Initial Public Offerings: factors to consider

Investor confidence has risen in equity markets in 2014 as the economy has picked up with a strong pipeline of Initial Public Offerings (IPOs) expected for this year and 2015.

There are a number of reasons why a company may decide to undertake an IPO. The most common reason is to raise capital in order to expand the company or reduce the amount of debt.

With an IPO there are key factors that need to be considered carefully, such as the increase in regulatory liability and the cost in relation to the time spent managing the IPO which will take management away from looking after day-to-day business.  It is important to understand that the entire process of taking a company through an IPO can be onerous and time consuming.

Listing eligibility

A company’s listing eligibility is evaluated on two aspects: the chosen market and management team. Therefore, before making the final decision to undertake an IPO, the following issues need to be considered by the company:

  • Which market is most suitable for launching the IPO? For example, AIM or Main Market, standard or premium listing
  • Is the company suitable to be listed on the chosen market and can the company meet the regulatory requirements on that market?
  • What changes may be required for the IPO to be successful in the chosen market? For example, changes to the constitution, share structure and management team could be required or desirable.

Who is involved in the IPO process?

One of the key aspects of preparing for a successful IPO is to have good quality external corporate advisors – brokers (or a NOMAD in the case of an AIM company), lawyers, public relations agency, registrar and transfer agent and a core team internally which should have at least:

  • A senior director
  • An in-house lawyer or company secretary
  • An in-house financial officer

During the entire IPO process a senior director who has the authority to make commercial decisions on behalf of the whole board is required; an in-house lawyer or company secretary is needed to advise the company on the legal matters relating to the company listing and the IPO in conjunction with appointed external legal advisers; and an in-house financial officer that can coordinate and advise on financial matters.

Regulatory conditions for premium listing

The listing rules set out the basic conditions in Chapters 2 and 6 (LR 2 and LR 6) which need to be satisfied by companies that decide to pursue a premium listing of shares. In the interest of protecting investors, the UKLA can also attach additional special conditions to a listing application.

Under LR 2 the basic conditions that need to be met are in relation to the company being correctly incorporated and operating according to its constitution, the issuing of shares in accordance with the relevant national law, the minimum value of shares being listed, the class of shares being issued and the approval of a prospectus by the FCA.

There are additional conditions for a premium listing which are set out in LR 6. Some of these include filing accounts covering the last three years, the production of financial information which relates to 75% of the business, demonstrating that the company has enough working capital for the forthcoming 12 months, and ensuring that a minimum of 25% of each class of shares is offered to the public.

The company will need to comply with continuing obligations under LR9 in order to maintain the listing.

Corporate governance

Investors are more attracted to companies which pay heed to the recommendations in the UK Corporate Governance Code. These recommendations are set out to protect investors. Under LR 9, two of the conditions require companies to “comply and explain” against the UK Corporate Governance Code.

Your company secretary or company secretarial advisers will advise the Board on the new corporate governance framework and associated policies and procedures which will need to be implemented prior to flotation and maintained thereafter. Some elements of this framework will be:

  • Appointment of non-executive directors
  • Setting up committees and terms of reference
  • Managing a programme of regular Board and committee meetings and the flow of information to non-executive directors
  • Implementing an insider list and managing the share dealing approval process
  • Managing registrars who maintain the register of shareholders
  • Producing an annual report complying with the new reporting requirements
  • Managing routine and financial results stock exchange announcements
  • Analysing the shareholder register and beneficial ownership
  • Managing the Annual General Meeting
  • Directors’ induction and development and board evaluation

Is it worth undertaking an IPO?

Overall the preparation involved for a company which decides to pursue an IPO can be lengthy and costly. However, the benefits of raising additional capital for growth can outweigh these disadvantages, especially for those companies who have exhausted all other funding options.

In addition, “going public” usually results in the ability to better promote the company. Companies that trade publicly are generally more well-known than those companies that are operating privately. This gives better scope for growth as a company, whilst at the same time requiring adherence to the continuing obligations of the UKLA.

Fahmeda  Khair
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