BPP University College Of Professional Studies Limited (BPP)
Notes on Corporate Finance for the LPC at BPP University.
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Equity Finance
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FLOTATIONS Methods of primary issue:
Retail offerings (public offer) = Offers to retail investors. – usually picked
INTRODUCTION: by well-known companies with potential for further growth.
Regulated market = includes the Main Market of the London Stock Institutional offerings = Offers to institutional investors (sophisticated
Exchange (LSE), but not AIM. investors). – used by less well-known companies or companies that want
Prescribed market = includes the Main Market and AIM. to avoid the additional regulatory burden.
Regulation of the financial market: A flotation could combine retail and non-public offers. All forms of offers
can also be combined. – eg. Placing and offers for subscription or offers
Financial Conduct Authority (FCA) = UK financial services regulator. for subscription and offers for sale.
Financial Reporting Council (FRC) = Independent regulator responsible
for promoting confidence in corporate reporting/governance.
PREMIUM OR STANDARD LISTING?
Documents published by the FRC:
1. UK Corporate Governance Code (CGC) When a company applies for listing, it can apply for its equity shares to
2. UK Stewardship Code be subject either to a premium/standard listing.
Securities and share issue: Premium Standard
Securities = include equity and debt instruments – shares are equity Which rules apply? All Listing Rules LR 14 and LR 2
instruments; bonds are debt instruments. 3-years of accounting LR 6 Yes No
Primary issue = the first time that a company makes an offer of listed history required?
shares. Also called flotation and initial public offering (IPO). Sponsor? LR 8 Yes No
Secondary issue = subsequent occasions when listed shares are issued. Share dealing restriction? MAR Yes MAR Yes
Corporate governance CGC, LR 9 and DTR 7 Disclosure Guidance
Private, public and listed companies: standard? Yes and Transparency
Rules (DTR)
Disclosure
Private companies Public companies requirements only
Inclusion in FTSE UK Index Yes No
A private company’s ability to Private companies’ shareholders series?
raise equity finance is heavily may raise further equity finance by Any rules on the LRs 6 and 9 Yes No
restricted by s.755 CA 2006 converting the company to a relationship between
public company and offer shares company and shareholder
s.755 CA 2006 It is an offence for to the public. with 30%+ shares?
Shareholder approval LR 10 For significant No
private companies to offer its needed? transactions
shares to the public. s.90 CA 2006 The procedure for LR 11 For related party
this is set out. transactions
May migrate from standard to premium listing and vice versa without
Listed companies having to cancel the initial listing. For moving down from premium to
standard listing, 75% shareholder approval is needed.
Listed companies = companies with shares listed on the Official List
(admitted on the Main Market of the London Stock Exchange). MAIN MARKET OR AIM?
Most investors prefer to invest in listed companies so that they can
buy and sell shares freely. Thus, some companies will seek a listing Main Market (LSE) AIM
and admission to trading to raise finance – technically the company
is not listed but its shares are. Pros: Pros:
Access to capital/thus lower Access to capital/thus lower
A company must convert to a public company before applying to debt and money for growth debt
have its shares listed/traded. Market for shareholders to Allows younger companies to
sell shares float
AIM companies are also public companies but not listed. More liquidity – share prices No need for prospectus –
are higher and are more easy cheaper and quicker
to sell Simpler corporate governance
CA 2006 Quoted company = includes a company whose shares are listed Publicity, attracting more and fewer disclosure rules
on the Official List (= the Main Market). investors Suits specialist industries
Part 13 CA 2006 Traded company = a company any shares of which carry Allows employee share Tax benefits: No stamp duty,
rights to vote at GMs and are admitted to trading on a regulated market. option schemes Capital Gains tax relief if AIM
Only needs to hire a sponsor shares are gifted, AIM shares
What is CREST? at certain times held for 2 years are
inheritance tax free.
CREST = a computerised system allowing UK shares to be held/traded Cons:
electronically. Regulation with potential Cons:
penalties Less publicity than LSE
How can shareholders hold shares through CREST? Costly – higher fees Riskier than LSE – less liquid,
1. By being a direct user – usually banks/stockbrokers. Time-consuming (managers less investors
2. By being a sponsored member – appoints a direct user to could grow the business Still must comply with
communicate on their behalf. instead) continuing obligations
3. By holding shares through a nominee – appoints a nominee. Changes board composition Nomads and brokers are
Loss of control with 10%+ in needed
Underwriting: public hands Lock-in requirement
Underwriting = the process that will estimate the likely demand for the
shares. During the underwriting process, the company will appoint a lead
underwriter to co-ordinate the underwriting of the issue. PREPARATION FOR LISTING: *POPULAR EXAM Q*
Reasons for underwriting: This question will ask you to recommend changes to procedures within
Guarantees that the company will receive the total proceeds it is seeking the company, possibly decision-making, reporting or communication
to raise through its issue and can spread the risk of issuing shares for the procedures.
first time.
The underwriter agrees to purchase shares not taken up by investors in In an exam question, you might be asked only a part of the below rules
the issue. – eg. A company is to make an offer of 100mil shares to the by asking only about board composition, or you might be asked what
public at £1 each. If the shares are all taken up by the public then the might the company do to prepare for listing – in that case, go through
underwriter is not obliged to purchase shares. However, if investors only the whole structure.
subscribe for 75mil shares, the underwriter is must purchase the
remaining 25mil shares under the underwriting agreement.
Equity finance – Revision notes | Page 1 of 17
,Exam structure – Board composition prior to flotation: Companies within the FTSE 350:
1. Convert to plc – special resolution Provision 32 Should have 3 independent, non-executive directors.
2. Comply with the free float and controlling shareholder rules Provision 11 Half the board excluding the chair should comprise of
3. Comply rules relation to accounts independent non-executive directors.
4. Comply with the UK CGC Provision 9 The roles of chairman and chief executive should not be
5. Identify the size of the company fulfilled by the same individual.
6. Decision-making procedures
7. Reporting procedures Smaller companies:
8. Communication procedures Provision 32 Should have 2 independent, non-executive directors.
9. Conclude Provision 11 Half the board excluding the chair should comprise of
independent non-executive directors.
Convert to plc: Provision 9 The roles of chairman and chief executive should not be
fulfilled by the same individual.
Is you company not a plc? Then you must convert the company to a plc
before application to listing. Reporting procedures:
s.755 CA 2006 Private company cannot offer shares to public. Principle Q Companies should appoint a remuneration committee.
Re-register company: The remuneration committee:
s.90(1) CA 2006 Pass a special resolution to re-register the company as Provision 32 Should have 3 members or 2 for small companies,
a public company. all independent non-executive directors.
Provision 33 Should develop executive remuneration and
Also change: determine director/the chair/senior managers’ pay.
1. s.90(3) CA 2006 Change the company name to include “plc”.
2. LR 2.2.4 Change the articles to be suitable for a listed company Principle J Companies should establish a nomination committee and
– including: make the company’s shares eligible for CREST by develop a formal procedure for appointing new directors. The majority
removing restrictions on electronic settlement. of members of the committee should consist of independent non-
3. Terminate the shareholders’ agreement (if any) to remove the executive directors.
existing pre-emption rights on transfer.
Principle M Companies to develop formal policies/procedures to ensure
Free float and controlling shareholder rules: compliance with: corporate reporting, risk management and internal
control principles.
LR 6.1.19(1)-(3) The free float requirement: There must be sufficient
shares (10% of all shares) in public hands at the time of admission. Provision 24 DTR 7.1.1 Companies must establish an audit committee.
Not in public hands if: The audit committee:
1. Held by a director Should have 3 members or 2 for small companies, all
2. Held under a family trust relating to the company independent non-executive directors.
DTR 7.1.1AR At least 1 member must be competent in
LR 6.1.20 FCA may accept less than 10% if it considers that the market accounting/auditing and all members must be competent in the
will operate properly with a lower percentage in light of the large company’s business sector.
number of shares in the same class and the extent of distribution to the Should monitor the audit procedures of the company, including
public. its systems of internal financial controls.
LR 6.1.2A If one shareholder controls 30% or more of votes: There Communication procedures:
must be a relationship agreement in place with the controlling
shareholder including independence provisions.
DTR 7.1.5R Issuers must make a statement disclosing which body carries
Rules on accounts: out the functions required by DTR 7.1 and how that body is composed.
LR 6.2.1 Prepare new accounts if: After listing:
1. Accounts don’t cover the last 3 years as a minimum The Board will not be allowed to disclose information to select
2. The last set of audited accounts are more than 6 months old journalists.
prior to the prospectus date. – check the accounting he board must meet regularly so as to discharge its duties and follow
reference date. LP1, A1.1, LR 7.2.2 and LR 7.2.3.
3. There are no consolidated accounts (only if the company has
subsidiaries) There also needs to be accurate and timely disclosures of information.
Comply with the UK CGC:
Explain that the company should comply with the UK Corporate
Governance Code. Although compliance is not compulsory, if the
company does not comply, institutional investors are less likely to invest
in the company.
LR 9.8.6R (5)-(6) Companies must make a ‘comply or explain’ statement
in their Annual Report stating whether they have complied with the CGC,
the extent of any non-compliance and why.
Identify the size of the company:
Small companies = Companies below the FTSE 350.
Smaller listed companies may decide that some of the provisions are
disproportionate or less relevant to their size.
Companies within the FTSE 350 will need to comply with all the rules.
Decision-making procedures/board composition:
Identify and list current directors. Deal with them in turn.
Count how many of them are independent non-executive directors. If
the shares of a director are being sold, anticipate that they might resign
soon.
s.273 CA 2006 The company secretary of a plc should be qualified and
competent – they must have a professional qualification, not just a law
degree.
Equity finance – Revision notes | Page 2 of 17
, AIM Admission:
What is AIM? Is a prospectus required?
AIM was developed by the LSE as a smaller secondary market to meet
the needs of growing companies which could not meet the criteria for AIM Rule 3 Unquoted applicants must produce an admission doc. This
listing on the Main Market. may be in the form of a prospectus. If a prospectus is required/
produced, then such a prospectus will serve as the admission document.
Who invests on AIM?
Investing in AIM companies is more risky as they are less regulated thus Unquoted applicants = applicants not listed elsewhere.
attracting only institutional investors/wealthy individuals. However, the
collapse of banks in 2008 have increased investment in AIM companies. A prospectus must be prepared and approved by the FCA when:
1. Test 1: An offer of securities is made to the public – s.85(1) FSMA
Regulatory status of AIM: 2. Test 2: When securities are admitted to trading on a regulated
An AIM company is not a listed company as Aim is not a regulated market, not including the AIM – s.85(2) FSMA – flotation on AIM
market. AIM is on a Recognised Investment Exchange (RIE) and is thus will not fall within test 2.
recognised by the FCA. It is exempt under the FSMA 2000.
In addition, most AIM flotations are structured to avoid the prospectus
Multilateral Trading Facility (MTF) = a trading system for buyers/sellers requirement imposed by Test 1. – eg. offers only to qualified investors
of shares/securities which includes AIM. AIM is an MTF. and offers to less than 150 people per EEA member state.
Advisers on admission to AIM: Where a prospectus is being issued, it must be submitted for approval
and the FCA will expect the same standard as for listed companies.
AIM Rules 1 and 35 A Nominated Adviser (Nomad) and a Broker must
be appointed/retained by AIM companies. Fast track admission – possible if:
1. Not traded on any exchange
Other advisers: OR
Reporting accountant 2. Already traded on AIM Designated Market for at least 18
Legal advisers months – eg. Main Market
Public relations advisers If qualifies for fast track, no need for admission doc.
A registrar
Other specialist advisers Admission document contents:
PROCESS FOR ADMISSION: *POPULAR EXAM Q* An admission document must disclose the information specified in
Sched 2 AIM Rules. It does not need the approval of the FCA.
Preparation:
Sched 2 paras (c)-(l) AIM Rules Admission doc must contain:
Re-register company: * Para c Working capital statement – a statement by the directors
Is you company not a plc? Then you must convert the company to a plc that the company has sufficient working capital for twelve
before application to listing. months from admission.
* Para d Profit forecasts – a statement by the directors that any
s.277 CA 2006 Private company cannot offer shares to public. profit forecast, estimate or projection has been prepared after
s.90(1) CA 2006 Pass a special resolution to re-register the company as due and careful enquiry.
a public company. * Para e On the first page, in bold, the name of the Nomad and a
risk warning.
Also change: * Para f Lock-up arrangements – a statement that related parties
1. s.90(3) CA 2006 Change the company name to include “plc”. and applicable employees will not sell their shareholdings for at
2. AIM Rule 36 Change the articles to be suitable for a listed least twelve months from admission.
company – including: make the company’s shares eligible for * Para g Details of the directors/proposed directors
CREST by removing restrictions on electronic settlement. * Para h Details of certain connected parties.
3. Terminate the shareholders’ agreement (if any) to remove the
existing pre-emption rights on transfer. * Para k Company has a duty of disclosure to include info in the
admission document which it reasonably considers necessary to
Shares are freely transferable: enable investors to form a full understanding of:
i) The assets, liabilities, financial position, profits and
AIM Rule 32 Ensure that its shares are freely transferable. losses and prospects of the applicant and its securities
ii) The rights attaching to those securities
Working capital: iii) Any other matter contained in the admission doc.
AIM Rules, Sched 2, para c The admission document must contain a * Para l The Company must include details of the recognised CGC
director’s statement that the company has sufficient working capital for that the board of directors have decided to apply.
12 months from the date of admission.
Pre-admission announcements:
Lock-in agreements for new businesses: *Popular MCQ*
AIM Rule 2 At least 10 business days before Admission day, applicants
AIM Rule 7 Under lock-in agreements, the issues must ensure that all must provide the LSE with the information required by Sched 1 AIM
related parties and applicable employees agree not to sell interest in Rules in the form of a pre-admission announcement.
its shares for 1 year from admission if the issuer’s main activity is a
business which has not been independent and revenue earning for min. Pre-admission announcements must include:
2 years. 1. Name, country of incorporation, registered office, website
address, description of business
A related party = 2. Number of type of securities in respect of which it seeks
a) A director of an AIM company/its subsidiary/parent company admission
b) Substantial shareholder (holding at least 10% of any class of AIM 3. Capital to be raised
security or 10% or more of the voting rights) 4. Percentage of AIM securities not in public hands at admission
c) An associate of a) or b) being family, trustees (where a person in 5. Names and functions of directors/proposed directors
a) or b) or their family are beneficiaries of the trust) and any 6. Details of any significant shareholder (person holding more than
company in whose equity shares such a person individually or 3% of a class of the company’s shares)
with his family are directly/indirectly interested to the extent 7. Anticipated accounting reference date
they are or could be able to exercise control over 30% of the 8. Expected admission date
votes at a general meeting. 9. Name and address of Nomad and Broker
10. Details of where the admission document will be available
Applicable employee = employee of the company/their subsidiary/ 11. The corporate governance code applied
parent company, who (together with his family) holds 0.5% or more of a
class of the AIM company’s securities. Application Documents:
AIM Rule 5 At least 3 business days before Admission day, the applicant
must submit application docs to the LSE. These comprise: a completed
application form, an electronic copy of the admission document and the
Nomad’s declaration.
Equity finance – Revision notes | Page 3 of 17
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