BPP University College Of Professional Studies Limited (BPP)
Notes on Equity Finance for the (Accelerated) LPC at BPP University.
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Equity Finance
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Hafsah Nawaz
Equity Finance Consolidation
Flotations
Advantages and disadvantages of seeking a flotation
Advantages Disadvantages
Access to capital to fund growth and/or reduce Burden of disclosure and reporting requirements
debt - LPDT Rules, MAR, LSE A&D Standards
- Flotations are a way to inject cash into a must be observed or else can lead to
company penalties, censure or suspension of listing
- New shareholders a potential source of - Need to publish preliminary, half-yearly
future funding for the company and annual accounts which is a big
management cost
- If the disclosures aren’t investor-friendly
then this could affect publicity which may
impact uptake on IPO
- Appointment of a compliance offer is
expensive
- Will open up the company to more
scrutiny via shareholder activism, but also
has substantial impact in providing
shareholders with confidence in their
investment
Provides a market Management time and costs
- Shareholders wishing to sell their shares - Process of listing is complex and time
can take advantage of a public market consuming. The more time spent on the
which isn’t otherwise available to private IPO is both a financial and administrative
companies cost
- Will allow the price to be influenced; - Managers will be expected to dedicate
generally PLCs will have a higher share months to listing whilst also managing the
price than LTDs company’s business effectively
- Any advisors employed will have to be
paid
Public market Changes to the board
- Publicity created by flotation is usually - Listed companies have to ‘comply or
good for business which will allow the explain’ the CG Code which stipulates how
company to raise their profile and the board should be constituted
credibility - Directors are potentially more at risk of
- If the company seeks international being sued in their personal capacity
expansion, being listed on a recognised - More directors/directors with relevant
stock exchange will provide extra skill and experience may have to be
legitimacy if it one day seeks to list abroad sought out, involving an administrative
cost
Incentivise employees Loss of control
- If the company introduces an employee - Directors will have to accept that they’ll
share scheme, this could add to both be subject to additional pressures on the
profitability and productivity in the long- way they run the company
term - Institutional shareholders may be in a
position to block resolutions or influence
decisions
- Potential loss of identify if the company
was previously family-run
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Preparation for listing – general
Re-registration as a PLC
A private company cannot offer its shares to the public (s755 CA) and therefore it must re-register
as a public limited company under s90 CA
Under s90(1) CA a private company may be re-registered as a PLC if a special resolution that it
should be so re-registered is passed
Under s90(3) CA, the company must make such changes to its name and articles as are necessary in
connection with its becoming a PLC
Minimum share capital requirements for re-registration
At the time the company is re-registered as a PLC, it must have-
o (a) the minimum allotted share capital of £50,000 to satisfy s91(1)(a) CA and s763 CA; and
o (b) the company’s allotted shares must be paid up to at least a quarter of their nominal
value and the whole of any premium to satisfy s91(1)(b) and s586 CA
Documentation required to complete re-registration
Under s90(1) CA a company as to submit an application for re-registration in the prescribed form-
o Statement of the proposed name on re-registration
o In the case of a company without a secretary, statement of the company’s proposed
secretary
o Statement of compliance i.e. that the requirements of Part 7 CA have been complied with
Under s94(2) CA the application must be accompanied with the following documents-
o A copy of the SR that the company should re-register as a PLC
o A copy of the articles as proposed to be amended (see below)
o A copy of the balance sheet required under s92 CA
Preparing accounts to float
LR 6.2.1R(1)/(3) – a new applicant must have published or filed audited accounts that cover at least
3 years and are the latest accounts for a period ended not more than 6 months before the date of
the prospectus
If the company has a subsidiary, the accounts must be consolidated for [COMPANY] and
[SUBSIDIARY] (LR 6.2.1R(4))
Sufficient working capital requirement
LR 6.7.1R- company will need to satisfy the FCA that the group has sufficient working capital
available for the group’s future spending needs for at least the next 12 months from the date of
the publication of the prospectus
Amending the Articles to make them appropriate for a listed company
Articles in the form of Table A or Model Articles are unlikely to be appropriate for a listed PLC
Pre-emption rights-
o LR 2.2.4R requires that, to be listed, shares must be freely transferable. A new set of
Articles suitable for listed companies should be adopted by the company which would not
include pre-emption rights on the transfer of shares
o If the company has a shareholders’ agreement then it is likely that this will have to be
terminated. Institutional investors are unlikely to want to invest in a company which is the
subject of a shareholders’ agreement
Eligible for CREST-
o The constitution of the company and the terms of its equity shares must be compatible
with electronic settlement (i.e. via CREST)
o The company should amend its articles to reflect the fact that some of the company’s
shares will be held in electronic form
,Hafsah Nawaz
Changes to corporate procedures
[COMPANY] should ensure that it complies with the spirit of the Listing Principles and Premium
Listing Principles in Chapter 7 LR. Their purpose is to ensure that listed companies pay due regard
to the fundamental role they play in maintaining market confidence and ensuring fair and orderly
markets (LR 7.1.2G)
LP 1 – a listed company must take reasonable steps to establish and maintain adequate
procedures, systems and controls to enable it to comply with its obligations
o LR 7.2.2.G and LR 7.2.3G elaborate that [COMPANY] should ensure that it has systems and
controls to be able to-
(a) ensure that it can properly identify information which requires disclosure in a
timely manner; and
(b) ensure that any information identified is properly considered by the directors
and that such a consideration encompasses whether the information should be
disclosed
o [APPLY TO FACTS]
PLP 6 – requires that [COMPANY] communicates information to holders in such a way as to avoid
the creation or continuation of a false market
PLP 5 – the company must ensure that all holders of the same class of shares are treated equally
o Board must ensure that it has procedures in place to ensure that all price sensitive
information – positive or negative – is communication to the market by way of an
announcement before it is disseminated informally to shareholders, suppliers, journalists
etc.
o [APPLY TO FACTS]
Preparation for listing – management
Section / Rule Notes
LR 9.8.6R(5) and (6) Compliance with the UK Corporate Governance Code is not compulsory.
However, LR 9.8.6R(5) requires a listed company to state how the listed
company has applied the Principles set out in the Code; and
Statement of compliance
with CG Code LR 9.8.6R(6) requires a listed company to state how it has complied or
not complied throughout the accounting period with all relevant
provisions set out in the Code, giving reasons for any non-compliance.
In any event it is advisable for an applicant to comply with the UK
Corporate Governance Code, as institutional investors are more likely to
invest in a company that follows principles of good corporate
governance.
DTR 7.2.1R, 7.2.2R DTR 7.2.1R requires MP to produce a corporate governance statement
(in its directors’ report). DTR 7.2.2R requires the corporate governance
Produce CG statement statement to contain a reference to the corporate governance code to
which the company is subject (for MP this will be the UK Corporate
DTR 7.2.3R and 7.2.4G Governance Code).
There is an overlap between the ambit of the DTR 7, LR 9.8.6R and the
UK Corporate Governance Code. Whilst compliance with the UK
Corporate Governance Code is advisable (but not compulsory),
compliance with DTR 7 is compulsory. DTR 7.2.4G states that a listed
company which complies with LR 9.8.6R(6) will satisfy the requirements
of DTR 7.2.2R and DTR 7.2.3R.
UK Corporate Governance Principle G: The UK Corporate Governance Code recommends that the
Code Principle G and board includes a balance of executive and non-executive directors (and
Provisions 10 and 11 in particular independent non-executive directors) so that no individual
, Hafsah Nawaz
or small group of individuals can dominate the board’s decision taking.
Composition of the board
with non-executive Provision 11 recommends that at least half the board of companies,
directors excluding the chair, should be independent non-executive directors.
Provision 10: However, Edward Lewis is unlikely to be an appropriate
candidate for a non-executive director position as he will not fulfil the
independence requirements described in Provision 10 (he has close
family ties with the board/ has been a former employee of the group
etc).
The current board members are nearly exclusively executive directors
and Erica Symons will resign as a non-executive director prior to the
float. MP will therefore need to appoint 5 more non-executive directors
who satisfy the independence criteria in Provision 10.
UK Corporate Governance Principle G recommends that there is a clear division of responsibilities
Code Principles F and G at the head of the company and that no one person has unfettered
and Provision 9 powers of decision.
Role of chairman and Provision 9 recommends that the roles of chairman and chief executive
chief executive should not be exercised by the same individual, that the chairman
should, on appointment, meet the independence criteria set out in
Provision 10 and that a chief executive should not go on to be chairman
of the same company. However, if the roles are held by the same
person, then this should be explained to shareholders in the Annual
Report and Accounts.
Therefore, another independent director, rather than Jeremy Lewis,
should be appointed as MP’s chairman prior to its flotation.
DTR 7.1.1R and 7.1.3R MP should establish an Audit committee: DTR 7.1.1R and 7.1.3R /
Provision 24, responsible for monitoring the audit procedures and the
Establishment of audit group’s systems of internal financial controls.
committee
Note that MP is obliged to create an audit committee as under DTR 7.1 it
UK Corporate Governance will not be able to ‘explain away’ non-compliance with this provision.
Code Provision 24
UK Corporate Governance Provision 17: MP should establish a Nomination committee, which leads
Code Provision 17 the process for board appointments and makes recommendations to the
board.
Establishment of
nomination committee
UK Corporate Governance Provision 32: MP should establish a Remuneration committee.
Code Provision 32 Provision 33 states that the remuneration committee should have
responsibility for setting remuneration for all executive directors and the
Establishment of MP chairman and should also recommend and monitor the level and
remuneration committee structure of remuneration for senior MP management.
UK Corporate Governance Provision 39 recommends that notice periods are set at one year or less.
Code Provision 39
It is advisable for MP to enter into service contracts with all of its
Notice periods for service executive directors so that continuity of the company’s successful
contracts management is guaranteed for a period of time. It may be that for
existing employees the notice periods cannot be changed without their
consent in which case this is an example of ‘explaining’ rather than
‘complying’.
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