunch an IPO must be based on a reaistic assessment of its business, its management resources, its stage of deveopment and its prospects. Pubic ownership offers significant advantages, such as access to the pubic equity and debt markets to finance growth and strengthen a company s financia position, as we as the creation of an open market for a company s shares. However, a company wi face heightened scrutiny and greater demands on its management. Panning is a key eement in any IPO. In order to avoid unnecessary deays and distraction, which coud be costy, management shoud evauate in detai how it wi commit adequate resources to meet the pressing deadines of an IPO process. The run-up to a company seeking a isting on the Main Market can be broady divided into two phases pre-ipo preparation and the IPO process itsef. Pre-IPO preparation incudes the critica review of a company s business pan and growth prospects, assessing the management team, appointing an appropriate board, tightening interna contros, improving operationa efficiency and resoving issues that may adversey affect the isting eary on. The United Kingdom Listing Authority s ( UKLA ) Listing Rues set the specific reguatory requirements that a company has to meet to be aowed to ist on a market. Unsurprisingy, a number of the UKLA s requirements coincide with the attributes which investors are ooking for in a company. The precise reguatory requirements are covered in the chapter The ega framework for an IPO on page 31. Areas such as a demonstrabe trading record and appropriatey experienced directors ceary hep to satisfy both the reguators and the potentia sharehoders. Utimatey, the abiity to meet the market s commercia expectations is crucia. For management and owners, an IPO may aso crystaise the need to examine their tax panning and persona weath management. This shoud be addressed eary to avoid distraction during the fina, and often hectic, few weeks of the IPO process. Pre-IPO preparation Businesses often begin their preparations for becoming pubic companies we before they aunch the IPO process. Typicay, pre-ipo preparations take four to six months, but they can take consideraby onger. Advance preparation is a key success factor that aows for a smooth and efficient execution process and the abiity to take advantage of market windows. Management team A company s management team wi need to expain the business, its strategy and prospects to investors, and demonstrate knowedge of the sector, as we as its chaenges, in order to gain the support and confidence of the market. The directors of a company wi be accountabe to its new and existing sharehoders for the performance of the business when it is a pubic company. Therefore, as a company prepares for its IPO it may need to ensure that its management has sufficient depth and breadth. Business pan For the purposes of an IPO, a company needs a Preparing for an IPO Page 21
comprehensive business pan that sets out its products, markets, competitive environment, strategy, capabiities and growth objectives. Companies engaging in successfu IPOs tend to have a ceary defined vision for the future performance of the business that can be articuated crediby, ceary and quantifiaby. Companies that are in mature or shrinking industries, operate within sma markets, or provide a narrow range of products to a sma and highy speciaised customer base may be unsuitabe for an IPO. Financia performance A company shoud expect to show investors a consistent pattern of top- and bottom-ine growth and a sound baance sheet post-ipo. For a company seeking a Premium Listing, its financia statements need to adhere to Internationa Financia Reporting Standards ( IFRS ). Further technica requirements of the financia information required to be incuded in a prospectus are covered in the chapter Accounting requirements and advice through the IPO process on page 43. Growth prospects Before investing in a company, most investors want to fee confident about its future growth prospects. A company shoud deveop a financia mode that quantifies its business pan and expected growth. The sponsor (see page 26) may work cosey with management and externa consutants/experts to deveop this mode and wi conduct due diigence on the assumptions behind the mode and stress-test the projections. Raising funds? The majority of istings take pace with a simutaneous share offering to investors. This can take the form of: raising additiona capita for the business by issuing new shares in a company to new and existing sharehoders (a primary offering) existing sharehoders seing their shares to new or other existing sharehoders, ie no additiona capita is raised for the business (a secondary offering); or a combination of both. If existing sharehoders intend to se in the IPO, it is hepfu to know the ikey quantum eary so that the IPO can be panned accordingy. Use of proceeds If a company is raising new capita, the use of proceeds shoud be ceary articuated and in ine with its strategy. In many cases, the proceeds wi be used to either pay down debt, fund capita investment or to provide working capita for expansion. In determining the quantum of new capita, a company needs to consider its future capita structure and its abiity to pay dividends at an appropriate eve. Financia contros The market expects companies to have proper financia contros in pace. In addition, the UKLA requires the sponsor to provide written confirmation of the adequacy of a company s financia contros. Companies contempating a isting wi therefore need to ensure that they have systems in pace to ensure a fow of accurate, timey information. Board A pubic company needs to satisfy corporate governance requirements. The principes are set out in the UK Corporate Governance Code (the Code ) and a company is required to compy with the Code, or expain why it has not, in its prospectus. It is typicay necessary to appoint new members to the board who are independent and to form new committees (eg audit and remuneration). Identifying suitabe candidates can take a Page 22 Preparing for an IPO
significant amount of time. Potentia directors often want to be invoved in the IPO process at an eary stage. The sponsor frequenty assists in the recruitment and assessment of potentia board members for a company seeking a isting. Group reorganisation The reorganisation steps undertaken in preparation for an IPO wi vary, depending on the existing and intended group structure. One of the key steps is determining the jurisdiction of incorporation of the isting entity. At IPO it is essentia to ensure that the group hods a assets, inteectua property and contractua rights necessary to carry on its business operations. Part of the group reorganisation may invove their transfer where they are currenty hed by reated parties outside of the group. Change may be necessary to optimise a group s tax position, or to remove businesses or assets that are not part of the group to be foated. For exampe, company-owned horses, boats and so on are unikey to be appropriate for a quoted company. Determine empoyee and management compensation and incentive pans As part of the IPO process, many companies review the amount of equity owned by their top executives and empoyees. Additiona equity options or other incentives at the IPO may be granted to increase management and empoyee ownership and to aign incentives from the IPO with a company s new investors. Remuneration consutants can advise on the structure of any schemes, as we as trends in the appropriate industry. The recommendations shoud be reviewed by the sponsor and bookrunner(s) to ensure that the awards are in ine with market expectations. Weath management and financia panning For many managers and owners of a business, an IPO is an opportunity to reaise or transfer part of their weath. Eary panning of their persona tax and financia affairs is advisabe to avoid deay or difficuty in the fina stages of an IPO. Controing sharehoders Potentia investors may be infuenced, negativey or positivey, by the presence of a controing sharehoder. A company shoud assess what wi happen with such sharehoders post an IPO, ie whether they wi se down some or a of their hodings, continue to have board representation or maintain veto rights on certain company decisions. In most situations, any specia rights wi be unwound and, where appropriate, a reationship agreement may be entered into as part of the IPO process to avoid potentia future conficts of interest. Reated-party transactions Any interna transactions, compensation arrangements and reationships invoving management or the board that might be appropriate for a private company but improper for a pubic company must be eiminated. A company shoud therefore consider whether any outside affiiations wi be negativey perceived by the market. Investor reations ( IR ) IR is the term used to describe the ongoing activity of companies communicating with the investment community. Whie the communication that pubic companies undertake is a mix of reguatory and vountary activities, IR is essentiay the part of pubic ife that sees companies interacting with existing sharehoders, potentia investors, research anaysts and journaists. Larger companies frequenty create a separate IR function to meet the demands for information and to assist in a communications with the market. Pease refer to the chapter Managing the company s profie on page 69 for more detai on this topic. Preparing for an IPO Page 23
IPO timetabe Private execution phase Week 1 2 3 4 5 6 7 Process Execution kick-off meeting Weeky meeting/conference cas Due diigence Long form report Preparation of audited numbers Vauation and capita structure Forecasts finaised Working capita report Vauation discussion Capita structure discussions Agree offer size Documentation Draft prospectus Prospectus fied with UKLA UKLA review prospectus Pubish pathfinder prospectus Pubish fina prospectus Preparation of pacing agreement Auditors comfort etters Marketing and roadshows PR process Anaysts pres n prepared and deivered Research prepared and reviewed Prepare and rehearse roadshow Announce intention to foat Pubish research Pre-marketing Price range set Roadshow Bookbuiding Pricing/aocation Settement and cosing Stabiisation Week 1 2 3 4 5 6 7 Active IPO execution Page 24 Preparing for an IPO
Pubic execution phase 8 9 10 11 12 13 14 15 16 17 + 3 0 d a y s 8 9 10 11 12 13 14 15 16 17 Active IPO execution Preparing for an IPO Page 25
IPO process Private phase Pubic phase Preparation of the IPO Preiminary vauation Anayst presentation Investor education Bookbuiding Aftermarket Appoint a advisers Kick-off meeting/ weeky meetings Due diigence Prepare prospectus and other ega documents Deveop investment case Corporate housekeeping Set initia vauation range Existing sharehoder views on price, size, structure Preparations at advanced stage Due diigence substantiay compete Anayst briefing Announcement of intention to foat ( AITF ) Pubication of research Target key investors Monitor market Anayse feedback Refine size, vauation Management roadshow One-on-one meetings Anayse demand Admission Stabiisation Research Investor reations Continuing obigations Ensure basic preparedness of company for the IPO Decide to proceed with anayst presentation Decide to proceed with pre-marketing Decide to aunch (size, price range decision) Price, sign pacing agreement and aocate Life as a Pc Key objectives IPO price maximised High-quaity sharehoder base Stabe, rising aftermarket Liquid trading and quaity research coverage The IPO Process The IPO process invoves both a private and pubic phase (see IPO Process chart above). Private phase Seect the sponsor A company seeking a isting is required to appoint a sponsor. The sponsor eads a company s team of professiona advisers and coordinates their roes to ensure a company successfuy competes the isting process. A fu ist of approved sponsors and their contact detais is avaiabe on the Financia Services Authority ( FSA ) website: www.fsa.gov.uk Often, companies approach the appointment of advisers by hoding beauty parades with a series of sponsors, asking each about their expertise, experience and fees, and getting a feeing for what it woud be ike to work cosey with them over an extended period. Since acting as a sponsor requires a high degree of commitment, the appointment process is often two-way. Hence, the sponsor wi aso want fuy to understand a company s business before agreeing to take on the isting. The sponsor has responsibiities both to the company and to the UKLA. For exampe, the sponsor is required to submit an eigibiity etter to the UKLA setting out how the company satisfies a number of the Listing Rues. The sponsor is aso obiged to consider whether the admission of the equity shares woud be detrimenta to investors interests. Appointment of other professiona advisers In addition to the sponsor, a company needs to assembe a number of other advisers to guide it through the process. This incudes the bookrunner(s), awyers (one firm advising the Page 26 Preparing for an IPO
company and another firm to advise the sponsor/bookrunner(s)), accountants, financia pubic reations advisers, remuneration consutants, registrars and financia printers. Experts in vauations or sector consutants may aso be appointed. IPO timetabe See IPO timetabe chart on pages 24 and 25. An IPO can generay be competed within 15 to 20 weeks. The exact timetabe wi vary depending on market conditions, the scope and compexity of the dea and a range of other factors. Kick-off meeting A kick-off meeting is usuay hed in person and invoves discussions to make sure that the working group fuy understands the structure of the transaction, the process, timetabe and a other reevant issues. The sponsor wi usuay provide a detaied organisation book that goes through a these issues in detai. Weeky meetings In order to ensure that the process remains on track, the sponsor is ikey to organise weeky meetings/conference cas. These meetings give an opportunity for a parties to be kept fuy up to date on the process and for any key issues to be raised. Prospectus UKLA process Before a company can be isted, the sponsor must get a company s prospectus approved by the UKLA. Athough the prospectus is a ega document, it is aso a marketing too to hep to se shares to potentia investors. A company s awyers usuay take the primary responsibiity for drafting the prospectus athough the sponsor/bookrunner(s) assist a company in crafting the appropriate marketing story. The drafting of the prospectus takes severa weeks and wi invove a advisers. A number of drafting sessions wi take pace on various sections of the document. From a marketing perspective, the prospectus outines a company s strengths, strategy and market opportunity. The precise areas that must be covered in a prospectus, such as the incusion of risks reating to a company, are covered in the chapter The ega framework for an IPO on page 31. The sponsor is responsibe for submitting drafts of the prospectus to the UKLA. The UKLA is aowed 10 business days after the first submission to respond to the sponsor with a comment sheet. The company and its advisers wi then revise the prospectus so that the sponsor can submit an updated draft with the UKLA for a further review. For the second and subsequent drafts, the UKLA responds via its comment sheet within five business days. As every transaction is unique, it is impossibe to predict exacty how ong this process wi take. However, as a rue, the timeframe is approximatey six to eight weeks from initia submission of the prospectus to the UKLA (approximatey three to four submissions) to preiminary approva ahead of aunching the transaction, often with a Pathfinder prospectus (see page 29). Due diigence The overa purpose of due diigence is to ensure the accuracy, truthfuness and competeness of a company s prospectus, and to understand any issues associated with the company. Whie each professiona adviser performs a different roe in this process, the sponsor/bookrunner(s) wi focus on the diigence of a company s operations, management, financia prospects, historica performance, competitive position and business strategy. The advisers wi aso ook cosey at factors such as a company s suppiers, customers, creditors and anything ese that might have a bearing on the offering or viabiity of a company as a pubic company and on the accuracy and competeness of the prospectus. Preparing for an IPO Page 27
Due diigence comprises many interreated processes. Business due diigence is conducted mainy by the sponsor and bookrunner(s) and is designed to verify a company s business strategy and potentia for future growth. As part of the information and fact-gathering process, the sponsor/bookrunner(s) may conduct onsite inspections, particuary for manufacturing and property-intensive businesses. They may aso interview company officias, suppiers and customers to understand fuy every aspect of a company s business and its financia statements. The knowedge obtained wi ater hep the sponsor/bookrunner(s) and management to craft a strong, consistent message that can be used during the marketing process. Financia due diigence is geared toward confirming a company s historica financia resuts and understanding its operationa and financia prospects. Key areas of focus incude: audited and interim financia statements capita structure breakdown of historica financias by business detaied review of budgets meetings with auditors budget versus actua financia statements accounting poicies and auditor management etters use of proceeds financia contro systems working capita requirements debt covenants. The financia due diigence workstreams are covered in more detai in the chapter: Accounting requirements and advice through the IPO process on page 43. Lega due diigence is conducted by the soicitors and is the process of verifying a company s ega records, materia contracts and itigation. Key areas of focus incude: itigation compiance with aws and reguations tite to principa assets corporate structure debt covenants environmenta issues inteectua property. Lega restructuring, documentation and agreements During this stage, a company s management, sponsor and awyers work together to draft the necessary ega documentation and impement any required corporate restructuring. The coective purpose of these documents is to assure investors and reguators that the IPO has been objectivey vetted for gaps, irreguarities, miseading statements and other potentia probems. The documents incude: the pacing agreement (if funds are being raised) comfort etters ega opinions ock-up agreements. Continue to prepare a company to become a pubic company The sponsor/bookrunner(s) wi assist a company on a number of matters critica to its transformation into a pubic entity. These incude: discussion of vauation deveopment of investment case the composition of the board and its committees interna contros prevaiing market conditions. Marketing strategy The bookrunner(s) and sponsor wi set up a comprehensive marketing pan to target specific investors. Page 28 Preparing for an IPO
Anayst presentation It is common practice for senior management to meet with the research anaysts empoyed by the bookrunner(s) before the IPO and for such anaysts to pubish pre-dea research on a company before the start of the roadshow. To prepare fuy for the presentation, severa meetings and rehearsas with senior management are usuay required. Materia information must be incuded in the prospectus, but considerabe additiona information wi be provided to the anaysts to ensure a fu understanding of a company s business and sector. Pubic phase The main components of the marketing process are outined beow and expained at greater ength in the chapter: Generating and capturing investor demand during an IPO on page 57. Announcement of Intention to Foat ( AITF ) The first time that a company provides specific confirmation of its IPO pans is in a pubic announcement known as the AITF. At this stage the marketing process begins in earnest, often with pubication of research by anaysts connected to the bookrunner(s). Larger companies are ikey to have a carefuy deveoped media PR campaign to promote knowedge of the business and management to the media. Pathfinder prospectus At this stage in the process, a draft prospectus (aso referred to as a Pathfinder prospectus) is often made avaiabe to prospective investors. This document is an amost fina version of the prospectus. Apart from detais of the precise size of the IPO and the subscription price of the new shares to be offered (which are unikey to be finaised at this stage), it shoud incude a other reevant detais. Investor education Investor education is the process whereby the anayst(s) referred to above market the story to Considerations for overseas companies For incusion in the FTSE UK Index Series, it is important for overseas companies to note that: a company not incorporated in the UK wi be required to pubicy acknowedge adherence to the principes of the UK Corporate Governance Code, pre-emption rights and the UK Takeover Code, as far as is practica; and a company not incorporated in the UK must have a free foat of not ess than 50 per cent. Detais in reation to the FTSE UK Index Series are covered in the chapter: London: a unique investment opportunity on page 87. investors using the research they have written. This takes pace on arger IPOs and is in advance of the management roadshow. Management roadshow presentation The management roadshow is a series of meetings with potentia investors. It typicay incudes a forma presentation by the CEO and CFO outining the company s business operations, financia resuts, performance, markets, products and services. As with the anayst presentation, the roe of the sponsor/bookrunner(s) in this workstream incudes assisting a company in the preparation of the presentation and organising rehearsas. Competion and pricing meeting Foowing the management roadshow and the pricing of the IPO, a competion meeting takes pace where a reevant documents and paperwork are reviewed in their fina form by both the directors and their advisers. The exchange of new shares for funds typicay occurs three business days after pricing. During this three-day period, the shares may trade on a when issued basis, meaning that the bargains are not setted unti the isting becomes effective. Preparing for an IPO Page 29