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Published by White Page Ltd in association with London Stock Exchange, with contributions from:

Main Market

A guide to listing on London Stock Exchange

Publishing editor: Nigel Page

Publisher: Tim Dempsey

Design: London Stock Exchange plc

Printing and binding: Argent Litho Ltd

A guide to listing on the London Stock Exchangeis published by:

White Page Ltd, 17 Bolton StreetLondon W1J 8BHUnited KingdomPhone: + 44 20 7408 0268Fax: + 44 20 7408 0168Email: [email protected]: www.whitepage.co.uk

First published: November 2010ISBN: 978-0-9565842-1-2

A guide to listing on the London Stock Exchange© 2010 London Stock Exchange plcand White Page Ltd

Copyright in individual chapters rests with theauthors. No photocopying: copyright licencesdo not apply.

This guide is written as a general guide only. Itshould not be relied upon as a substitute forspecific legal or financial advice. Professionaladvice should always be sought before takingany action based on the information provided.Every effort has been made to ensure that theinformation in this guide is correct at the time ofpublication. The views expressed in the articlescontained in this guide are those of the authors.

London Stock Exchange, AIM and the coat ofarms device are registered trademarks ofLondon Stock Exchange plc. The publishersand authors stress that this publication doesnot purport to provide investment advice, nordo they bear the responsibility for any errors oromissions contained herein.

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Copyright November 2010 London Stock Exchange plcLondon Stock Exchange, the coat of arms device and AIM are registered trademarks of the London Stock Exchange plc.

London Stock Exchange statistics as at end September 2010

Whatever your company’s size or sector, we can put you at the heart of one of the world’s most sophisticated financial communities.

The Main Market is home to approximately 1,400 companies from over 60 countries, including some of the world’s most successful and dynamic organisations. So far this year £20.8 billion has been raised on the London Stock Exchange, of which £17.9 billion has been raised on the Main Market.

Here at the London Stock Exchange we help companies to access the deepest pool of international capital. Premium Listed companies on the Main Market meet the highest listing standards helping to raise their corporate profile and increase their exposure to investors.

Learn more about the Main Market and why leading companies choose to list on the London Stock Exchange – www.londonstockexchange.com/mainmarket

QUOTED

http://www.londonstockexchange.com/mainmarket

mailto:[email protected]

http://www.whitepage.co.uk

Contents

3 ForewordLondon Stock Exchange

5 The Main Market – the standard for excellenceLondon Stock Exchange

13 The role of the UKLAThe United Kingdom Listing Authority

19 Preparing for an IPOUBS Investment Bank

31 The legal framework for an IPOFreshfields Bruckhaus Deringer LLP

43 Accounting requirements and advice through the IPO processErnst & Young LLP

57 Generating and capturing investordemand during an IPOUBS Investment Bank

69 Managing the company’s profileFishburn Hedges

81 The role of the registrar in an IPOCapita Registrars

87 London: a unique investment opportunityFTSE Group

91 Preparing to list depositary receiptsCleary Gottlieb Steen & Hamilton LLP

105 Establishing a depositary receipt programmeJ.P. Morgan

116 Useful contacts

A guide to listing on the London Stock Exchange

The Main Market –the standard for excellence

London Stock Exchange

© October 2014 London Stock Exchange plc. London Stock Exchange and the coat of arms device are registered trademarks of the London Stock Exchange plc.

The world’s capital market

The Main Market is London’s flagship market helping larger and more established companies access the deepest pool of capital in Europe.

www.lseg.com

The Main Market – the standard for excellence


Established in 1698, the London Stock Exchange’s(the ‘Exchange’) Main Market has long been hometo some of the UK’s, and indeed the world’s,largest and best-known companies. There are over1,400 companies on the Main Market with acombined market capitalisation of £3.7 trillion.Companies of all types, nationalities and sizestogether represent some 40 sectors.

As well as sectoral and geographical diversity, theMain Market accommodates the admission totrading of companies with a Premium Listing or aStandard Listing. The FSA’s listing categories aredescribed in detail in the chapter ‘The role of theUK Listing Authority’ on page 13.

A listing on the Main Market demonstrates acommitment to high standards and providescompanies with the means to access capital fromthe widest set of investors. Over the last 10 years,£366 billion has been raised through new andfurther issues by Main Market companies – capitalthat has seen companies through the good timesand the bad.

Why join a public market…?

Joining a public market – the Main Market or AIM(our market for smaller, growing companies) – is away to grow and enhance your business. Whenconsidering the available financing options, thefollowing factors are frequently cited as the keybenefits of admission to a public market:

l providing access to capital for growth,enabling companies to raise finance forfurther development, both at the time ofadmission and through further capitalraisings

l creating a market for the company’s shares,broadening the shareholder base

l placing an objective market value on thecompany’s business

l encouraging employees’ commitment andincentivising their long-term motivation andperformance, by making share schemesmore attractive

l increasing the company’s ability to makeacquisitions, using quoted shares ascurrency

d

Responsibility for the approval of prospectuses and admission of companies to the Official List lieswith the UK Listing Authority (UKLA). The Exchange is responsible for the admission to trading ofcompanies to the Main Market. Joining the Main Market consequently involves two applications: oneto the UKLA and one to the Exchange.

Joining the Main Market

UKLA admits securities tothe Official List

London Stock Exchangeadmits securities to trading

on the Main Market

Official List notice issued to the market

Admission to trading noticeissued to the market


l creating a heightened public profile –stemming from increased press coverage andanalysts’ reports – helping to maintainliquidity in the company’s shares

l enhancing the company’s status withcustomers and suppliers.

Companies that choose to seek admission to apublic market in London have a range of optionsdepending on their size, stage of development andcapital-raising requirements. The options open tocompanies should be discussed in detail with theirteam of advisers.

Companies which are successful on AIM and reacha certain size and stage of development, may seekto transfer their securities from AIM to the MainMarket, provided that they meet the eligibilitycriteria. While a move to the Main Market maysubject the company to increased regulatoryrequirements, it can bring benefits in terms of aheightened profile and attracting differentinvestors.

…and why the Main Market?

The success of the Main Market is built on a widerange of factors:

l a respected and balanced regulatoryenvironment

l choicel access to capital from a broad and

knowledgeable investor basel expert advisory communityl enhanced profile and status.

The Main Market has attracted companies of allsizes and from all sectors over many years.Irrespective of their sector, origin or strategicdirection, they have all sought to take advantageof the range of benefits a listing on the MainMarket affords. Those benefits include:

A respected and balanced regulatoryenvironmentThe UKLA’s listing framework underpins London’sreputation for balanced and globally-respectedstandards of regulation and corporate governance.Regulatory requirements in London are principles-based and provide an appropriate balance ofinvestor protection, practitioner certainty andflexibility. The Exchange aims to be involved in allrelevant processes where amendments oradditions to the regulatory framework areconsidered. This is to ensure that London’scompetitive advantage remains undiminished; thatlistings and subsequent capital raisings are cost-effective and efficient for our companies; and thatinvestors have the appropriate amount ofinformation to make informed investmentdecisions.

ChoiceCompanies with either a Premium or a StandardListing can choose to admit to trading on the MainMarket.

A Premium Listing means that a company mustmeet standards that are over and above (oftendescribed as ‘super-equivalent’) those set forth inthe EU legislation, including the UK’s corporategovernance code. Investors trust the super-equivalent standards as they provide them withadditional protections. By virtue of these higherstandards, companies may have access to abroader range of investors and may enjoy a lowercost of capital owing to heightened shareholderconfidence. A Premium Listing is only available toequity shares issued by commercial tradingcompanies.

With a Standard Listing, a company has to meetthe requirements laid down by EU legislation. Thismeans that their overall compliance burden will belighter, both in terms of preparing for listing andon an ongoing basis. Standard Listings cover theissuance of shares and Depositary Receipts


(‘DRs’) as well as a range of other securities,including fixed-income. Large companies fromemerging markets may wish to list their DRs, thusattracting investment from the significantinternational pool of capital available in London. (A table showing the key differences between aPremium Listing and a Standard Listing can befound in the chapter ‘The role of the UK ListingAuthority’ on page 18).

In this guide, the chapters ‘Preparing to listdepositary receipts’ and ‘Establishing a depositaryreceipt programme’ are dedicated to the listingand admission to trading of DRs on both the MainMarket and the Professional Securities Market(‘PSM’). The PSM provides an alternative route toa listing on the Exchange for issuers of DRs.

Access to capital We provide access to the largest pool ofinternational equity assets in the world. Thisculture is embedded in London’s investmentmanagement community, which understandscompanies from home and abroad and wants toinvest in the global economy.

Once they are listed and admitted to trading onthe Main Market, companies should notunderestimate the value of being able to return tothe market to raise funds through further issues.Even during the recent difficult market conditions,the Exchange successfully facilitated significantlevels of capital raising. Further issues by MainMarket companies provided capital injections thatwere used to pay off debt, rebuild balance sheetsand fund further growth.

Expert advisory communityThe decision to join the Main Market is a pivotalone. To achieve a successful listing and admissionto trading, companies must deliberate over manyconsiderations.

Underpinning the Main Market is a network ofexperienced advisers who will guide you on thejourney to an initial public offering (‘IPO’) andprovide ongoing advice once your company islisted.

Selecting the right advisers for you and yourcompany is vital. Getting it right early on will helpensure that disruptions to the process areminimised and you are able to get on with the taskat hand. Factors to consider when appointingadvisers include the firm’s relevant and recentexperience in relation to your business and thesector you operate in, as well as the personalrapport you develop with the individuals with whomyou will be working.

The diagram on page 10 below shows the differentadvisers typically involved in a flotation on theMain Market and briefly highlights their varyingroles and responsibilities.

ProfileFloating a company on the Main Market raisesyour company’s profile and helps you to meet yourstrategic objectives. You will have the opportunityto project your company onto a global stage withincreased media coverage, investor interest andbroad analyst coverage.

With a Premium Listing comes the potential forinclusion in the FTSE UK series of indices whichincludes the FTSE 100, FTSE 250 and FTSESmall Cap indices. Access to these indices isoften seen as one of the key benefits of achievinga Premium Listing since so many investmentmandates – particularly in respect of the vastamount of capital represented by tracker funds –are driven by FTSE indexation. For moreinformation see chapter ‘London: a uniqueinvestment opportunity’ on page 87.

Our commitment to the primary marketsThere is a continuous stream of proposed regulatory

changes affecting companies on our markets, withlegislation stemming from changes here in the UKand in Brussels. With companies’ best interestsfront of mind, we continue to lobby on their behalfto ensure our markets are fit for purpose. It iscrucial that through our lobbying we continue topromote a regulatory regime based on principles,seeking to limit disproportionate legislationapplicable to issuers that are admitted to trading onour markets, while ensuring sufficient investorprotection.

Once you are listed on the market, we arecommitted to helping you raise your profile andkeeping you abreast of market developments. Wehelp to do this through the provision of brand marks(see page 11); a dedicated page on our websitespecific to your company (including latest news andpricing information on the trading of yoursecurities); educational initiatives, such as seminarsand practical guides; and investor-focused eventssuch as capital markets days that bring companiesand investors together.

Advisers’ roles and responsibilities

• Overall co-ordination and project management of IPO process• Co-ordination of due diligence and prospectus• Ensure compliance with applicable rules• Develop investment case, valuation and offer structure• Manage communication with LSE and UKLA• Act as adviser to the company’s board• Ongoing support/advice after flotation

• Prepare company for roadshow• Facilitate research• Build the book pre-float • Marketing and distribution• Pricing and allocation

Sponsor

• Legal due diligence• Draft and verification of prospectus• Corporate restructuring• Provide legal opinions

• Review financials – assess company’s readiness for IPO• Tax structuring• Financial due diligence - long form, short form and working capital reports

• Develop communication strategy to support pre-IPO process• Enhance market perceptions to develop liquidity and support share price • Pre- and post-IPO press releases

• Registrars• Financial printers• Remuneration consultants

due diligence, prospectus and working capital review

Lawyers

THE COMPANY

Financial PR Reporting accountant

Bookrunner

Other advisers


S T A N D A R DDEPOSITARY RECEIPTS

L I S T E DS T A N D A R D

SHARES

L I S T E DP R E M I U M

L I S T E D

These brand marks are provided exclusively to companies listed on the Main Market. Companies mayuse the brand mark across corporate and investor relations materials to showcase their associationwith the London Stock Exchange and provide information as to their listing status. More information is available on the Exchange’s website:www.londonstockexchange.com/brandmarks

Main Market brand marks


And finally…

Listing and admission to trading on the MainMarket is an efficient way for companies to accesscapital to fund their growth, while simultaneouslybenefiting from enhanced profile and liquiditywithin a well-governed and regulated marketstructure.

As an ambitious company with plans to take yourbusiness to the next level, joining the Main Marketis an ideal way to assist you in realising your globalaspirations.

The role of the UK Listing Authority UKLA

The role of the UK Listing Authority

The role of the UKLAPage 14

The UK Listing Authority (‘UKLA’) is the nameused by the Financial Services Authority (‘FSA’)when it acts as competent authority for listing, ascompetent authority for the purposes of theEuropean Prospectus and Transparency Directives,and as competent authority for certain aspects ofthe Market Abuse Directive. These roles have astatutory basis in Part VI of the Financial Servicesand Markets Act 2000 (‘FSMA’). Threesourcebooks in the FSA Handbook implement therelevant rules. These are:

l Listing Rules – these rules include theeligibility requirements for admission to theOfficial List (or ‘listing’) and the continuingobligations that apply thereafter. They comepartly from the European ConsolidatedAdmissions and Reporting Directive, but alsoinclude a significant body of rules that are‘super-equivalent’ or additional to theEuropean minimum requirements. Theseadditional requirements include substantiveeligibility requirements such as the need for athree-year track record, the class test andrelated party regimes, and the requirementfor a sponsor in relation to a Premium Listing.

l Prospectus Rules – these rules stemprimarily from the enactment of the EuropeanProspectus Directive and detail thecircumstances when a prospectus is requiredand the disclosures a prospectus shouldinclude.

l Disclosure and Transparency Rules (‘DTRs’)– these rules govern the periodic and ad hocdisclosure of information by listed companies.Periodic information includes interim andannual accounts, and ad hoc disclosures,including major shareholding notifications anddetails of significant developments that mightaffect the price of the securities. These rulesoriginate from the Transparency Directive andpart of the Market Abuse Directive, and alsofrom the 4th/7th Company Law Directives.

As a consequence, when a company wishes tomake an initial public offering (‘IPO’) of itssecurities onto a regulated market such as theMain Market of the London Stock Exchange, theUKLA has two principal roles to perform: to reviewand approve the issuer’s prospectus, and to admitthose securities to listing once it is happy that theissuer complies with all relevant eligibility criteria.

Listing categories

The term ‘listed’ is used in a number of differentcontexts, but in the UK this technically meansadmitted to the Official List of the UKLA. TheUKLA has created a number of different listingcategories which determine the eligibility criteriaand continuing obligations that apply to the issuerand its securities.

The UKLA introduced the listing categories to helpclarify that listing refers to admission to theOfficial List of the UKLA, and does not relate tothe market to which a security is admitted totrading. Listing categories are also intended toclarify the regulatory standards that apply todifferent types of listing. A Standard Listingrequires compliance only with EU minimumstandards, whilst a Premium Listing also requirescompliance with the more stringent super-equivalent standards. Note that only equity sharesmay be admitted to a Premium Listing; issuers ofother securities may only seek a Standard Listingfor their securities. A table showing the keydifferences between Premium and StandardListings can be found on page 18.

Eligibility

An issuer will generally select its preferred marketand listing category in consultation with itsadvisers prior to engagement with the UKLA. Forissuers requesting a Premium Listing of theirequity shares, contact with the UKLA will beundertaken by the issuer’s appointed sponsor firm.The role of a sponsor is to guide the issuer on theapplication of the Listing Rules and the Prospectus

Listing segment

Premium Standard

Equity shares

Commercialcompanies

Equity shares

Closed- ended

investment funds

Equity shares*

-

Non-equityshares

GDRs

Debt & debt-like

Debt

securities

Asset-backedsecurities

Convertible securities

Preference

shares (specialist securities)

Securitised derivatives

Misc. securities

Options

Subscription warrants

Equity Shares

Open- ended

investment companies

Listing category

Examples of

types of companies/

securities

LR6

LR15

LR14

LR18

LR17

LR19

LR20

LR16

Listing Rule

chapter

shares

Rules. This includes liaison with the UKLA onbehalf of the issuer, and to provide certaindeclarations to the UKLA that provide comfortthat the relevant rules have been complied withand the issuer has established appropriateprocedures.

The UKLA maintains a list of approved sponsorsand conducts supervisory activities in order toensure that the list of sponsors contains only thosefirms that meet the eligibility criteria for a sponsor.For issuers that are seeking a Standard Listing, theUKLA has no preference as to whom the mainpoint of contact should be, although it should besomeone that is reasonably knowledgeable aboutthe UKLA and its processes.

To start the eligibility process, the UKLA generallyexpects that a letter is submitted detailing theissuer’s compliance with the applicable eligibility

requirements. The UKLA suggests that suchletters are sent in as early as possible in the IPOprocess and that they are as detailed as possible,including relevant background information on thenature of the issuer’s business. This is becauseunnecessary delay can be caused to the timetablewhere significant eligibility concerns arise late inthe IPO process.

Issuers seeking a Premium Listing of equity shareswill be required to comply with the moresubstantive eligibility requirements that areimposed by the super-equivalent parts of theListing Rules, in addition to those requirements inthe Listing Rules based entirely on EU law. Forcommercial companies, these additionalrequirements include the requirement for a cleanthree-year track record of operations, and therequirement for a clean working capital statementfor at least the next 12 months. For investment

Page 15The role of the UKLA

* an investment entity will only be able to benefit from this Standard Listing category for a further class of equity shares if italready has (and only for so long as it maintains) a Premium Listing of a class of its equity shares

entities, these requirements include an additionaldegree of regulation in relation to the corporategovernance of the issuer. Overseas issuers wishingto comply only with the minimum standards appliedby the EU Directives can apply for a StandardListing of either equity shares or GDRs. The UKLAhas recently also extended the Standard Listingcategory to UK issuers of equity shares whichcould previously only have had a Premium(formerly ‘Primary’) Listing.

Prospectus review and approval

An admission of securities onto the Official Listand the Main Market of the London StockExchange requires the production of an approvedprospectus. As the UKLA is the UK’s competentauthority for the purposes of the ProspectusDirective, it typically approves prospectusesproduced during an IPO.

Although final confirmation of an issuer’s eligibilitycan only be given once its prospectus has beenapproved, the UKLA will generally try to resolveany major eligibility issues prior to starting itsreview of an issuer’s prospectus. This reviewinvolves an iterative process of reviewing andcommenting on drafts of the prospectus until theUKLA is satisfied that all applicable rules havebeen complied with. The number of draftsnecessary to reach this point will depend on thecomplexity of the issues and the quality of thesubmissions. By way of example, many large IPOscan involve the review of five or more substantivedrafts for one reason or another.

The UKLA seeks to comply with its publishedservice standards for the document review andapproval process, and aims to provide commentson an initial draft of a new applicant prospectuswithin 10 working days, and comments on eachsubsequent draft within five working days. Onaverage, the review and approval of a prospectustakes around 6-8 weeks for an IPO.

The prospectus can be published once it has beenformally approved by the UKLA. The actual timingof that approval will depend on the issuer’s choiceof issuance method – for example, if the issuanceinvolves a retail offering then approval andpublication must occur sufficiently in advance ofthe beginning of the offer. A prospectus relatingonly to an introduction where no offer to the publicis made may be approved as little as 48 hours priorto admission to listing.

Listing Particulars

Although no prospectus is required for theadmission of securities to unregulated marketssuch as the Professional Securities Market (the‘PSM’), the UKLA does require Listing Particularsfor the admission of those securities to listing onthe Official List. In these cases, the process forreviewing the document, and the contentrequirements, are very similar to the requirementsfor a prospectus. The principal difference is thatthe financial information in a prospectus must beprepared in accordance with IFRS or anequivalent GAAP. In the case of ListingParticulars where securities are to be admitted tothe PSM, the financial information can beprepared in accordance with local standards.

Passporting

An overseas issuer may also seek to passport ontoa UK-regulated market, using a prospectus thathas been approved by another competentauthority. Although in these circumstances theUKLA will rely upon the passport to satisfy therequirement for an approved prospectus, it will stillseparately assess the issuer against the relevanteligibility requirements. As part of this process, theUKLA reviews the issuer’s proposed prospectus tohelp in its assessment of eligibility, so again theUKLA recommends that an issuer makes contactsufficiently early in the process, and certainlybefore the prospectus has been approved by thehome competent authority.

Page 16 The role of the UKLA

Post-IPO interaction with the UKLA

l DTRs – a listed issuer must comply with theDTRs on an ongoing basis, as failure tocomply with these rules may result in thesuspension of the listing of its securities. TheUKLA has a team dedicated to monitoringissuers’ compliance with the DTRs, and toproviding guidance on these rules on a real-time basis.

l Prospectus requirements – if the issuerseeks admission of further securities of thesame class it will be required to produce aprospectus, unless an exemption applies.Exemptions include, among other things, theissue of shares under employee shareschemes and bonus issues. The UKLA wouldtypically be required to approve any futureprospectus.

l Significant transactions – if the issuer has aPremium Listing of its equity shares, it will berequired to consider whether any significanttransaction that it undertakes will needannouncement or, if it is of sufficient size,shareholder approval. Lower size thresholdsare applied if the transaction is beingundertaken with a related party such as adirector or substantial shareholder. TheListing Rules include rules governing thedisclosure requirements in circulars whereshareholder approval is sought, and alsoclarify which circulars require UKLA approval.

l Timetables – the UKLA staff (or ‘readers’)allocated to a particular case will typically beworking on a large number of transactions atany one time. Whilst the UKLA makes everyeffort to accommodate tight timetables itcannot deal with every issue immediately ormeet unrealistic timetables. Complex issueswill need time for proper consideration priorto resolution and therefore the UKLA alwaysadvises that such issues should be brought toits attention as early as possible.

l Helpdesks – the UKLA offers severaldifferent helpdesks to provide guidance onthe Listing Rules, Prospectus Rules, and theDTRs. This enables complex issues to bediscussed and agreed prior to the submissionof documents, or in relation to significanttransactions (Tel: +44 (0)20 7066 8333).

Page 17The role of the UKLA

The role of the UKLA

A summary of the key differences between Premium and Standard listings

Key eligibility criteria Premium –Equity Shares

Standard –Shares

Standard –Depositary Receipts

Free float 25% 25% 25%

Audited historical financialinformation Three years Three years or such

shorter periodThree years or suchshorter period

75 per cent of applicant’sbusiness supported by revenue-earning record for the three-yearperiod

Required n/a n/a

Control over majority of theassets for the three-year period Required n/a n/a

Requirement for clean working capital statement Required n/a n/a

Sponsor Required n/a n/a

Key continuing obligations

Free float 25% 25% 25%

Annual financial report Required Required Required

Half-yearly financial report Required Required n/a

Interim management statements Required Required n/a

EU-IFRS or equivalent Required Required Required

UK Corporate Governance Code Comply or explain n/a n/a

Model Code Applies n/a n/a

Pre-emption rights Required As required by relevantcompany law n/a

Significant transaction (‘Class tests’) Rules apply n/a n/a

Related-party transactions Rules apply n/a n/a

Cancellation75 per cent

shareholder approvalrequired

No shareholder approval required

No shareholder approval required

This list is not exhaustive and should be read in conjunction with the FSA Handbook (Listing Rules, Prospectus Rules andDisclosure & Transparency Rules).

Preparing for an IPO

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Initial public offerings (‘IPOs’) are among the mostchallenging transactions that a business canundertake. The decision on whether to list acompany’s shares on a public market is asignificant one; obtaining a public quote is a majormilestone in any company’s life. The process ofgoing public is time-consuming, but it is anopportunity for a company to critically examineitself. A company, its management and its ownersare likely to be in the public eye to a much greaterextent than before.

A company’s decision to launch an IPO must bebased on a realistic assessment of its business, itsmanagement resources, its stage of developmentand its prospects. Public ownership offerssignificant advantages, such as access to thepublic equity and debt markets to finance growthand strengthen a company’s financial position, aswell as the creation of an open market for acompany’s shares. However, a company will faceheightened scrutiny and greater demands on itsmanagement.

Planning is a key element in any IPO. In order toavoid unnecessary delays and distraction, whichcould be costly, management should evaluate indetail how it will commit adequate resources tomeet the pressing deadlines of an IPO process.

The run-up to a company seeking a listing on theMain Market can be broadly divided into twophases – pre-IPO preparation and the IPO processitself. Pre-IPO preparation includes the criticalreview of a company’s business plan and growthprospects, assessing the management team,appointing an appropriate board, tighteninginternal controls, improving operational efficiencyand resolving issues that may adversely affect thelisting early on.

The United Kingdom Listing Authority’s (‘UKLA’)Listing Rules set the specific regulatoryrequirements that a company has to meet to be

allowed to list on a market. Unsurprisingly, anumber of the UKLA’s requirements coincide withthe attributes which investors are looking for in acompany. The precise regulatory requirements arecovered in the chapter ‘The legal framework for anIPO’ on page 31. Areas such as a demonstrabletrading record and appropriately experienceddirectors clearly help to satisfy both the regulatorsand the potential shareholders. Ultimately, theability to meet the market’s commercialexpectations is crucial.

For management and owners, an IPO may alsocrystallise the need to examine their tax planningand personal wealth management. This should beaddressed early to avoid distraction during thefinal, and often hectic, few weeks of the IPOprocess.

Pre-IPO preparation

Businesses often begin their preparations forbecoming public companies well before they launchthe IPO process. Typically, pre-IPO preparationstake four to six months, but they can takeconsiderably longer. Advance preparation is a keysuccess factor that allows for a smooth andefficient execution process and the ability to takeadvantage of market windows.

Management teamA company’s management team will need toexplain the business, its strategy and prospects toinvestors, and demonstrate knowledge of thesector, as well as its challenges, in order to gainthe support and confidence of the market. Thedirectors of a company will be accountable to itsnew and existing shareholders for the performanceof the business when it is a public company.Therefore, as a company prepares for its IPO itmay need to ensure that its management hassufficient depth and breadth.

Business plan For the purposes of an IPO, a company needs a



comprehensive business plan that sets out itsproducts, markets, competitive environment,strategy, capabilities and growth objectives.Companies engaging in successful IPOs tend tohave a clearly defined vision for the futureperformance of the business that can bearticulated credibly, clearly and quantifiably.

Companies that are in mature or shrinkingindustries, operate within small markets, orprovide a narrow range of products to a small andhighly specialised customer base may beunsuitable for an IPO.

Financial performanceA company should expect to show investors aconsistent pattern of top- and bottom-line growthand a sound balance sheet post-IPO. For a companyseeking a Premium Listing, its financial statementsneed to adhere to International Financial ReportingStandards (‘IFRS’). Further technical requirementsof the financial information required to be includedin a prospectus are covered in the chapter‘Accounting requirements and advice through theIPO process’ on page 43.

Growth prospectsBefore investing in a company, most investorswant to feel confident about its future growthprospects. A company should develop a financialmodel that quantifies its business plan andexpected growth. The sponsor (see page 26) maywork closely with management and externalconsultants/experts to develop this model and willconduct due diligence on the assumptions behindthe model and stress-test the projections.

Raising funds?The majority of listings take place with asimultaneous share offering to investors. This cantake the form of:

l raising additional capital for the business byissuing new shares in a company to new and

existing shareholders (a primary offering)l existing shareholders selling their shares to

new or other existing shareholders, ie noadditional capital is raised for the business (asecondary offering); or

l a combination of both.

If existing shareholders intend to sell in the IPO, itis helpful to know the likely quantum early so thatthe IPO can be planned accordingly.

Use of proceedsIf a company is raising new capital, the use ofproceeds should be clearly articulated and in linewith its strategy. In many cases, the proceeds willbe used to either pay down debt, fund capitalinvestment or to provide working capital forexpansion.

In determining the quantum of new capital, acompany needs to consider its future capitalstructure and its ability to pay dividends at anappropriate level.

Financial controls The market expects companies to have properfinancial controls in place. In addition, the UKLArequires the sponsor to provide writtenconfirmation of the adequacy of a company’sfinancial controls. Companies contemplating alisting will therefore need to ensure that they havesystems in place to ensure a flow of accurate,timely information.

BoardA public company needs to satisfy corporategovernance requirements. The principles are setout in the UK Corporate Governance Code (the’Code’) and a company is required to comply withthe Code, or explain why it has not, in itsprospectus. It is typically necessary to appoint newmembers to the board who are independent and toform new committees (eg audit and remuneration).Identifying suitable candidates can take a


significant amount of time. Potential directorsoften want to be involved in the IPO process at anearly stage. The sponsor frequently assists in therecruitment and assessment of potential boardmembers for a company seeking a listing.

Group reorganisationThe reorganisation steps undertaken in preparationfor an IPO will vary, depending on the existing andintended group structure. One of the key steps isdetermining the jurisdiction of incorporation of thelisting entity. At IPO it is essential to ensure thatthe group holds all assets, intellectual property andcontractual rights necessary to carry on itsbusiness operations. Part of the groupreorganisation may involve their transfer wherethey are currently held by related parties outsideof the group.

Change may be necessary to optimise a group’stax position, or to remove businesses or assetsthat are not part of the group to be floated. Forexample, company-owned horses, boats and so onare unlikely to be appropriate for a quotedcompany.

Determine employee and managementcompensation and incentive plansAs part of the IPO process, many companiesreview the amount of equity owned by their topexecutives and employees. Additional equityoptions or other incentives at the IPO may begranted to increase management and employeeownership and to align incentives from the IPOwith a company’s new investors. Remunerationconsultants can advise on the structure of anyschemes, as well as trends in the appropriateindustry. The recommendations should bereviewed by the sponsor and bookrunner(s) toensure that the awards are in line with marketexpectations.

Wealth management and financial planningFor many managers and owners of a business,

an IPO is an opportunity to realise or transfer partof their wealth. Early planning of their personal taxand financial affairs is advisable to avoid delay ordifficulty in the final stages of an IPO.

Controlling shareholdersPotential investors may be influenced, negativelyor positively, by the presence of a controllingshareholder. A company should assess what willhappen with such shareholders post an IPO, iewhether they will sell down some or all of theirholdings, continue to have board representation ormaintain veto rights on certain company decisions.In most situations, any special rights will beunwound and, where appropriate, a relationshipagreement may be entered into as part of the IPOprocess to avoid potential future conflicts ofinterest.

Related-party transactionsAny internal transactions, compensationarrangements and relationships involvingmanagement or the board that might beappropriate for a private company but improper fora public company must be eliminated. A companyshould therefore consider whether any outsideaffiliations will be negatively perceived by themarket.

Investor relations (‘IR’)IR is the term used to describe the ongoing activityof companies communicating with the investmentcommunity. While the communication that publiccompanies undertake is a mix of regulatory andvoluntary activities, IR is essentially the part ofpublic life that sees companies interacting withexisting shareholders, potential investors, researchanalysts and journalists. Larger companiesfrequently create a separate IR function to meetthe demands for information and to assist in allcommunications with the market. Please refer tothe chapter ‘Managing the company’s profile’ onpage 69 for more detail on this topic.


Process

Execution kick-off meeting ⧫

Weekly meeting/conference calls ⧫ ⧫ ⧫ ⧫ ⧫ ⧫

Due diligence

Long form report

Preparation of audited numbers

Valuation and capital structure

Forecasts finalised ⧫Working capital report

Valuation discussion

Capital structure discussions

Agree offer size

Documentation

Draft prospectus

Prospectus filed with UKLA ⧫UKLA review prospectus

Publish pathfinder prospectus

Publish final prospectus

Preparation of placing agreement

Auditors’ comfort letters

Marketing and roadshows

PR process

Analysts pres’n prepared and delivered

Research prepared and reviewed

Prepare and rehearse roadshow

Announce intention to float

Publish research

Pre-marketing

Price range set

Roadshow

Bookbuilding

Pricing/allocation

Settlement and closing

Stabilisation

Private execution phase

Week

IPO timetable

Week

Active IPO execution

1 2 3 4 5 6 7

1 2 3 4 5 6 7


⧫ ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ ⧫

⧫⧫

⧫

⧫⧫

Public execution phase

+30 days

Active IPO execution

8 9 10 11 12 13 14 15 16 17

8 9 10 11 12 13 14 15 16 17

⧫

⧫⧫


The IPO Process

The IPO process involves both a private and publicphase (see ‘IPO Process’ chart above).

Private phase

Select the sponsorA company seeking a listing is required to appoint asponsor. The sponsor leads a company’s team ofprofessional advisers and coordinates their roles toensure a company successfully completes the listingprocess. A full list of approved sponsors and theircontact details is available on the Financial ServicesAuthority (‘FSA’) website: www.fsa.gov.uk

Often, companies approach the appointment ofadvisers by holding ‘beauty parades’ with a seriesof sponsors, asking each about their expertise,experience and fees, and getting a feeling for whatit would be like to work closely with them over an

extended period. Since acting as a sponsor requiresa high degree of commitment, the appointmentprocess is often ‘two-way’. Hence, the sponsor willalso want fully to understand a company’s businessbefore agreeing to take on the listing.

The sponsor has responsibilities both to thecompany and to the UKLA. For example, thesponsor is required to submit an eligibility letter tothe UKLA setting out how the company satisfies anumber of the Listing Rules. The sponsor is alsoobliged to consider whether “the admission of theequity shares would be detrimental to investors’interests”.

Appointment of other professional advisersIn addition to the sponsor, a company needs toassemble a number of other advisers to guide itthrough the process. This includes thebookrunner(s), lawyers (one firm advising the

Ensure basic preparedness of company for the IPO

• Appoint all advisers

• Kick-off meeting/weekly meetings

• Due diligence

• Prepare prospectus and other legal documents

• Develop investment case

• Corporate housekeeping

Preparationof the IPO

• Set initial valuation range

• Existing shareholder views on price, size, structure

• Preparations at advanced stage

• Due diligence substantially complete

• Analyst briefing

• Announcement of intention to float (’AITF’)

• Publication of research

• Target key investors

• Monitor market

• Analyse feedback

• Refine size, valuation

• Admission

• Stabilisation

• Research

• Investor relations

• Continuing obligations

• Management roadshow

• One-on-one meetings

• Analyse demand

Key objectives

Private phase Public phase

Preliminaryvaluation

Analystpresentation

Decide to proceedwith analyst presentation

Decide to proceedwith pre-marketing

Decide to launch (size, price rangedecision)

Price, sign placingagreement and allocate

Life as a Plc

Investoreducation

Bookbuilding Aftermarket

IPO price maximised High-qualityshareholder base

Stable, rising aftermarket

Liquid trading and quality research coverage

IPO process


company and another firm to advise thesponsor/bookrunner(s)), accountants, financialpublic relations advisers, remunerationconsultants, registrars and financial printers.Experts in valuations or sector consultants mayalso be appointed.

IPO timetable See ‘IPO timetable’ chart on pages 24 and 25.

An IPO can generally be completed within 15 to 20weeks. The exact timetable will vary depending onmarket conditions, the scope and complexity of thedeal and a range of other factors.

Kick-off meetingA kick-off meeting is usually held in person andinvolves discussions to make sure that the workinggroup fully understands the structure of thetransaction, the process, timetable and all otherrelevant issues. The sponsor will usually provide adetailed organisation book that goes through allthese issues in detail.

Weekly meetingsIn order to ensure that the process remains ontrack, the sponsor is likely to organise weeklymeetings/conference calls. These meetings givean opportunity for all parties to be kept fully up todate on the process and for any key issues to beraised.

Prospectus – UKLA processBefore a company can be listed, the sponsor mustget a company’s prospectus approved by theUKLA. Although the prospectus is a legaldocument, it is also a marketing tool to help to sellshares to potential investors. A company’s lawyersusually take the primary responsibility for draftingthe prospectus although thesponsor/bookrunner(s) assist a company incrafting the appropriate marketing story. Thedrafting of the prospectus takes several weeks andwill involve all advisers. A number of drafting

sessions will take place on various sections of thedocument. From a marketing perspective, theprospectus outlines a company’s strengths,strategy and market opportunity. The precise areasthat must be covered in a prospectus, such as theinclusion of risks relating to a company, arecovered in the chapter ‘The legal framework for anIPO’ on page 31.

The sponsor is responsible for submitting drafts ofthe prospectus to the UKLA. The UKLA is allowed10 business days after the first submission torespond to the sponsor with a comment sheet. Thecompany and its advisers will then revise theprospectus so that the sponsor can submit anupdated draft with the UKLA for a further review.For the second and subsequent drafts, the UKLAresponds via its comment sheet within five businessdays. As every transaction is unique, it is impossibleto predict exactly how long this process will take.However, as a rule, the timeframe is approximatelysix to eight weeks from initial submission of theprospectus to the UKLA (approximately three tofour submissions) to preliminary approval ahead oflaunching the transaction, often with a Pathfinderprospectus (see page 29).

Due diligenceThe overall purpose of due diligence is to ensurethe accuracy, truthfulness and completeness of acompany’s prospectus, and to understand anyissues associated with the company. While eachprofessional adviser performs a different role inthis process, the sponsor/bookrunner(s) will focuson the diligence of a company’s operations,management, financial prospects, historicalperformance, competitive position and businessstrategy. The advisers will also look closely atfactors such as a company’s suppliers, customers,creditors and anything else that might have abearing on the offering or viability of a company asa public company and on the accuracy andcompleteness of the prospectus.


Due diligence comprises many interrelatedprocesses. Business due diligence is conductedmainly by the sponsor and bookrunner(s) and isdesigned to verify a company’s business strategyand potential for future growth. As part of theinformation and fact-gathering process, thesponsor/bookrunner(s) may conduct onsiteinspections, particularly for manufacturing andproperty-intensive businesses. They may alsointerview company officials, suppliers andcustomers to understand fully every aspect of acompany’s business and its financial statements.The knowledge obtained will later help thesponsor/bookrunner(s) and management to craft astrong, consistent message that can be usedduring the marketing process.

Financial due diligence is geared toward confirminga company’s historical financial results andunderstanding its operational and financialprospects. Key areas of focus include:

l audited and interim financial statementsl capital structurel breakdown of historical financials by businessl detailed review of budgetsl meetings with auditorsl budget versus actual financial statementsl accounting policies and auditor management

lettersl use of proceedsl financial control systemsl working capital requirementsl debt covenants.

The financial due diligence workstreams arecovered in more detail in the chapter: ‘Accountingrequirements and advice through the IPO process’on page 43.

Legal due diligence is conducted by the solicitorsand is the process of verifying a company’s legalrecords, material contracts and litigation. Keyareas of focus include:

l litigationl compliance with laws and regulationsl title to principal assetsl corporate structurel debt covenantsl environmental issuesl intellectual property.

Legal restructuring, documentation andagreementsDuring this stage, a company’s management,sponsor and lawyers work together to draft thenecessary legal documentation and implement anyrequired corporate restructuring. The collectivepurpose of these documents is to assure investorsand regulators that the IPO has been objectivelyvetted for gaps, irregularities, misleadingstatements and other potential problems. Thedocuments include:

l the placing agreement (if funds are beingraised)

l comfort lettersl legal opinionsl lock-up agreements.

Continue to prepare a company to become apublic companyThe sponsor/bookrunner(s) will assist a companyon a number of matters critical to itstransformation into a public entity. These include:

l discussion of valuationl development of investment casel the composition of the board and its

committees l internal controlsl prevailing market conditions.

Marketing strategyThe bookrunner(s) and sponsor will set up acomprehensive marketing plan to target specificinvestors.


Analyst presentationIt is common practice for senior management tomeet with the research analysts employed by thebookrunner(s) before the IPO and for suchanalysts to publish pre-deal research on acompany before the start of the roadshow. Toprepare fully for the presentation, severalmeetings and rehearsals with senior managementare usually required. Material information must beincluded in the prospectus, but considerableadditional information will be provided to theanalysts to ensure a full understanding of acompany’s business and sector.

Public phaseThe main components of the marketing processare outlined below and explained at greater lengthin the chapter: ‘Generating and capturing investordemand during an IPO’ on page 57.

Announcement of Intention to Float (‘AITF’)The first time that a company provides specificconfirmation of its IPO plans is in a publicannouncement known as the AITF. At this stagethe marketing process begins in earnest, oftenwith publication of research by analysts connectedto the bookrunner(s). Larger companies are likelyto have a carefully developed media PR campaignto promote knowledge of the business andmanagement to the media.

Pathfinder prospectusAt this stage in the process, a draft prospectus(also referred to as a Pathfinder prospectus) isoften made available to prospective investors. Thisdocument is an almost final version of theprospectus. Apart from details of the precise sizeof the IPO and the subscription price of the newshares to be offered (which are unlikely to befinalised at this stage), it should include all otherrelevant details.

Investor education Investor education is the process whereby theanalyst(s) referred to above market the story to

investors using the research they have written.This takes place on larger IPOs and is in advanceof the management roadshow.

Management roadshow presentationThe management roadshow is a series ofmeetings with potential investors. It typicallyincludes a formal presentation by the CEO andCFO outlining the company’s businessoperations, financial results, performance,markets, products and services. As with theanalyst presentation, the role of thesponsor/bookrunner(s) in this workstreamincludes assisting a company in the preparationof the presentation and organising rehearsals.

Completion and pricing meeting Following the management roadshow and thepricing of the IPO, a completion meeting takesplace where all relevant documents and paperworkare reviewed in their final form by both thedirectors and their advisers. The exchange of newshares for funds typically occurs three businessdays after pricing. During this three-day period,the shares may trade on a ‘when issued’ basis,meaning that the bargains are not settled until thelisting becomes effective.

Considerations for overseas companies For inclusion in the FTSE UK Index Series, it isimportant for overseas companies to note that:

l a company not incorporated in the UK will berequired to publicly acknowledge adherenceto the principles of the UK CorporateGovernance Code, pre-emption rights and theUK Takeover Code, as far as is practical; and

l a company not incorporated in the UK musthave a free float of not less than 50 per cent.

Details in relation to the FTSE UK Index Seriesare covered in the chapter: ’London: a uniqueinvestment opportunity’ on page 87.


Impact DayThis is typically the day after the completionmeeting and is the day on which the availability ofthe prospectus is advertised and the listing isofficially announced to the market.

UKLA final approvalThe prospectus must be submitted in final form,which will include the relevant pricing and sizeinformation, to the UKLA for final approval.

The UKLA also requires any supportingdocuments, including directors’ service contracts,audited accounts and all reports referred to in theprospectus, to be delivered on the date ofapproval. The UKLA only approves the prospectuson the day it is dated and published.

Applications for listing and tradingAt least 48 hours before admission, the formalapplication for a listing is submitted to the UKLA.At the same time, a formal application foradmission to trading is submitted to the Exchange.

AdmissionThis is the point at which a company’s shares are‘admitted’ to listing and the shares are tradedpublicly on the Main Market. The listing is officiallygranted by the UKLA in conjunction withadmission to trading being granted by the LondonStock Exchange.

Specialist companiesSpecific rules apply to a variety of businessesincluding investment companies and resource

companies and certain financial companies. Insome cases, expert reports will be required (eg toreport on oil and gas reserves).

Occasionally, companies may be able to IPOwhen they do not meet the three-year rule onfinancial statements, such as when they areseeking a Standard Listing. The requirements forlisting should be discussed in advance with boththe sponsor and the London Stock Exchange orthe UKLA.

Summary

When contemplating an IPO, a company’smanagement and its owners should notunderestimate the significant time, resources andplanning required in listing a company on the MainMarket.

There are two distinct stages: pre-IPO preparationand the IPO process itself. It is imperative for thesuccess of an IPO that a company undertakessufficient pre-IPO preparation to ensure it issuitable to become a public company.

To assist in the planning process, a sponsor, whichis usually an investment bank, should beappointed. A sponsor is able to advise a companythrough its pre-IPO preparation and will, duringthe IPO process, lead a company’s team ofprofessional advisers and coordinate their roles toensure a smooth listing process.

Section titleThe legal framework for an IPOSimon Witty and David Cotton

Freshfields Bruckhaus Deringer LLP

An IPO is just the beginning.

www.freshfields.com

In 2009, we helped our clients complete 14 initial public offerings (IPOs) globally, raising in excess of $15bn. We also completed 58 further issues, raising in excess of $62bn.

We’re proud of those statistics, but they’re only a part of the story. We cover every kind of mandate and, because we work hard to maintain long-standing client relationships, we get to work with clients through the good times and the challenging. Freshfields Bruckhaus Deringer currently acts for over a third of the FTSE 100 and those clients know that, when the going gets really tough, we are the law firm they can turn to for business-focused advice on the most complex challenges.

With over 2,500 lawyers in 27 offices, we are able to offer our clients the best legal advice for their business – wherever they need it, whatever the jurisdiction and through every stage of development.

If you would like more information please contact any of [email protected], [email protected] or [email protected].

Freshfields Bruckhaus Deringer LLP is proud to be the official legal services provider to the London 2012 Olympic and Paralympic Games.

This chapter provides an insight into the followingareas:

l regulations governing the Main Market andan overview of the relevant rulebooks

l eligibility criteria for companies seekingPremium and Standard Listings

l contents requirements for the prospectusl considerations for companies located outside

the UKl continuing obligations.

The legal and regulatory basis of

the Main Market

The Main Market of the London Stock Exchange(the ‘Exchange’) is governed by EU law, UK Actsof Parliament, regulations drawn up by theFinancial Services Authority (‘FSA’) and theExchange’s rules.

EU law, through various directives and regulations,provides the minimum standards (applicable EU-wide) that apply to the Main Market. The UK has,where necessary, implemented these directivesand regulations through the Financial Services andMarkets Act 2000 (‘FSMA’) and through theListing Rules, the Prospectus Rules and theDisclosure and Transparency Rules. Among otherthings, FSMA gives statutory powers in relation tolistings and listed companies to the FSA, whichalso acts as the UK Listing Authority (‘UKLA’).The UKLA is also the UK’s ‘competent authority’for the purposes of EU legislation. Also relevant tointerpreting and applying the relevant EU and UKlegislation are guidance published by theCommittee of European Securities Regulators(‘CESR’), materials published by the FSA/UKLA(eg LIST!) and the UK Corporate GovernanceCode (formerly the ‘Combined Code’), which ispublished by the Financial Reporting Council.

Access to the Main Market is a two-stage process:first it is necessary for the UKLA to admit acompany’s shares to the official list of the FSA

(the ‘Official List’), and then for the Exchange toadmit those shares to trading on the Main Market.

In order to obtain admission to the Official List, acompany must meet the requirements of theListing Rules and have published, or passportedinto the UK, an approved prospectus. Therequirements of the Listing Rules will varyaccording to the type of listing being sought – aPremium Listing or a Standard Listing. In order tobe admitted to trading on the Main Market, inaddition to obtaining admission to the Official List,a company must comply with the Exchange’s ownregulations as laid out in its Admission andDisclosure Standards (‘A&DS’).

Eligibility for joining the

Official List/Main Market

For shares to be admitted to the Official List andto trading on the Main Market, a company and theshares it issues must satisfy the relevant OfficialList and the Exchange’s eligibility requirements. Acompany also needs to bear in mind, and ensurethat it is able to comply with, the continuingobligations to which it will be subject followinglisting and admission. These are described on page 39 and following.

UKLA eligibility requirementsThe UKLA eligibility requirements are found in theListing Rules. There are requirements that apply toall listings, as well as additional requirements thatapply only to Premium Listings. One suchrequirement that applies to companies seeking aPremium Listing is that they must appoint a‘sponsor’, which will generally be an investmentbank, to advise them on the Listing Rules andProspectus Rules and to give confirmations as totheir compliance with those rules and certain othermatters to the UKLA. Although a sponsor isrequired to provide advice to the company, itsprimary responsibilities and obligations are owedto the UKLA. The Listing Rules contain provisionsas to the independence of the sponsor and

The legal framework for an IPO

Page 33The legal framework for an IPO

5


identifying and managing conflicts of interestbetween its relationship with the company and itsrole as sponsor (it is, for example, customary for asponsor also to be a bookrunner or underwriter inan offering). See the chapter ‘Preparing for anIPO’ on page 19 for more detail on the role of thesponsor and the chapter ‘Generating and capturinginvestor demand during an IPO’on page 57 formore information on the role of the bookrunner(s).

Eligibility requirements that apply to bothStandard and Premium Listings

Chapter 2 Listing Rules requirementsChapter 2 of the Listing Rules contains basicrequirements that, subject to some modifications,apply to listings of all types of securities.

The first set of requirements relates to legal mattersand these require that the company is dulyincorporated, validly existing and operating inconformity with its constitution and that its sharescomply with the laws of the company’s place ofincorporation, are duly authorised and have allnecessary statutory and other consents. The sharesmust also be admitted to trading on a recognisedinvestment exchange, such as the London StockExchange (in practice, the listing and admission totrading will take place simultaneously), be freelytransferable, fully paid and free from any liens orrestrictions on the right of transfer (save for failureto comply with a statutory notice requiringinformation about interests in shares). Neither usualselling restrictions imposed as part of an offeringnor a contractual lock-up arrangement would beconsidered a bar on transferability for thesepurposes. In addition, all the shares of the sameclass as the listed shares must be listed and theshares must have a minimum market capitalisationof £700,000. Finally, a prospectus relating to theshares must be approved by the FSA (or by anotherEEA state competent authority and passported intothe UK) and published.

‘Free-float’ requirementIn order to obtain a Premium or Standard Listing,at least 25 per cent of the entire class of sharesmust, by the time of their admission to listing, beheld by ‘the public’ in one or more EEA states. Theamount of share capital held by the public is alsoknown as the ‘free-float’. Generally speaking,shares are deemed held by the public unless theyare held by one or more of the following: (i) directors of the company or group members; (ii) persons connected with directors of thecompany or group members; (iii) trustees of anygroup employee share scheme or pension fund; (iv)a person who has the right to nominate a director;and/or (v) persons who individually or acting inconcert have a 5 per cent or greater interest in theshare capital.

This rule is to ensure that there are sufficientsmaller and non company-related shareholders forthe market in the shares to operate properly – thatis, for there to be sufficient liquidity in the shares.Given this, the UKLA does sometimes allow asmaller free-float than 25 per cent – for instance,where there are shares held outside the EEA thatwould be capable of being traded, or where thecompany’s market capitalisation is so large that asmaller percentage might still allow for asufficiently liquid market in the stock.

This rule is of particular interest in an IPO wherethe existing owners intend to maintain asubstantial majority stake following the listing, asit will limit the number of shares they can retainpost-IPO, especially if there is also a ‘strategic’investor with more than 5 per cent.

Eligibility requirements for a Premium ListingThe eligibility requirements for a Premium Listingare found in Chapter 6 of the Listing Rules (‘LR6’).As indicated above, these go beyond the basicrequirements of the EU legislation.

Audited historical financial informationA company seeking a Premium Listing mustgenerally have published or filed accounts for atleast the last three financial years, audited withoutmodification (which will generally mean withoutqualification), and the most recent must be for aperiod ended not more than six months prior to thedate of the prospectus. This requirement will oftendrive the IPO timetable and will necessitate thepreparation of interim audited accounts where theexisting annual accounts are not sufficiently recent.

In addition to the above requirements, the auditorsmust be independent of the company and thecompany must obtain written confirmation fromthem that they comply with the relevantaccounting and auditing independence guidelines.

75 per cent of the business being supported byrevenue-earning record, control of assets andindependenceAt least 75 per cent of the business of a companyseeking a Premium Listing must generally besupported by a revenue-earning record covering theperiod for which accounts are required under LR6– namely, at least three years. In practical terms,this means that a company that has made majoracquisitions (amounting to 25 per cent or more ofits business) over the financial track record periodmust include financial information for thesebusinesses both before and after their acquisition.

The form this information will take will bedetermined in accordance with the rules relating to‘complex financial histories’ (rules contained,amongst other places, in Regulation 211/2007,which amended the Prospectus Regulation809/2004 EC (the ‘EU PD Regulation’)).

A company must also have controlled the majorityof its assets for at least the three-year period forwhich accounts are required and be carrying on anindependent business as its main activity. Whereshareholders continue to own a substantial stake

after IPO, it is customary to put in place arelationship agreement between thoseshareholders and the company to assist indemonstrating its operational independence.

The requirements relating to the nature andduration of the company’s business activities areintended to enable investors to make a reasonableassessment of the future prospects of thecompany’s business. Accordingly, an issuer maynot satisfy these provisions if its strategy, businessor financial performance in the future is expectedto be significantly different from that in its three-year track record.

Working capitalA company seeking a Premium Listing is required tosatisfy the FSA that it has sufficient working capitalfor at least the next 12 months. On a practical level,this is generally satisfied by the working capitalstatement to this effect included in the prospectusand the sponsor’s declaration to the FSA. Bycontrast, an issuer seeking a Standard Listing neednot have sufficient working capital for the next 12months, although if not it would need to explain inits prospectus how it intends to procure suchcapital. To support the working capital statementand, where applicable, the related declaration, thecompany and its accountants will prepare a workingcapital report. The sponsor will review this reportand conduct other related due diligence.

Warrants or options to subscribeThe total of all issued warrants and options tosubscribe for equity share capital of the companymust not exceed 20 per cent of its issued sharecapital.

Mineral companies and scientific research companiesMineral companies and scientific researchcompanies are subject to additional eligibilityrequirements, although they are not required to havea three-year, revenue-earning, audited track record.



London Stock Exchange eligibility requirementsThe London Stock Exchange eligibilityrequirements are found in the A&DS. The essentialrequirement of the company is that it complieswith the requirements of the securities regulatorsby which it is regulated (ie the FSA and any otherhome state regulator) and any other stockexchange on which it has securities admitted totrading. The A&DS also impose requirementsrelating to the trading and settlement of theshares: the shares must be capable of beingtraded in a fair, orderly and efficient manner andthey must be eligible for electronic settlement.

The prospectus

A prospectus must be published by a companybefore its securities can be listed and admitted totrading on the Main Market. A prospectus sets outdetailed information about a company’s business,management and financial information, and there aredetailed provisions in the FSA’s Prospectus Rulesand the EU PD Regulation regarding its content. Theprospectus and its contents also form the base formarketing any offering to potential investors.

PassportingThe EU Prospectus Directive introduced thepossibility of using a single prospectus approvedwithin one EU jurisdiction to enable companies tooffer or list securities throughout the EU. Therequirements to effect the passporting into the UKof a prospectus approved elsewhere in the EU areminimal: the relevant regulator must provide theFSA with a copy of the prospectus andconfirmation of its approval and the summarysection of the prospectus (expected to be no morethan 2,500 words) must be available in English.

‘Pathfinder’ or ‘Price Range’ prospectusBy the time a company has completed its IPO it islikely that it will have produced a ‘pathfinder’prospectus (strictly an advertisement rather than aprospectus) as well as the UKLA-approvedprospectus. The pathfinder prospectus is a near-

final draft of the prospectus that, in the context ofoffers to institutional investors only, will be used aspart of the book-building and marketing process ofthe IPO. A few days before the day of admission toboth the Official List and trading on the MainMarket, a final, complete and UKLA-approvedprospectus will be published containing the price atwhich the securities are offered for sale. If theoffer is also being made to non-institutionalinvestors, a pathfinder prospectus is not normallypublished, and instead a UKLA-approved ‘pricerange’ prospectus is used, offering shares toinvestors within a specified indicative offer pricerange. A pricing statement would subsequently beissued once the offer price is fixed at the end ofthe book-building and marketing period.

What must the prospectus contain?The prospectus must contain the informationnecessary for investors to make an informedassessment of the assets and liabilities, financialposition, profits and losses and prospects of thecompany, as well as the rights attaching to thesecurities being offered. This information must bepresented in a way that is comprehensible andeasy to analyse.

These are the overarching requirements of FSMA,but there are also more detailed contentrequirements contained in the Prospectus Rules,which along with FSMA implement the ProspectusDirective and the EU PD Regulation (which will beshortly amended, although mainly in the context ofsecondary offerings rather than IPOs). Additionally,certain of these detailed requirements are furtherdescribed in guidelines and questions and answerspublished by CESR, which will be taken intoaccount by the FSA when it is determining whetherthe company has complied with its obligationsregarding the prospectus. Further guidance on theapplication and interpretation of the EU PDRegulation and Prospectus Rules can be found inthe LIST! newsletters published by the UKLA fromtime to time.

Summary This section must briefly (in no more than 2,500 words) convey in non-technical language theessential characteristics of, and the risks associated with, the company and its securities. This willusually include a summary of the company, its business, strategy and prospects along with asummary of its financial information and the risk factors.

Risk factors This section must describe the principal risks of relevance to the company and an acquisition of itsshares. The former should be specific to the company and its industry – often a prospectus willdivide the risk factors so as to address these separately. It will generally take a considerable time todraft the risk factors. As part of the approval process, the FSA will check to ensure that the riskfactors do not undermine any of the statements made in the rest of the prospectus, especially theworking capital statement.

Business description This section describes and discusses the company’s business and operations. It will generally startwith an overview section, followed by a summary of the group’s strengths and strategies. Followingthis, there will be a description of the principal products or services sold by the group, together withdetails of where and how these are produced and sold, including information on the group’scustomers and suppliers. An overview of the industry in which the group operates will also beincluded in this section, or included as a standalone section. The business description section willalso typically include information on the group’s employees, research and development, the group’scompetitors and the legal and regulatory framework in which the group operates.

This section is intended to provide investors with the information necessary to enable them toassess the key drivers of the group’s business, of relevance to both past and future performance,and to understand management’s perception of these matters. The operating and financial reviewwill also include a description and explanation of the trends in the financial information included inthe prospectus (including by business segment where appropriate) and a description of the group’ssources and uses of liquidity and capital resources.

Financial information This section must include information about the company’s assets and liabilities, financial positionand profits and losses for the three most recent financial years (or, unless a Premium Listing, suchshorter period as the company has been in operation) as well as any interim results published. Thefinancial information needs to be audited (subject to certain exceptions) and prepared inaccordance with IFRS or an ‘equivalent’ GAAP (eg US GAAP). As well as the historical financialinformation, the prospectus must include a ‘pro forma’ table, illustrating the effect of the IPO (andany significant transactions that are not consolidated into the financial statements) on the balancesheet and income statement. If the company wishes (for marketing reasons) or is obliged (becauseit has previously published one that remains current) to include a profit forecast or estimate in itsprospectus, that forecast or estimate must be reported on by an auditor and that report must beincluded in the prospectus.

The directors must make a working capital statement stating that the company has sufficientworking capital for the requirements of its group for the 12 months following publication of theprospectus (or, in the case of a Standard Listing, if not, how it intends to procure sufficient workingcapital). In addition, the prospectus must include a statement confirming that there has been nosignificant change in the financial or trading position of the group since the end of the last annual orinterim financial period (or, if there have been changes, include details).

l dividend policy l material litigation l directors and senior management l related-party transactions l major shareholders, and l terms of the share offering and share capital.

Summary of prospectus contents

Operating andfinancial review

Working capital andno significant change

Other information about the company



Who is responsible for the prospectus?The company directors are obliged in theprospectus to state that they accept responsibilityfor the information in it and that it is true to the bestof their knowledge, having taken reasonable care tomake sure that this is the case. The issuer will alsobe responsible for the prospectus, as potentially arecertain others (for example, providers of any expertreports included in the prospectus).

Responsibility for the prospectus carries with it thepossibility of liability for the company, its directorsand others. Quite apart from these considerations,the accuracy and completeness of the prospectusare of the utmost importance for commercial andreputational reasons. As a consequence,procedures have developed around the preparationof any prospectus, collectively referred to as ‘duediligence’, with this aim in mind. The processdepends on the collective efforts of managementas well as the banking, legal, accounting and otheradvisers. The due diligence exercise may alsoinclude a specific ‘verification’ exercise in whichthe steps taken to check material factualstatements in the prospectus are recorded.

TimetableThe process, from the start of due diligence to thefinal printing of the prospectus prior to UKLAapproval, is accordingly a complex one and cantake four months or more to complete (see IPOtimetable on pages 24 and 25 in the chapter‘Preparing for an IPO’).

Considerations for overseas companies

There are a number of additional factors that anon-UK company needs to take into account. Forexample, although non-UK companies can obtain aPremium Listing, FTSE index inclusion (one of themain motivations for a Premium Listing) will notalways be possible. A non-UK company also needsto consider which competent authority will beresponsible for approving its prospectus. In thecase of companies incorporated in another EEA

state this will normally be the competent authorityin its state of incorporation.

Eligibility requirements Subject to the additional eligibility requirement inrespect of non-EEA companies without a homelisting (see below), the Official List and LondonStock Exchange eligibility requirements are thesame for both UK and non-UK entities. However,non-UK companies may find it more difficult tocomply with some of the Official List eligibilityrequirements.

Absence of a home listingWhere the shares of a non-EEA company are notalso listed in that company’s country ofincorporation or the country in which the majorityof its shares are held, the FSA must be satisfiedthat the absence of a listing is not due to the needto protect investors. For instance, the companyhas not been delisted or refused a listing in itshome country due to breaches of law or regulation.

Financial informationA non-UK company that has not historicallyprepared its financial information to IFRS or anequivalent set of standards (eg US GAAP) willneed to restate its historical financial informationto IFRS or an equivalent set of standards, whichcan be a lengthy and costly process. This wouldapply to a listing anywhere in the EEA.

SettlementTo be eligible for admission, a company’s sharesmust be capable of being traded electronically. Foradmission to the Exchange’s Main Market, thismeans that the shares must be capable of beingadmitted to CREST, a system operated byEuroclear UK & Ireland Limited (‘Euroclear’) tohold and transfer uncertificated securities. Onlyshares of a UK or Irish company can be admitteddirectly to CREST. For other issuers, depositaryinterests in respect of the underlying shares willneed to be created and admitted to CREST.

As well as giving rise to an additional workstreamand extra costs, Euroclear imposes certaineligibility requirements as to the laws of thecountry of incorporation before it will admitdepositary interests in respect of shares. Not allcountries have historically been able to meet theserequirements (for example, Russia). A depositaryinterest is similar to a global depositary receipt,but it has the advantage that the sharesthemselves are listed rather than receipts, which,among other things, can increase the range ofpotential investors and permits a Premium Listing.

Home member stateIn addition to the various obligations that will applyby virtue of being admitted to trading on a UK-regulated market, a company will be subject tocertain ongoing obligations as to periodicdisclosure of financial and other information,disclosure of major shareholdings and treatment ofshareholders under the law of its ‘home memberstate’ (see ‘Continuing obligations’ below). Thesecurities regulator in a company’s home memberstate will also be the regulator responsible forapproval of prospectuses prepared by that issuer.The identity of a company’s home member state istherefore important as it will affect both an IPOprocess (and any future prospectuses) andongoing obligations.

If a company is incorporated in the EEA, its homemember state will be its state of incorporation. If itis not incorporated in the EEA, the home memberstate may be chosen from the state(s) in which theissuer first makes an application to admit itsshares to trading or makes an offer of thoseshares. For non-EEA entities seeking a listing inLondon, the home member state will generally bethe UK. However, it is not uncommon for non-EEAgroups to establish a non-UK EEA-incorporatedholding company (for example, in Cyprus,Luxembourg or the Netherlands), in which case theissuer’s home member state will be the state ofincorporation of that holding company. An issuer

facing this issue should consider the ramificationsof being subject to two sets of rules and tworegulators (including having a regulator other thanthe FSA approve prospectuses).

FTSE inclusion, Takeover Code, UK CorporateGovernance Code and pre-emption rightsOnly securities with a Premium Listing arepotentially eligible for inclusion in the FTSE UKindices series (see FTSE’s chapter, ‘London: aunique investment opportunity’ on page 87, formore information on non-UK companies accessingthe FTSE UK series of indices).

Ongoing obligationsA non-UK company should also consider thecontinuing obligations to which it will be subjectfollowing listing and admission to trading. Althoughthese continuing obligations do not generally differbetween UK and non-UK entities, companieswithout prior experience of being subject to suchobligations will need to ensure that the necessarysystems and controls are in place and that theiremployees have been adequately trained tocomply with them following listing. In addition,some of those obligations may require changes tothe company’s constitution to give shareholderspre-emption rights and impose a regime consistentwith the UK Takeover Code.

Continuing obligations

A company will become subject to a number ofcontinuing obligations once its shares have beenlisted on the Official List and admitted to tradingon the Main Market. Certain obligations apply toall listed companies, whether they have a Standardor Premium Listing, and there are additionalobligations that apply only to Premium Listedcompanies. The main obligations are set out below.Of particular note are the significant transactionand related-party transaction rules that apply toissuers with a Premium Listing. These restrict thecompany’s ability to complete major transactions,or transactions outside the ordinary course of



business with related parties, without firstpublishing a detailed circular and obtainingshareholder approval.

This section assumes that the company’s homemember state is the UK, which will generally bethe case for a London-listed company. If, however,its home member state is another EEA state, notall of these requirements will apply or apply in full(for example, DTRs 3, 4 and 5). That said, similarrequirements may well be imposed by that othermember state as many of these rules are takenfrom EU legislation.

Continuing obligations that apply only toPremium Listed companies

Significant transactions A Premium Listed company is required to classifycertain transactions on the basis of the ‘classtests’, which produce a ratio of the transaction sizeto certain company indicators (eg marketcapitalisation) set out in the Listing Rules. Not alltransactions need to be classified, includingtransactions of a revenue nature in the ordinarycourse of business and issues of securities ortransactions to raise finance that do not involvethe acquisition or disposal of assets. An eligibletransaction will be classified as ‘Class 3’ (ratios allless than 5 per cent), ‘Class 2’ (any ratio at least 5per cent, but all less than 25 per cent), ‘Class 1’(any ratio at least 25 per cent) or as a reversetakeover (an acquisition where any ratio is at least100 per cent or that would result in a fundamentalchange in the board or voting control). Relatedtransactions within a 12-month period areaggregated.

Entry into a Class 3 or Class 2 transactionrequires the notification of certain information onthe transaction to the market via a ‘RegulatoryInformation Service’ (‘RIS’) (see below). The entryinto a Class 1 transaction is a more significantmatter, requiring publication of a ‘Class 1 Circular’

to shareholders and shareholder approval (with asimple majority). A Class 1 Circular needs to beapproved by the UKLA and will contain certaininformation in relation to the proposed transactionand its expected effect on the listed company.Among other things, a Class 1 Circular is alsorequired to include a working capital statement onthe basis that the transaction has gone ahead, ano significant change statement and, if the Class 1Circular relates to an acquisition, financialinformation on the target.

A reverse takeover is subject to the samerequirements as a Class 1 transaction and, inaddition, the UKLA will generally cancel the listingof the issuer and require the combined entity toreapply for listing (which will, among other things,require the combined group to comply with manyof the eligibility requirements of Chapter 6 of theListing Rules as if it were a new applicant).

Related-party transactions Certain transactions entered into betweenPremium Listed companies and ‘related parties’, orwhich benefit a ‘related party’, require publicationof a shareholder circular and shareholder approvalby a simple majority, with the related party notvoting. The shareholder circular must be approvedby the UKLA and include a recommendation froman independent adviser (generally an investmentbank) that the terms of the transaction are fair andreasonable as far as shareholders are concerned.

A ‘related party’ is a person who is or was withinthe previous 12 months a substantial shareholder(broadly speaking, a shareholder holding at least10 per cent), a director of the company or anothergroup member, a person exercising significantinfluence over the company, or an associate of anyof these persons.

Certain related transactions are exempt from therequirement to publish a circular and obtainshareholder approval. These include transactions

of a revenue nature in the ordinary course ofbusiness, very small transactions (below 0.25 percent based on the class tests) and certaintransactions in relation to an issue of securities. Inaddition, for related-party transactions where theclass test ratios are all below 5 per cent, a circularand shareholder approval are not required, but anindependent adviser is required to confirm inwriting to the FSA that the terms of thetransaction are fair and reasonable as far asshareholders are concerned.

SponsorA Premium Listed company is required to appoint asponsor to advise it and, if applicable, to givecertain confirmations to the FSA – for example,where the company is to publish a Class 1 orrelated-party circular or prospectus.

Model CodeA Premium Listed company must require each of its‘persons discharging managerial responsibilities’(PDMRs) to comply with a securities dealing codeat least as rigorous as the Model Code annexed tothe Listing Rules. The Model Code governs whenand in what circumstances a PDMR is able to dealin the company’s securities and imposes certainobligations on a PDMR in respect of his or herconnected persons.

In particular, the Model Code restricts PDMRs fromtrading during ‘close periods’ (that is to say, in theweeks before publication of annual, semi-annual andquarterly reports) and during any other periodswhen the company is in possession of insideinformation. There are some exceptions to theserestrictions, but they are very limited. A similarrestriction applies to the company and members ofits group dealing in the company’s securities.

Unaudited financial information and profit forecastsIf a Premium Listed company has publishedunaudited financial information or a profit forecastor estimate, it must reproduce the figures in its

next annual report and accounts and, if the actualfigures differ from them by 10 per cent or more,provide an explanation of the differences.

UK Corporate Governance (the ‘Code’)A Premium Listed company is required to complywith the Code, or explain the reasons for non-compliance in its annual report. The Code ispublished by the Financial Reporting Council andcontains a number of rules governing thecomposition and operation of the board ofdirectors and board committees of a listedcompany. Among other things, the Code requiresthat (except for smaller companies outside theFTSE 350) at least half the board (excluding theChairman) is comprised of independent non-executive directors.

Pre-emption rights and further issues A Premium Listed company is generally required tomake issues of new shares on a pre-emptive basis,except where pre-emption rights have beendisapplied in accordance with the UK CompaniesAct or equivalent national legislation. For non-UKentities where pre-emption rights do not exist as amatter of law, this requirement will need to beaddressed in the articles of association orequivalent constitutional document.

When offering new shares to investors, a PremiumListed company is, in broad terms, required toensure that the offer price is at a discount of notmore than 10 per cent to the existing market priceof those shares, unless a larger discount has beenapproved by shareholders, shareholder pre-emption rights have been disapplied or the offeringtakes the form of a rights issue.

Repurchase of securitiesVarious rules regarding the repurchase ofsecurities apply to Premium Listed companies.These include a prohibition on repurchasing sharesduring a period in which PDMRs would beprohibited from dealing under the Model Code,


limits on the price at which shares can berepurchased and a requirement for a tender offerin relation to purchases in excess of 15 per cent ofthe company’s share capital.

Continuing obligations that apply to all listedcompanies

Disclosure of inside informationA company is required to publish any ‘insideinformation’ that directly concerns it on a RIS assoon as possible. ‘Inside information’ is informationthat, if made public, would be likely to have asignificant effect on the price of the shares orrelated financial instruments. There is limited abilityto delay disclosure of inside information – inpractice this is normally limited to transactionssubject to ongoing negotiation, the disclosure ofwhich could prejudice the outcome of thosenegotiations.

A company will also be subject to various otherrules on the control and management of insideinformation, including a requirement to maintain listsof persons who have access to inside informationand to provide such lists to the FSA on request.

A RIS is a service that disseminates regulatoryinformation, such as company announcements, andmust be approved by the FSA. The Exchangeoperates the Regulatory News Service (RNS),which is a RIS.

Disclosure of dealings and shareholdings PDMRs and their connected persons are required tonotify the company of all transactions in its shares(including instruments relating to those shares). Inaddition, persons who hold voting rights (or rights tovoting rights – such as convertibles) must notify thecompany if they reach, exceed or fall below 3 percent, or any 1 per cent threshold in excess of 3 percent, of the company’s total voting rights (forinstance, if a shareholder moved from a 4 per centholding to a 5 per cent holding or vice versa). The

company is in turn required to notify a RIS of anynotifications made to it under these rules.

Periodic reportingA company will be required to publish annual andsemi-annual reports including consolidatedfinancial information for the relevant period,together with an accompanying review of thecompany’s business for that period, within fourmonths and two months respectively of the end ofthe relevant financial period. The annual financialinformation must be audited. The semi-annualfinancial information need not be audited. As wellas a report on the company’s business for theperiod, certain other information is required,including information on the risks and uncertaintiesfacing the business. The reports are also requiredto include responsibility statements from therelevant directors of the issuer, for example theChief Financial Officer (‘CFO’).

A company is also required to publish an interimmanagement statement twice a year, between itsannual and semi-annual reports. This is notrequired to include any financial information butshould include an update on the group’s businessand financial position in the period.

Free float An issuer is required to ensure that at least 25 percent of its shares are at all times in ‘public hands’(see ‘Free float requirement’ on page 34 for adescription of how this is calculated).

Further issuesFurther issues of shares of 10 per cent or more ofthe company’s share capital (aggregated on a 12-month rolling basis) will generally require thepublication of an approved prospectus.

Page 42 The legal framework for an IPO

Section titleAccounting requirements and advice through the IPO process

David Wilkinson

Ernst & Young LLP

Although the initial public offering (‘IPO’) eventitself generally lasts for between four and sixmonths, the process of transforming a businessinto a public company begins at least a year or twobefore the IPO, and continues well beyond it.

An IPO is a key turning point in the life of acompany. As such, it should be seen as a businesstransformation process rather than simply a one-off financial transaction. The IPO is also anopportunity for a business to simplify itsstructures, formalise business practices and makeimprovements that will prepare it to face thechallenges of operating in the public spotlight.

This chapter summarises the principal financialinformation requirements for a company seeking aPremium Listing and admission to trading on theLondon Stock Exchange’s (the ‘Exchange’) marketfor listed securities. The prospectus requirementsset out below apply equally to Standard andPremium Listings, but those eligibility requirementsunder the Listing Rules, and the requirement toappoint a sponsor, only apply to a Premium Listing.

Regulatory background

The Financial Service Authority’s (‘FSA’)Prospectus Rules, Listing Rules and Transparencyand Disclosure Rules (collectively, the ‘Rules’)establish a regulatory framework that determinesthe financial reporting requirements for a listing. Inapplying the Prospectus Rules, the FSA will takeaccount of guidance issued by the Committee ofEuropean Securities Regulators (‘CESR guidance’).

Financial information requirements

The most significant requirements arise from:

Prospectus requirementsA company seeking to list on the Main Marketmust prepare a prospectus presenting detailedinformation on management and the underlyingbusiness.

The equity growth story for the business to attractinvestors must be presented, however, other keyinformation required includes:

l operating and financial reviewl current trading and significant changes in the

businessl key investment risksl audited financial recordl unaudited interim financial information*l indebtedness, funding requirements and

capital structurel statement on the adequacy of working capitall pro forma financial information* l profit forecast.** only required in certain circumstances

While some of these requirements must have anopinion from a reporting accountant/auditor, not allwill lead to disclosure of financial information in theprospectus. They will, however, all need to bebased upon financial information.

Listing RulesThese require a company (subject to certainindustry-specific exemptions) to have accountsthat have been audited without qualification and:

l cover at least three yearsl have a final balance sheet that is not more

than six months before the date of theprospectus

l show a revenue-earning record that supportsat least 75 per cent of the company’sbusiness.

The financial information implications of theserequirements should be carefully considered and,where necessary, they should be agreed with theFSA at an early stage in the IPO process. It isparticularly important if major acquisitions haveoccurred during the period covered, as they cansignificantly impact the work required by both thecompany and the reporting accountants.

Accounting requirements and advice through the IPO process

Page 45Accounting requirements and advice

Accounting requirements and advice

Long form report A private due diligence report on significant aspects of thebusiness – its exact scope will be determined by the company’s circumstances (see table on pages 47 and 48).

FRP reportA business should be able to meet its reporting obligations as a public company and therefore consideration of FRP is critical in determining its listing suitability. The report assesses the suitability of the company’s reporting procedures, and controls, as a basis for the directors to make judgements on the company’s financial position and its prospects.

Accountant’s report The company’s historical financial record contained in the prospectus must be reported on. While this can be achieved by audit opinions provided for each set of financial statements included, market practiceis for an Accountant’s report to be issued on the entire financial track record. This forms part of the prospectus and is equivalentto an audit report, but provides greater flexibility as it does not needto be issued by the same firm that issued a previous audit opinion.

Working capital reportThis is a private report that considers the basis for the working capital statement in the prospectus. This includes the company’s approach to financial forecasting, its projections underpinning the working capital statement, as well as analysis of the impact of changes in the key assumptions, and the available banking facilities.

Other reportsIf a company includes either a profit forecast or pro forma financialinformation in the prospectus, an Accountant’s report on the compilation of information must be included in the prospectus. While companies rarely choose to include a profit forecast, owing to the additional risk, cost and time involved, pro forma financialinformation is commonly used to illustrate the effect of the IPO, recenttransactions or a reorganisation that are not reflected in the historical financial information. When a profit forecast is reported on, it is usual for the reporting accountant to prepare a detailed private report that comments on the preparation of the forecast and the risks toits achievement.

The reporting accountant also provides a ‘comfort letter’ to the directors and sponsor to assist with the verification of other financial information in the prospectus.

Key reports prepared by the reporting accountant

SponsorThe Rules require that any company seeking aPremium Listing of equity securities must appoint asponsor (see chapter ‘Preparing for an IPO’ on page19). The sponsor will make an assessment of thecompany’s suitability for IPO and the contents ofthe prospectus. As part of its responsibilities, thesponsor is required to make a declaration to theUnited Kingdom Listing Authority (‘UKLA’) whichcovers among other things:

l whether the company has establishedappropriate financial reporting procedures(‘FRP’)

l that the directors of the company aresatisfied at the time of the IPO that thecompany will be able to meet its futurereporting obligations as a listed company

l the directors’ basis for the working capitalstatement. This statement declares that thecompany will have adequate financialresources for its present requirements,covering at least 12 months from the date ofthe prospectus. Making this assessment willform an important aspect of the IPOpreparation.

The sponsor will usually require the company tocommission the reporting accountant to preparereports covering both of these matters.

The reporting accountant’s role

The reporting accountant is instructed to preparea number of reports. These either:

l meet specific regulatory requirements; orl assist the directors and sponsor in meeting

their obligations.

As such, much of their work is based on acceptedmarket practice and therefore results in reportsthat are not published.

The directors bear legal responsibility for thecontents of the prospectus and the sponsor facesconsiderable reputational risk should it prove tobe deficient. The due diligence process isdesigned to mitigate these risks and the workcarried out by the reporting accountant istherefore extensive.


The following sections explain what the variousreporting entails and how disruption to thecompany’s business and cost can be minimisedthrough appropriate preparation.

Long form report

This is an integral component of the IPO process. Itis established practice in the UK, rather than a legalor regulatory requirement, for the report to beprepared as part of the consideration of thecompany’s suitability to be admitted to a publicmarket. While the report is not made publiclyavailable, it will influence the contents of theprospectus.

The long form report is often prepared by the samefirm that audits the company’s accounts, but thework is performed by personnel who are not partof the audit team. This is owing to the specialistnature of the work and the need to provide a moreobjective and independent view.

The table below illustrates the typical contents of along form report and some of the issues that it mayneed to address. These will be raised with thecompany and sponsor as the work progresses forconsideration and/or timely action, as appropriate.The scope of the report is tailored to therequirements of each IPO and is agreed betweenthe reporting accountant, the company and thesponsor.

The report’s extensive scope requiresmanagement to make a significant commitment oftime and resources in order to provide thenecessary information and explanations. Thiscoincides with competing demands on companyresources arising from other aspects of the IPO,and some of the same information will also berequired by the other IPO advisers. Cooperationbetween the various IPO advisers is required toreduce the pressure on the management team.

Long form report contents

Illustrative scope of work Illustrative due diligence issuesBusiness overview • markets and competition

• sales strategy, sales organisation• customers, contracts and pricing• products range, description,

development, life-cycle, revenue andcontribution

• purchasing strategy, purchasingorganisation, principal suppliers (andassociated purchases)

• manufacturing strategy, facilities, capacity and utilisation

• distribution• premises

• size of the market, growth potentialand resilience to market conditions

• supply constraints, regulatory,economic or technological issues

• opportunities for further expansion• key customer and supplier reliance• historical development of the

business (organic vs acquisition) • scalability of business • impact of related inter-company

transactions and intended relationshippost-IPO

Organisationalstructure,management andpersonnel

• management committees • directors' and senior executives'

biographies • organisation of personnel department

and responsibilities• analysis of employees (eg part/full-time,

function, remuneration)• pensions and other employment and

post-employment benefits, shareincentive, share option and profit-sharing schemes

• suitability of current managementstructures

• whether management appear qualified and/or experienced tomanage a UK-listed business

• staff shortages in key areas


Illustrative scope of work Illustrative due diligence issues

Financialperformance

• historical trading performance, includinganalysis by business segments andreasons for significant fluctuations

• analysis of and commentary on‘exceptional’ items

• adjusted EBITDA• current trading performance • balance sheets at each year/period end

of significant trends and ‘on-balancesheet’ exposures

• ‘off-balance sheet’ exposures andfinancing arrangements

• cash flow performance• seasonality in working capital

requirements• cash conversion rate

• the historical results may be impactedby one-offs/non-recurring items,provisions, acquisitions/disposals,changes in accountingpolicies/applications

• drivers of year-on-year revenue andearnings growth

• reliance on key products/geographies• current trading performance/monthly

run-rate may not support short-termprojections

• overstated net assets or understatedliabilities (eg off-balance sheet items)which might impact valuation

UK and overseastaxation

• status of agreement of tax filings andpayments, details of any tax audits andopen correspondence with the taxauthorities

• impact of the IPO on the taxationposition

• compliance with corporation tax,employment tax and sales taxregulations

• details of the provision for tax in theaccounts

• tax compliance position may besubstantially in arrears

• tax impact of any envisaged pre-IPOrestructuring work

• adequacy of tax balances in auditedbalance sheet to cover the business’sdeclared taxes, including deferredtaxes, and any additional tax liabilitiesidentified by due diligence

Accountingpolicies and basisof preparation

• consistency of accounting policies andprocedures applied

• compliance of policies with GAAP/law• alignment with industry practice and ‘best

practice’• impact of any proposed changes

• inconsistent accounting policies over the period

• aggressive accounting policies, not in line with listed peers

• significant differences between local country GAAP and IFRS

• inappropriate allocation bases used to derive ‘carve-out’ numbers,separation/standalone costs

Information systems

• significant information systems • significant application and hardware • support and maintenance procedures• controls over systems development and

data file access• recovery and back-up procedures• IT personnel• IT strategy

• core business applications and related IT infrastructure may not supportcurrent/future business requirements

• additional unplanned IT investment may be required

• governance procedures may not besufficient for a UK-listed business

• separation of company from parent maycreate certain gaps

• company may require transitional ITservices

Long form report contents (continued)

FRP

Failure to make timely disclosure of financial andprice-sensitive information can damage acompany’s reputation and result in fines for boththe company and its directors. Significant emphasisis therefore placed on a company’s FRP during theIPO process, culminating in the sponsor’sdeclaration to the FSA that the company hasestablished procedures that are fit for purpose. Thelack of appropriate FRP can result in postponementand, in some cases, abandoned flotations.

Most companies will need to improve their FRP, asit takes time to identify changes, and to design andimplement revised procedures. The key message isthat FRP needs to be addressed early with, ideally,

an initial gap analysis performed at least 12 monthsprior to the IPO. This will be particularly important ifthe company has made acquisitions that need to beintegrated.

The reporting accountant will normally prepare aprivate report commenting on the FRP and give anopinion as to whether it considers that theprocedures provide the directors with a reasonablebasis on which to make judgements concerning thecompany’s financial position and prospects. Thefocus on prospect management has becomeincreasingly important in recent years.

The work performed would not typically extend totesting the relevant controls or procedures.However, identifying the key performance indicators(‘KPIs’) is critical. Once these are identified, thereporting accountant will assess whether theprocedures are capable of producing information forthe KPIs on a timely and reliable basis.

An example scope of work for FRP includes, but isnot limited to, the following areas:

l high-level financial controls (eg ‘tone from thetop’, risk identification and management,internal audit function, board and itscommittees)

l design of internal controlsl budgeting and forecasting processesl treasury managementl accounting policies and proceduresl management reporting frameworkl financial statement consolidation and

reporting proceduresl IT general controls and application controls

for production of key financial information.

Historical financial information

Aside from a few specific exemptions (investment,mineral and scientific research-based companies)a company must be able to present financialinformation covering at least three years.

l start planning early and in particular:– identify information requirements thatmight not be straightforward, egGAAP conversions, complextransactions, and related-party andinter-company transactions– check the quality and consistency ofinformation across all subsidiaries

l assign a project manager to deal withinformation requests. It may beappropriate to hire additional resource

l establish an electronic data room. Thiscan be particularly beneficial wheninformation is being drawn from manysources and locations and/or differentadvisers require access to the sameinformation

l start the due diligence in advance of theother IPO work streams. A draft reportcan be prepared and then updated forcurrent trading later in the IPO process.This reduces pressure on the company’sresources and provides a useful basisfrom which to draft the prospectus.

Long form report preparation tips



However, there are some additional, potentiallyonerous, requirements that are considered below.

ReportingThe financial information must be reported on,either by means of an audit report or, moretypically, an Accountant’s report. The opinion ineach of these reports is essentially the same, butan Accountant’s report may require additionalwork. Whichever form of report is used, it shouldbe unqualified. Any audits must have beenperformed in accordance with auditing standardsaccepted in an EU member state or equivalent.

Age of historical financial informationThe financial information for Premium Listingsmust be drawn up to date no more than six monthsbefore the prospectus date. This could mean thatfull, audited financial statements are required to aninterim date, with comparative information,although the latter can be unaudited.

Interim information should be prepared and auditedearly in the IPO planning process, as failure to do socan cause a delay and incur additional costs.

If a company wishes to offer shares in the US toqualified investors under Rule 144A of the USSecurities Act and the latest audited financialinformation is more than 135 days old, the auditors

The separation of a large energy business from its parent, and subsequent IPO onto the Main Market,involved the complex detachment of legal entities, assets, people, systems and shared/centrally-provided services. As the new entity had not previously operated as a standalone business, the designand implementation of new FRP was a priority.

Ernst & Young identified the FRP gaps through an early readiness assessment and the following actions were undertaken:

l A comprehensive separation plan was developed, which was led by a dedicated separationmanager. The key areas covered were: – management and people – the scope of central services to be provided by the parent – shared and separated IT systems – contractual agreements – confidentiality considerations

l An action plan was then developed to address the implementation required for new FRP relatingto corporate governance, management and statutory reporting, preparation of IFRS managementaccounts, budgeting and forecasting.

Ernst & Young’s readiness assessment and the resulting remediation plan enabled the company toavoid delays and unnecessary cost by ensuring its FRP were appropriate in advance of the IPO.

The action plan also highlighted the additional expertise that the company would need to hire in orderto implement the new FRP procedures successfully, particularly with regard to International FinancialReporting Standards (‘IFRS’).

FRP – a separation case study

may need to review more recent, unpublishedfinancial information so that they can issue theauditor’s comfort letter, required by theunderwriters to the offering.

Financial track record and transactionsA minimum of 75 per cent of the company’sbusiness must be supported by a revenue-earningtrack record for the three-year period.

The implications are that, even with this trackrecord, a company may still not be eligible forlisting, if, for example, its core activity has changedfundamentally during the three-year period or thelevel of operations has increased exponentially. Insuch cases, management should discuss the matterwith the FSA to determine whether the companywill be eligible for listing at the present time.

If the company has made a significant acquisitionin the three years leading up to the IPO, it may

mean that its existing financial information doesnot reach the 75 per cent threshold. To reach thisthreshold, additional pre-acquisition financialinformation for acquired companies will have to bepresented separately.

This inevitably adds to the work of the financeteam and the reporting accountants, particularlywhen the financial information in question has notpreviously been audited or was prepared usingdifferent accounting policies from those of thecompany.

Accounting policiesAt least the last two years of the financialinformation must be prepared using the accountingpolicies that will be used in the first set of auditedaccounts post-listing. For EU-registeredcompanies preparing consolidated accounts, thiswill mean accounts prepared under IFRS asadopted by the EU. Non-EU registered companieshave greater flexibility, as they can also use certainother approved GAAPs.

Companies that do not already prepare accountsunder IFRS should give advance consideration tothe conversion. This can be very time-consumingand could impact the IPO story if the trading trackrecord changes significantly when looked atthrough a different accounting lens.

Adopting IFRS will necessitate a change in internalreporting and may require new or different internalcontrols that will also impact the FRP workstream.

Working capital statement

The prospectus will include a working capitalstatement that considers both internal and externalfinancial resources available to the issuer in order tomeet its liabilities as they fall due. This statementcannot be qualified, or stated to be subject toassumptions, although the Listing Rules providepotential concessions for certain regulatedcompanies.

The regulators do not want any surprises andwant to know that companies can meet theirreporting requirements in a timely fashion.Listed companies must be able to respondquickly and effectively to the rigorousinformation demands of a listing on the MainMarket.

Companies should:l conduct an early gap analysis of FRPl allow time to resolve gaps in key controls

and financial information gatheringl embed policies and procedures into the

business, including the effect of IFRSl ensure that FRP are scalable, to support

both existing processes and future growthplans.

Achieving successful financialreporting



The directors therefore need to be satisfied thatthe company has sufficient working capital tofinance its business plan and also sufficient marginor headroom to cover a reasonable worst-casescenario.

ProjectionsTo prepare a working capital statement, thecompany will make unpublished financialprojections and identify the key assumptions. Theprojections take the form of an internallyconsistent cash flow, profit and loss and balancesheet, on a monthly basis. While the statementonly covers 12 months after the proposed date oflisting, the projections typically extend to atleast 18 months.

To prepare the projections, the company needs to:

l perform an analysis of its existing business l consider the strategy and plans of the

business, the related implementation risksand resultant uncertainties

l identify assumptions that address theuncertainties, checking against externalevidence

l include capital expenditure and otherresource requirements of the business

l identify the financing facilities available andrequired

l perform sensitivity analysis to identify theimpact of changes in key assumptions.

The complexities of a pre-IPO IFRS conversion were heightened for a private equity-backed consumerproduct business by a significant overseas acquisition made 18 months prior to the float. When askedafter the successful IPO what he would have done differently, the company’s CFO stated that hewould have started much earlier on the preparation of the IFRS historical financial information.

His first challenge related to IFRS conversion. Issues arising included:

l accounting for hedges and other financial instruments and, in particular, issues arounddemonstrating the effectiveness of hedge instruments for accounting purposes and valuations

l fair value accounting and valuations for the intangible assets arising on the acquisitions madeduring the three years included in the track record

l segmental reporting requirementsl deferred taxation changes.

The second challenge related to the overseas acquisition. The requirement in the Listing Rules for 75per cent of the business to be supported by a historic revenue-earning record, meant that separatehistoric financial information had to be included for the overseas acquisition. At the IPO date, thismade up more than one-third of the group’s business. The acquisition had not previously been subjectto a full audit and its accounts were not prepared under IFRS. As a result, significant lead time wasrequired by Ernst & Young to complete this process for the pre-acquisition period.

In addition to preparing the historical financial information under IFRS, the team had to build the newaccounting policies into the ongoing management reporting and forecasting processes. This also tooksignificant time and effort to complete, but was essential for the company to operate on the samemetrics used by market participants.

IFRS conversion – a case study

Finance facilitiesIn making a working capital statement, the companymay only include facilities to which it has securedaccess at the time of making the statement. Thismeans that committed bank facilities (for theperiod they are committed) and the proceeds of anoffering (if they are either fully underwritten, or, inthe case of a placing, firmly placed) can be takeninto account when making the statement.

The company should also consider projectedcompliance with any loan covenants (includingunder the sensitivity analysis, unless there aremitigating actions) and the borrowing limits in itsArticles of Association.

Working capital report

The reporting accountant will then prepare aprivate report* commenting on the:

l preparation of the projectionsl assumptionsl accuracy of the previous forecastingl availability of financingl restrictions on cash movements

within the groupl sensitivity analysisl the directors’ basis for making the working

capital statement.* There are additional requirements in place for

mineral companies that have not been producing on a commercial scale for the previous three years.

Structurel holding company locationl personal holding structure – 50 per cent taxrate, capital vs income

l rollover/cash out of existing debt and equitystructure, including share options

l tax clearances and transaction taxes (egstamp duty)

Float processl availability of tax information and in-housetax resources

l project management and coordination of taxstructure, tax disclosure for long form, shortform, working capital report, funds flows etc

l likely UK GAAP to IFRS adjustments

Tax status

l ensure all tax filings and payments are up todate

l look to resolve any open items with therelevant tax authorities

l review the approach taken to any other areasof tax uncertainty

l tax assets (eg unprovided deferred taxassets)

Post-float

l tax resource requirementsl post-close tax filings and paymentsl ongoing tax compliance, planning andreporting

l securing tax upsidesl securing tax assetsl management of structure and optimising taxprofile

Tax considerations



Tax structuring

Companies seeking admission to the Main Marketshould consider their tax structure prior to listing,and in particular the location of key management.A structure should be implemented that closelyaligns with the commercial and operationalmanagement structure of the group to be listed, soit can be effectively managed in the future.

It is essential that management understands theeffect of the decisions taken about the IPO onfuture tax rates and the tax position of existinginvestors. Failure to prepare early may constrainthe flexibility of management’s decision-makingcloser to the IPO event and may also createadditional burdens on management’s time duringthe challenging later phases of preparation.

A range of potential tax implications should beconsidered in order to determine the future optimalstructure. These are highlighted in the table onpage 53.

Overseas companiesOverseas companies thinking of listing in Londonwill need to be aware of the implications ofbecoming UK tax-resident and how appropriatestructuring and good governance can preservenon-resident status.

A UK listing does not automatically place thebusiness within the UK tax net if it comes throughan overseas holding company.

Overseas companies with a free float of less than 50per cent are not eligible for inclusion in the FTSE UKindex series (see chapter ‘London: a uniqueinvestment opportunity’). Companies in this positiontherefore tend to use a UK-incorporated company asthe listing vehicle.

However, a successful challenge by the UK taxauthorities on the parent company’s tax residencecan result in profits of overseas subsidiaries being

Ernst & Young carried out a tax readiness reviewfor a large private mining group in order toidentify potential tax issues (and opportunities)in preparation for its listing on the Main Market.The determination of the tax residence of theparent company was identified as a key issue.

Key management individuals were personally taxresident in a number of jurisdictions, so thestructure was assessed in detail to ascertainwhat was practical for the group, recognisingimplementation issues. The most practicablesolution was a bespoke tax structure that alignedwith the company’s commercial strategy.

If this issue had not been identified well inadvance of the planned IPO, the potential andsignificant tax consequences would have, atbest, resulted in an additional tax charge; atworst, a delay to the IPO process.

In order to ensure that the structure wasmanaged in a way expected of a company witha Premium Listing on the Exchange, newprocedures were needed for corporategovernance, the physical location of keymanagement activities and the commercialstructure of the entity to be listed.

As the design, implementation and managementof tax residence were demanding matters, therewas a risk that they would occupy significantmanagement time. However, the process wentsmoothly because the issues had beenidentified and acted upon early. Consequently,much of the implementation of the taxstructuring work had been completed inadvance of the IPO and management were nottied up in dealing with these matters during thekey IPO execution phase.

Tax structuring – a case study

brought into the UK tax net under existing orfuture controlled foreign company rules. The UKtax authorities increasingly look at a group’stransfer pricing policies as a further way ofbringing additional tax income into the UK.

Personal tax factors and employee incentives

UK tax rates are, at the time of writing, high andcareful structuring of remuneration andshareholdings is crucial to protect employees’ taxposition and avoid incurring higher company costs(eg tax and social security). Appropriate taxstructuring though can result in a more effectiveand motivational reward package.

Becoming a listed company also providesopportunities, through shares, to incentivise amuch wider group of employees. A range ofpossible plans are available for executives and allemployees, some with specific tax breaksapproved by HM Revenue & Customs.

The implications of an IPO on employeeremuneration and incentives are summarised in thetable opposite.

Ongoing obligations post-IPO

Once the IPO has been completed and thecompany has been admitted to the Main Market, alisted company will be subject to a number ofreporting obligations. These include:

Report and accountsl audited annual report and accounts must be

published within four months of the year-endand include corporate governance disclosures

l unaudited figures must be prepared for thehalf-year within two months of the half-yearend

l interim management statements during eachof the first and second halves of the year.

Pay structures in public companies differsignificantly to those in private companies andcome under a great deal more scrutiny fromnon-executive directors, external regulators andinvestor bodies.

Companies planning for an IPO should consider:

l the quantum of pay, bonuses and structureof any share incentive schemes. Salarybenchmarking is required to ensure theseare in line with comparable listedbusinesses and market practice

l ensure institutions are comfortable withlevel of dilution of pre- and post-IPO equityincentives, usually requiring shareholderapproval on admission

l early indication and communication toinvestors of any likely charge goingthrough the income statement

l appropriate performance targets post-IPOl ensure as far as possible that

remuneration and incentives are deliveredin the most tax-efficient manner whilstbeing aware of the attitudes of investors inthis regard

l ‘lock-in’ arrangements are likely to apply tomanagement shareholders, in order to helpretain key management, which is key tothe value of the business from an investorperspective

l the remuneration committee will set paydesign and levels for executives

l current management shareholdingsinvestments and options will be impactedby any restructuring of the group pre-listing and tax advice should berevisited as part of the listing process.

Implications of an IPO on employeeremuneration and incentives


Disclosure of price-sensitive informationl the company must make a prompt

announcement in connection with anyprice-sensitive information.

Transaction and document disclosurel many types of transactions have to be

disclosed to the market and some requireshareholder approval.

Acquisitions and disposals post-IPO

Transactions by Premium Listed companies aresubject to ‘class tests’ that compare the size ofthe potential target to the listed company’sexisting business, based on a number of financialmeasures. A proposed transaction that exceedsthe 25 per cent class test would be conditionalupon shareholder approval. Additionally, if the 100 per cent threshold is breached, the companyenlarged by the acquired entity would need toreapply for listing. The class tests are based on:

l gross assetsl profit before taxl gross capitall consideration: market capitalisation.

These requirements could introduce an element ofuncertainty into a transaction, potentially affectingthe company’s competitiveness in an auctionprocess. Additional costs are added with theserequirements, including the need to provide acircular to shareholders to enable them to reach adecision. The company would need to appoint asponsor to provide declarations to the FSAconcerning the transaction and reports will also berequired from a reporting accountant.

A shareholder circular, and approval, is alsorequired for transactions with ‘related parties’ thatexceed 5 per cent of any of the class tests.

A business transformation process

As this chapter shows, the work of the reportingaccountant is extensive. It has to be performed at adetailed level to satisfy the regulatory requirementsand to provide the directors of the company and thesponsor with the comfort they need. Providing allthe information mandated by reportingrequirements presents an onerous task tomanagement. The burden will be particularly heavyon the finance team, who will already be subject tocompeting demands from other parties involved inthe listing process. The reporting accountant canassist with many aspects where help is required, butare precluded from some for independence reasons,so management should consider employingadditional temporary resources.

The key message that should come through fromthis chapter is the need to start this process early.The earlier that management starts to identify thegaps in their company’s IPO readiness, the soonerthey can address the tasks required to fill them.Those companies that start to behave like a publiccompany before they list, will find their newenvironment post-IPO very much easier tonavigate. For these reasons, it is essential to viewan IPO as part of a business transformationprocess, rather than seeing it as a standalonetransaction.

Page 56 Accounting requirements and advice

Think and operate like a listed company pre-IPO. Early preparation is everything.

Generating and capturing investordemand during an IPO

Christopher Smith and Alex Bloch UBS Investment Bank

© UBS 2010. All rights reserved.

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Generating and capturing investor demand

From a capital markets perspective, there are threemain objectives of an initial public offering (‘IPO’):

l to raise sufficient proceeds for the companyand/or for the selling shareholders

l to optimise the price at which shares are sold(this is important both for selling shareholdersand to minimise the dilution impact of newmoney being raised for the company)

l to provide the company with a strongshareholder base for its future development.

The objectives of the IPO

In this chapter, we explore the process used tomaximise investor interest and demand for an IPOon the Main Market, as this is critical in raisingadequate funds for the company and the overallsuccess of the transaction. There can sometimesbe a conflict between maximising the price atwhich the shares are offered and optimising theshareholder base for the company’s future. Whilstthe ideal result would be an IPO which is pricedhighly with a very strong, long-term investor base,there is sometimes a degree of trade-off. To informthat debate, companies should build-up anunderstanding of the characteristics of differentpotential shareholders as the make-up of theregister post-IPO is critical to the after-market andthe company’s ability to access the equity marketin the future. Below is a list of some of the keyinvestor qualities one should look for whenestablishing a strong shareholder base through an IPO:

l a strong understanding of the company’sequity story and its positioning – it isimportant that a company’s shareholdersshould thoroughly grasp its investment case.Focusing the marketing process on investorswho are thought leaders and highlyexperienced will make this a more likelyoutcome

l the ability to maintain a shareholding overthe long term – investors with a long-term

investment horizon will be less influenced byshort-term trading considerations and aremore likely to help the company achieve itsfuture ambitions

l the ability to invest further in the after-market – the IPO should not be seen as theend of the investment process and certainshareholders will look to increase theirholdings in the company after the IPO. Suchinvestors lend important support to the stockin the after-market

l the ability to act quickly and participate infuture equity raisings and/or sell-downs –the company may have requirements to raiseadditional equity at some point after the IPO(eg in connection with an acquisition) or theremay be further sell-downs by existingshareholders. These transactions are likely tobe best facilitated if the company’s largestshareholders are able to react quickly and arelikely to be supportive.

The overall goal of the IPO should therefore be toachieve transaction success whilst maximising thequality of the share register with which thecompany begins life as a public company on theMain Market.

Appointing a syndicate to manage the offering

In addition to the sponsor, who is responsible foradvising the issuer on all market and regulatoryissues and for representing to the FSA that theissuer has met its responsibilities, a bank/broker ornumber of such institutions will be appointed tomarket the offering to investors. It is typical for thesponsor to have a dual-role and also perform thisfunction, but this need not necessarily be the case.For certain IPOs, it may be appropriate to have asingle bank or broker performing the marketing role,but for larger transactions it is common to see anumber of banks or brokers appointed. Such banksor brokers are often called ‘bookrunners’ becausethey are responsible for running the order book ofdemand which is built during the marketing process.

Generating and capturing investor demandduring an IPO


The two important questions relating to this topicwhich face any company considering an IPO are:

(i) how many bookrunners should be appointedto handle the offering, and

(ii) which are the right bookrunners for the IPO?

Whilst increasing the number of bookrunnersinvolved in the IPO will increase the syndicate’spotential marketing ‘reach’ with investors, there islikely to be an optimal syndicate size for a givendeal. Beyond this, the additional marketing ‘reach’of an extra bookrunner will be outweighed by theadditional complexities of involving another bank orbroker in the process. The chart above illustratesthe average number of bookrunners in a syndicate(for IPOs on the London Stock Exchange (the

‘Exchange’) of different sizes since 2000). It mayhelp companies to decide on the optimum numberof bookrunners required.

In order to select the right bookrunners for theIPO, many companies and their shareholders willinvite a number of potential candidates to a formal‘beauty parade’ (so that they can hear the views ofeach and make an informed decision on the backof that information). This process has becomemore common in recent years and is well advisedfor any company considering an IPO. In certaincircumstances, an independent adviser may behired to assist in the process of selectingbookrunners for the offering.

Some of the criteria that can be used to assessthe candidates are listed below, but this should not

Average number of bookrunners in a syndicate(IPOs on the London Stock Exchange since 2000)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

<£50m £50m - £100m £100m - £300m £300m - £500m £500m - £1,000m >£1,000m

Ave

rage

num

ber

of b

ookr

unne

rs

Size of IPO


be considered prescriptive and each company willlook for different qualities in its IPO bookrunners:

l quality of project team and commitmentl relevant credentials and distribution

capabilitiesl quality of research analyst and market

credibilityl industry knowledge, understanding of the

issuer and its equity storyl ability to support the issuer in the after-

marketl views on valuation and positioningl proposed level of feesl company’s relationship/rapport with the

adviser.

The investor universe for a UK IPO

The bookrunners will be able to advise the issueron the specific characteristics of individualinvestors but an understanding of the targetinvestor community and its different constituentswill assist the management team to prepare itselfproperly for the marketing process. We set outbelow general comments on the main investorgroups for a UK IPO although in practice the linesbetween the long-only and hedge fund investors isblurred. Many long-only investors have in-househedge funds and many hedge funds run long-onlyfunds and have long investment horizons andrigorous, research-based investment processes.

UK ‘long-only’ institutionsThe term ‘long-only’ is used to refer to investorsthat only take long positions in securities. A longposition is one which generates a return to theinvestor if the share price increases. Long-onlyinvestors are typically traditional institutions thatare seeking to generate a return on theirinvestments over a relatively longer time horizonthan certain other market participants. Suchinvestors include pension funds, insurancecompanies, investment trusts and mutual funds.They include investment advisers who manage

assets using long-only strategies on behalf of bothinstitutional and retail clients.

UK long-only investors manage equity assetsrepresenting approximately 45-50 per cent of thetotal UK market and are therefore of paramountimportance to any company seeking to raise equitycapital in the UK. Many of these investors will onlyhave a mandate to invest in UK equities. In mostIPOs on the Exchange, UK long-only investors arethe single biggest provider of demand.

International investorsThere is often a grey area between what might beconsidered a UK investor and an internationalinvestor. A number of global investmentinstitutions will have offices in London, some ofwhich may only invest in the UK, making thedistinction even less clear. However one treatsinternational investors with offices in London,there is also a separate class of investors that onlyoperate out of offices overseas. The mostimportant regions for UK IPOs have tended to bethe US and Europe and it is common forcompanies to market their offerings in both regions(this is something that needs to be reviewed bythe legal advisers as it impacts the due diligenceexercise and the offering documentation).

Many of those non-UK investors that areinterested in UK equities have a mandate to investonly outside of their domestic region and, incertain cases, they may be running funds thatsolely invest in the UK or Europe. These types offund managers are often as well-versed in UKequities as domestic, long-only institutions andthey form an important pool of additional demandfor IPOs on the London Stock Exchange.

Sector specialistsWhile most investors will be interested incompanies in a variety of industries, someinvestors are sector specialists that will only investin certain sectors. This specialism can sometimes


be at an institutional level, but is more common ata fund level. So, for example, within some of thelargest asset managers, there may be certainfunds dedicated explicitly to investing in miningcompanies. Other sectors which lend themselvesto specialist funds include real estate, financialsand technology. For companies in these sectorsconsidering an IPO, it is critical to tap into thisadditional pool of demand and in-depthunderstanding during the marketing process.

Hedge fundsHedge funds are investment vehicles whichexplicitly pursue absolute returns on theirinvestments. While long-only investors targetoutperformance relative to their benchmarkindices, hedge funds target positive returns totheir investors, irrespective of the wider marketbackdrop. Such funds are able to employstrategies that allow them to generate positivereturns when security prices are falling. The term‘hedge fund’ has come to incorporate any absolutereturn fund applying non-traditional portfoliomanagement techniques (including shorting,leveraging, arbitrage, the use of derivatives and so on).

These funds have become increasingly significantin the market place. Whilst historically there hasbeen scepticism about their motivations amongsome corporates, it is important to note that anumber of these funds are extremely long-term intheir focus. Indeed, many of the mostsophisticated asset managers in the investorcommunity are now employed in such institutions.Furthermore, the distinction between long-onlyinstitutions and hedge funds is gettingincreasingly less clear, as many investmentadvisers now manage funds which employ bothtypes of strategy. Lastly, these types of investorscan provide a significant amount of demand andliquidity in an IPO and will always form somecomponent of the final book of demand.

The marketing process

The marketing of an IPO can be divided into anumber of stages, not all of which are equallypublic in their nature. The process described inthis section is a common one, but slightmodifications to it will be made in someinstances.

Syndicate analyst research and the process to publicationOutside of the IPO process, investment banksemploy research analysts to monitor theperformance of different companies that they‘cover’ in a certain sector and to make investmentrecommendations to their investor clients on thosestocks. In most IPOs, the bookrunners’ researchanalysts will write detailed research notes on thecompany in order to educate investors before thecompany’s management markets the transaction.The company’s management team typicallypresents to the syndicate analysts early on in thepreparatory process. This ensures that they havesufficient background information andunderstanding of the company and its prospects towrite a research note.

This is an important part of the preparatoryprocess for the IPO. Ensuring that the analystsproperly understand the company’s businessmodel and prospects is critical to ensuring that theinvestors have a good grasp of this before meetingmanagement. Whilst investors carry out their owndetailed analysis ahead of making an investmentdecision, the work, forecasts and views of thesyndicate analysts will be important in informinginvestors’ opinions. As such, it is essential for thecompany’s equity story to be effectively conveyedto the syndicate analysts in this presentation.

The analysts will have a period of one to twomonths to write their research note. During thattime, they will be in regular dialogue withrepresentatives of the company (including theCFO) to have their questions on the business


addressed. Draft research notes will be submittedto the company and the lawyers for a review oftheir factual accuracy. The research note will needto be completed by the time the company issuesits ‘Announcement of Intention to Float’ as at thatstage the analysts will begin a process of investoreducation, which is described further below.

Initial meetings with potential investors (‘pilot fishing’)This exercise is one part of the marketing processwhich certainly does vary from deal to deal. Thepurpose of carrying out ‘pilot fishing’ meetingswith investors is to introduce the company to thembefore the transaction is publicly launched so as toobtain feedback on how the market will assess andvalue the company. Such meetings also help tobuild relations with potential key investors earlyon. However, they are not always carried out andmay not be required if the company has a simplebusiness model with known, listed peers andlimited valuation outturns. To the extent that suchmeetings are held, they would be organised by thebookrunners and limited to a very small number ofinvestors so as to maintain the transaction’sconfidentiality.

Announcing the intention to floatThe announcement of the intention to float is theformal start of the public marketing exercise. Thecontent of this announcement should be carefullyconsidered because it is likely to include a summaryof the company’s investment case and informationon the offering, potentially including its size (thoughthat may still be undetermined at this stage).

It is usual for a number of meetings to be held withthe media on the day the announcement isreleased. This ensures the most positive mediareaction to the company and the IPO.

On the same day, the bookrunners (and any otherbanks in the syndicate which have writtenresearch) will publish their notes on the company.

This day marks the beginning of what is usually atwo-week process of investor education.

Investor educationInvestor education is the process through whichthe market is educated about the company and itsinvestment case. This is carried out by theresearch analysts of the various syndicate banks,together with their equity sales forces. Equitysalespeople are individuals at an investment bankwho are responsible for discussing investmentideas with the bank’s investor clients. Theyleverage the work of the research department inthese client conversations.

In the IPO process, it will be common for theequity salespeople to book a series of investormeetings in different regions.These provide theresearch analysts with an opportunity to educatetheir institutional clients about the company.Feedback from the meetings will be collated by theanalyst, the salesperson responsible for that clientand by the equity capital markets teams. Thefeedback is used to refine the company’s thinkingon and presentation of the investment case in itssubsequent meetings. This is also the point in themarketing process when meaningful conversationsabout valuation begin to be held with investors.Ultimately, the feedback from this exercise needsto be used to set a price range for the shares thatwill be offered in the IPO.

Management roadshowThe final stage in the marketing process is also themost important. During this stage the managementteam (typically the CEO and CFO) will meet with asignificant number of investors (usually over a two-week period) to explain the business, theinvestment case and the rationale for the IPO.Depending on the size of the transaction and thelegal restrictions around the offering, this roadshowwill take place in a number of regions. For largerIPOs, it is common for the management team tohold meetings in the UK, Europe and the US. In


certain instances there will be more than one teamof presenters attending these investor meetings.

Almost all investors will want to have spent sometime with management before committing anymeaningful amount of capital. These meetings aretherefore fundamental to the entire process. Theanalysts will have educated the market on thecompany and the investment case, but it willultimately be the management of the company thatmust ‘sell’ its equity story to the investors. This iscrucial for encouraging them to participate in theoffering at an attractive valuation for the company.

Pricing the offer

Participating in an IPO is an investment decision.Investors first need to establish whether they‘believe’ in the investment case before decidinghow much they are prepared to pay to buy theshares being offered. Since there will be no publicmarket value for the business to inform them ofthe ‘right price’, their challenge is to establishwhat that public market value should be. Theexisting shareholders will be looking to maximisethe valuation of the business, either to minimisetheir dilution or to maximise the proceeds of anyshares they sell (or both). Having said that,existing shareholders and the company itself willknow that it is also important to establish a strong(but not excessive) share price performance in theafter-market. There are therefore a number ofdynamics which impact the pricing process andmanaging these is one of the key roles of thebookrunners on the IPO. The process of pricing anIPO involves a number of stages – discussed indetail below.

Syndicate analyst research valuation rangeThe research reports written by the syndicateanalysts will typically each include a valuationrange. These ranges will be the market’s firstpublic attempt at putting a value on the company’sequity. The methodology used to value thecompany will vary between companies, sectors

and even analysts, but there are a number ofcommon methodologies which are often applied. Inmany cases, these methodologies will be similar tothose used by the analysts to value the company’slisted peers. Examples of the techniques usedinclude applying the multiples at which the listedpeers trade (or potentially a premium or discountto those multiples depending on the company’sinvestment case); using a discounted cash flowanalysis, or using a valuation of the group’sindividual businesses to arrive at a combined ‘sum-of-the-parts’ valuation.

Throughout the process of investor education, the bookrunners’ analysts and salespeople willdiscuss the valuation range contained in theresearch note with investors and this will allowthe bookrunners to assess the market’s reactionto that valuation. Investors, at this stage, will stillnot have met management and some may still befamiliarising themselves with the business model,so these initial discussions should be interpretedaccordingly. In many cases, there will be scope for the investor’s valuation to increase from this point.

Setting the price rangeAt the end of the investor education exercise, thebookrunners, the company and its existingshareholders will discuss the feedback from theinvestors meetings and agree a price range withinwhich the offering will be marketed. In certaincases (especially fund offerings), the IPO will be ata fixed price, but for most corporates a price rangewill be used.

The price range is used to generate a competitiveauction for the shares to ensure that pricing ismaximised, subject to having a stable after-market. There are different strategies for setting aprice range, but the ‘textbook’ approach is to setthe bottom of the range where there is broad ‘buy-in’ from the investor community. This allows thebookrunners to generate sufficient demand to ‘get


the book covered’ (ie have demand for all theshares being offered) quickly. From this point on,competitive tension between buyers can beestablished to increase the price. If there is no‘hook’ at the bottom of the range, there is a risk ofinsufficient momentum, which potentially meansthat the book might not be covered.

Typically, the price range is set before themanagement begin their roadshow, but in certaincircumstances it may be appropriate to delay thesetting of the range by a few days. This bothreduces the period of ‘market risk’ and can allowfor a higher and tighter price range, if earlyfeedback from the management meetingsis highly positive.

Building the book of demandOnce the price range has been set, thebookrunners begin taking orders from investors.This process allows the bookrunners to build a bookof demand, showing how much demand there is forthe shares being offered at different prices. Thesystem is electronic and pooled between thebookrunners to give the company and eachbookrunner a view of the combined demandgenerated. This process of bookbuilding lasts forthe full duration of the management roadshow.Orders can come in various styles – some investorsmay put a price limit on their order (ie a cap on theamount they are willing to pay such that they haveno demand above that price), others may give anunlimited order and some will give stepped ordersthroughout the price range (ie giving preciseamounts of demand at different prices).

Setting the offer price and allocating the sharesAt the end of the bookbuilding process andmanagement roadshow, the time will come to setthe price of the shares in the offering. A meetingto agree that price will be held with thebookrunners, the company and certain of theexisting shareholders. Sometimes this will be a

short discussion – in the ideal scenario, the bookwill be many times covered by high-qualityinvestors at the top of the range. However, there isoften a balance to be sought between price andquality of investors. The debate will be aboutwhere to set the IPO price so that proceeds tosellers are maximised and/or dilution minimised,consistent with providing the company with astrong shareholder register and stable after-market performance. Having agreed on the price,the bookrunners and the company will then agreeon the allocation of the shares and theseallocations will be confirmed to the investors thefollowing morning, before the shares begin trading.

The after-market

Typical trading patterns post IPO It is common after an IPO to see some turnover inthe shares in the first few days. Certain investorsmay be looking to buy more stock whilst otherswho have participated may trim their exposure.The average volume of shares traded in the firstday post the IPO is 23 per cent of the sharesoffered in the transaction (based on IPOs on theLondon Stock Exchange over the last five years).This number increases to 34 per cent for the firstweek post-IPO. Over time, trading will settle downand come more into line with the typical levelsseen elsewhere in the secondary market.

StabilisationBecause there is a heightened sensitivity to theshare price performance immediately post-IPO,regulators internationally permit one of thebookrunners to support the share price in theafter-market (‘stabilisation’) through buying sharesin the open market. In the UK, such stabilisation isonly permitted for a period of 30 days and thebookrunner selected to carry out this activity isonly allowed to buy stock in the market if theshares are trading below the issue price in the IPO,and only for the express purpose of supporting theshare price.


To allow the stabilisation process to occur, thebookrunners initially over-allot shares in the IPO(up to a maximum of 15 per cent of the totalnumber of ordinary shares which comprise thebase offer in the UK). The proceeds from this over-allotment may then be used to buy back up to thatnumber of over-allotted shares if stabilisation isrequired. By way of example, if the offer has beenset at 100 shares, the bookrunners may actuallysell, say, 115 shares to investors. They wouldborrow 15 shares from an existing shareholder todeliver to new investors at the time of the IPO. Ifthe share price drops below the IPO issue price,the stabilisation bookrunner may elect to buy up to15 shares and return these shares to the originalowner. If the shares trade above the IPO issueprice, no stabilisation will be carried out and theproceeds of the sale of the over-allotted shares willbe paid to the original owner.

The ongoing role of the corporate brokerThe IPO is the beginning of the company’s life as alisted entity. A critical component of that life ismanaging the company’s relations with the market– with research analysts, investors, the LondonStock Exchange, the regulators, the media and soon. Whilst the company’s corporate broker will beresponsible for advising the company on regulatoryaspects, the broker will also be an important‘voice’ for the company and will act as thecompany’s eyes and ears in the market.

The corporate broker’s research analyst willdisseminate the company’s equity story widely tomaximise the investor following and understandingof the story in the market. The salespeople willensure the message is disseminated to ageneralist audience as well as to the sectorspecialists who will also be the focus of theresearch analyst.

The corporate broking professionals at the firm willadvise the company on all aspects of thecompany’s interaction with the market, including

the development of key messages and how theyare best communicated to the market. Their roleincludes capital markets and corporatetransactions advice and strategic non-transactionadvice such as dialogue on the company’sinvestment case, being a sounding board on keystrategic issues (strategy, capital structure anddividend policy) and providing support around keyinvestor events. The corporate broker will alsoprovide its clients with relevant market intelligencesuch as share price movements, trading strategies,key market themes and macroeconomic events. Inaddition, a corporate broker will carry out investortargeting exercises, organise investor meetingsand collate feedback from investors.

It is usual that the banks or brokers selected forthis role will be some or all of those that acted asbookrunners in the IPO. In many ways, theyshould be the firms that best understand thecompany’s investment case and are thereforebest-placed to present that to the rest of themarket on an ongoing basis. In order to performthe role well, the corporate broker must bethought of as a ‘trusted adviser’ by the companyand this is the relationship that is best forgedfrom the outset of the IPO process.

Other IPO considerations

Retail offeringsIn some instances, the company or its existingshareholders may wish to make the offeringavailable to the general public, or to a subset ofit – the company’s customers, for instance. Theseoffers were a common feature of governmentprivatisations. In most cases, the public willparticipate on the same terms as the institutionalinvestors. Sometimes a discount or other rewardis given to encourage public participation. Retaildemand can be meaningful in IPOs of certaintypes of companies. It is most applicable wherethe company has a strong brand presence andlevel of customer loyalty. A retail offer can be

made as an offering to the public, through publicapplication forms (which has certain technicalimplications on the timetable and documentation),or as an intermediaries’ offering which is madeavailable to clients of private client brokers only.

Employee offeringsThese are similar to the above, but are only madeavailable to the company’s employees. They arerelatively simple to execute and facilitate increasedemployee ownership of the business – often apositive for the company and its staff. If this isbeing considered, it is important to ensure that theappropriate legal steps have been taken where theemployee base is international as this canconstitute an offering into other jurisdictions(giving rise to regulatory implications).

Additional considerations for international issuersThe Exchange is a popular listing venue amongstinternational issuers. Being incorporated outsidethe UK is typically not an issue from a marketingperspective. It may, however, encourage thebookrunners to adjust the regions in which theinvestor education and management roadshow arecarried out to reflect potential investment interestfrom the company’s home country. Aside from this,and certain technical considerations aroundensuring that the company is eligible for FTSEindex inclusion, there are limited differences to the marketing process on an IPO of a UKincorporated company and an international issueron the Exchange.

Page 67Generating and capturing investor demand

Summary

The Exchange provides an excellent platform formarketing any IPO. Optimising the marketingexercise is critical to the IPO's success and willultimately impact the valuation achieved for thecompany and its shareholders. This exerciseneeds to be carefully designed by thebookrunners to achieve the objectives of raisingsufficient proceeds for the company or itsshareholders, optimising the price at which sharesare issued and establishing a strong shareregister for the company's future.

The key areas to focus on, as discussed in detailin this chapter, are as follows:

l ensuring the right bookrunners are appointedto market the offering

l positioning the investment case in a waywhich effectively demonstrates theattractions to equity investors

l meeting enough and the right type ofinvestors on the management roadshow; and

l setting the price range to generatemomentum and a successful bookbuildingexercise.

Getting these critical points right is the key toachieving a successful listing on the Main Marketof the Exchange.

Managing the company’s profileAndy Berry

Fishburn Hedges

!!

!

!!

Managing the company’s profile

For companies looking to join the Main Market andbegin the flotation process, corporatecommunications can be an important and valuabletool. An ongoing PR programme is fundamental toestablishing and maintaining a company’s profileand is a key component to ensuring a successfulflotation.

Joining the Main Market offers considerablebenefits to companies. Gaining access to capital tofund business growth and an enhanced internationalprofile are key advantages. So, too, are offering anew currency for acquisitions and the staffmotivation that a listing encourages. But in order torealise the full potential of these benefits, thepositioning of your business is important. Investorsare selective and will look to invest in thosecompanies with a strong and well-establishedcorporate reputation. As a company you will need tobe transparent, committed to building long-termvalue for both customers and shareholders andbecome an active member of and contributor to thecommunities to which you belong.

Reputation adds valueSo, does reputation have value for a company?Absolutely. Reputation is intrinsically valuable andcan set companies apart from their competitors.That might mean the difference between a high andmodest valuation, or – in tougher times – between asuccessful market debut and a failed issue.

It should also be recognised that, following theglobal financial crisis, the world is markedlydifferent. In the UK, for example, an already cynicalmedia industry is now only too ready to voice strongopinions about companies that stand out for thewrong reasons. There is also a growing view in manyquarters that companies do not just exist to createvalue for shareholders: they must also demonstratethat they serve the interests of a wider group ofstakeholders, which includes employees, analysts,potential investors, the media and the community inwhich the company operates.

In this chapter we explain why goodcommunications are instrumental in achieving asuccessful IPO and how a well-constructed PRcampaign can add value to your propositionthrough building and maintaining reputation. Thisruns from the preparation stages of defining yourobjectives and understanding your audiences,through to executing an effective strategy withinthe confines of the IPO timetable. We also look atlife beyond the IPO and how communications,done well, can help you maintain the valuation yourcompany deserves.

Your communications objectives

Set your objectives early onIt is critical that communications objectives are setfrom the start of the IPO process. Of course, it isimportant to be flexible, but you will need a clearplan to follow, and it is vital that yourcommunications objectives dovetail with youroverall strategy. At the core of this is the need to:

l build a strong, credible story – introducemanagement to stakeholders and explain whythe company is a ‘must have’ investmentopportunity


l define key overall objectives – maximiseadvantages and minimise risks

l preparation is paramount – build value inadvance to attract the investors you want

l set long-term expectations – a successful IPOis the starting point, not the finishing line

l be ready to communicate in a clear, effectiveand transparent manner.

And don’t forget…

l work towards the good times, but preparefor the worst – you must have a crisiscommunications plan.

Checklist for a successful IPO


l build the relationships that matter – ensureyou have a ‘fan-club’ ready to support you

l position the IPO as a stage in the company’sdevelopment, not as an end in itself.

Be preparedAs part of ensuring that the IPO runs smoothly, itis necessary to prepare for unexpected events thathave the potential to impact negatively on theprocess. You should have a crisis plan in place todeal with any issues that arise, whether concerningthe IPO itself or from an operational perspective.

Audiences and stakeholders: who are you

talking to?

Understand your audiencesIn order to achieve your objectives, it is importantto identify who your different audiences are, aswell as understanding their needs, objectives and –crucially – how they interact with each other.

The IPO will be one of your company’s mostnewsworthy events, and this news will be of interestto a wide range of stakeholders including media,investors, analysts, employees, trade unions, tradeassociations, customers, partners, regulators,government and a variety of opinion formers. Thesestakeholders form a complex matrix, informing eachother and shaping the response to your IPO. Thestructure of this network means that public markettransactions can face a much higher level ofscrutiny now than in the past few years, and youneed to be prepared for this.

While communication across all stakeholdergroups must be consistent, it is also important toaddress the interests of individual audiences. Forexample, all stakeholders will want assurance ofthe company’s long-term growth potential, butpotential investors will need convincing that theycan make a return on their money, and employeeswill want to know that their jobs are secure.Anticipating and appreciating the needs and

interests of each group will allow you to run yourcommunications strategy smoothly.

A strong public relations campaign is central to anyflotation, particularly in an environment where manyestablished norms are changing. It is important tounderstand the evolving media landscape andconsider how different forms of media can help youcommunicate with your stakeholders. Traditionalprint media has gone digital with specific onlinecoverage, podcasts and vodcasts; digital-onlypublications have sprung up; and social media anduser-generated content have exploded. In addition,we now have citizen journalism, where anyone witha mobile phone can report on a story and share theirviews with a wide audience. (see ‘Identifying youraudience’ chart on the next page).

Coordinating the communications strategy

In the past, PR was often seen as an added extra,bolted on towards the end of the IPO processshortly before the official ‘go live’ date. Thisinevitably meant that external communicationswere secondary to the rest of the IPO activity. Butthe increased scrutiny of quoted companiesbrought about by the financial crisis means thatthis is at best ill advised, and at worst potentiallydamaging to the entire IPO process.

Start your PR earlyFor this reason, PR considerations should beworked into the overall strategic plan right fromthe beginning of the IPO process. Indeed, it isbetter to think of PR around the IPO as part ofyour overall communications strategy and not as aone-off project – just as the IPO itself should beseen as an integral part of your company’s long-term business strategy. This holistic view will bestbe able to address the different butinterconnecting interests of your variousaudiences, so achieving the overall aim of buildinglong-term value by establishing your company as asuperior investment opportunity.


Identify your storyTo this end, your PR agency should work closelywith you and your other advisers from early on inthe process to identify and develop your corporatestory. This will ensure that all regulatory guidelinesare followed and, if you are working on a duallisting, that the needs of each regime are identifiedand respected. Once the right story has beendeveloped, it will be included in IPO marketingmaterials, regulatory documents and press releases.

Make the most of itHaving the right communications story in place asearly as possible will allow you to make the mostof the opportunities thrown up by the IPO process.

Typically, this falls into three phases:

l the corporate or pre-offer phase – where theobjective is to raise awareness andunderstanding of the company as a potentialinvestment opportunity

l the offer phase – where the emphasis is onthe details of the offer, the timetable and thesubscription period

l the post-offer phase – capitalising on thesuccess of the flotation and building on thelong-term, strategic goals of the company.

Preparation, preparation, preparationYour communications strategy should becoordinated around these phases. Focusing on PR

MediaAnalysts

Financial Stakeholders

External Influencers

CorporateInfluencers

Potential investors

(institutional, retail, high net worth)

Industry bodies

Regulators

Government

Unions

Businesspartners

CustomersCompetitors

Trademedia

Staff

Regional news and business

writers

Newswirejournalists

Sectorcorrespondents

City editors and

commentators

Financial trade media

UK andinternational

businesscorrespondents

Communications no longer operates in silos:expect your story to be part of a discussion

Identifying your audience


during the pre-offer phase means that you canstart to raise the profile of the business prior tothe live IPO work. The aim of this is to begin thevalue-building process early, raising awareness ofyour company and thus laying a good foundationfor the later fundraising activities.

Once you enter the offer phase, communicationsactivity will take place around the most importantevents typically occurring in the IPO timetable:

l announcement of the intention to floatl announcement of the pricing rangel announcement of the final pricingl announcement of first-day dealings.

A regular stream of positive announcements andupdates will help maintain momentum and keep theinvestment opportunity in front of your audience.

Announcement of intention to floatThis will be the first time that you will be declaringyour plans publicly. Typically, your financial PRagency will work with you and your other advisersto choose the best time to ‘go live’ with the storyand decide which tactics to use in order to achievemaximum profile. The press release that is issuedat this time will reflect the corporate story alreadyidentified, and will describe the company and itsmain attributes, set out the anticipated timetablefor the IPO and include quotations from thecompany’s management.

If other supporting material (such as an analyst’snote) is also available, this can be packaged upwith the press release to provide positiveaccompanying commentary. Photography can alsobe used – a good picture can enhance theattraction of the story. All in all, the intention tofloat announcement is a chance to start the fundraising process in a positive, high-profilefashion – crucial when trying to compete forinvestment.

Pricing rangeWith the issue of the pathfinder prospectus, afurther press release can be used to announcethe pricing range of the IPO. Media expectationshere need to be handled carefully to ensure thatthe IPO will be perceived as a success. This isparticularly important in the UK, as the media will often look for bad news and want to highlightIPOs being priced towards the bottom of their range.

Announcement of final priceOnce the marketing period is completed, the finalIPO price can be announced. Again, care needs tobe taken here to ensure that this is positionedappropriately.

First-day dealingsAn announcement can also be issued to mark thefirst day of dealings on the stock market. This is a

This is crucial as it will run through the entireIPO process, linking up the work you do withpotential investors, press, analysts and yourown employees. The ‘story’ will need to answerthese questions, and potentially others:

l What aspects make your company standout?

l Why is your company the best recipient ofinvestors’ money?

l Why are you right to come to a publicmarket?

l How will you use the money you raise?l How you will ensure long-term success?

You will need to be able to answer all thesequestions and deliver your messages in a short,succinct and memorable way.

Getting the story right


good opportunity for management to brief externalresearch analysts on the story, as well as alertingmarket commentators to the stock on its marketdebut.

While these are typically the fundamental stages inthe IPO timetable, your PR agency and advisers willwork to identify any other suitable opportunities tosupport the marketing process, if appropriate.These could include profiles of senior managementand news of appointments or contract wins.

Internal communications: don’t forget your staff

In their annual reports and accounts statement, ithas become commonplace for chairmen of listedcompanies to acknowledge that the company’smost valuable assets are its staff and to thankthem for their efforts over the year.

However, it is less common for companies toremember this when planning their IPO. All too

often, communication with staff is something of anafterthought, coming late in the process and, as aconsequence, failing either to counter the fearsstaff may have or to help obtain maximum valuefrom the flotation.

Keep your staff informedWhen considering a flotation, one of the firstinternal communications steps is to decide whenand how to advise staff of the decision to list. Thiswill always be something of a balancing act:weighing up the desire for confidentiality with theneed to ensure that staff are appropriatelyinformed, and see the listing as a welcome andexciting event for themselves and for theircompany.

It is important to recognise that, in most industries,few members of staff will be familiar with theprocess of a company joining the market. Theymay also harbour fears that the listing will prove to

Value

Time

Pre-offer Offer Post-offer

Corporate profile building

Preparation

Connected analyst research Over-subscription

Pathfinder High-quality investor base

Institutional roadshow Optimum valuation

Pricing range Healthy after-market

Pricing Strong investor rating

Perception of success Raised corporate profile

Awarenessof the company and IPO

Understandingand high regard

Endorsementof equity story and offer terms

Intention to float

First-day dealings

The communications timetable


be a catalyst for additional change within thebusiness – something that may threaten their jobsecurity.

Hopefully, internal communications procedureswithin the company are already compliant with

best practice, with meaningful dialogue with staffestablished as the norm rather than theexception. If that is not the case, plan well inadvance and work with your PR advisers to auditand upgrade your internal communications assoon as possible.

Make sure they understand the processYou can probably afford to tell staff about thepotential listing rather earlier than you mightimagine. Tell them what it means for the companyand – vitally – what it means for them. If you plan tointroduce incentive programmes for staff at, or priorto the IPO, inform them, but make sure that youcommunicate clearly, avoiding financial jargon. Staffalso need to understand what they can and cannotsay to their contacts – most likely your customers.There is little point in setting out on a campaign ofcustomer communications if the customers’ day-to-day contact points – your staff – are uninformed anduncertain of what the listing means.

None of this is to suggest that your staff should orcould become official spokespeople for yourcompany at this important time. Rather it is torecognise that they need, at the very least, to beaware of the issue and to whom any questionsshould be referred.

Engage and communicateThe increasing use of social media will have asignificant influence on the way that you shouldcommunicate with your staff. You can be sure thatonce informed of the listing, staff will discuss thisamong themselves online, and equally sure that, asa result, this debate will be visible to the outsideworld. So any evidence of disquiet among staff willbe only too clear to potential investors and others.Engage and communicate with staff, understandtheir concerns, address their questions and ensurethat achieving the listing becomes a jointobjective – something to which they can allcontribute.

The communications strategy should flow fromthe objectives which have been set out at thestart. They should dovetail together in order tomake a robust, distinctive, credible case aboutyour company’s qualities and ensure a successfulflotation.

Effective co-ordination of communicationsenables the release of information to take place ina controlled and strategic manner. This willreinforce the perception that the flotation is beingprofessionally managed by the company and itsadvisers.

It is essential that the flow of communicationsshould build momentum and keep the story intact,maintaining the focus on the business and theinvestment case. Clear, consistent communicationwith all stakeholders will not only help yourcompany navigate through potential pitfalls, butwill build and protect its reputation and brand insubsequent years.

Throughout the duration of the campaign, it isessential that the timing and sequence ofmessages are carefully managed and themomentum of the campaign maintained. Withoutcareful preparation and guidance, it is all too easyto create misleading perceptions or expectations,which will adversely affect the outcome of theflotation. Communication of key information mustbe clear, comprehensively prepared andconsistent with the agreed timetable.

Create momentum – make the mostof set-piece moments


When the IPO has happened and you are quotedon the Main Market, you must continue tocommunicate openly. Make sure your members ofstaff are all aware of their responsibilities inconnection with the handling of material or price-sensitive information. Remember them when youare communicating company results or corporatedevelopments, such as major contracts or jointventures. There can be few things moredemotivating for staff than finding out about newsaffecting their company and their working livesfrom the newspapers or social media outlets.

Internal communications – done well – will addsignificant value to your IPO and yourcommunications with staff could, over time, proveto be the most valuable of all.

Post-flotation: ongoing financial PR strategy

After many months of preparation and muchanticipation of a successful outcome, you havefinally made it – trading in your company’s shareshas started, hopefully at a premium to the offerprice. You have become a member of one of theworld’s most exclusive clubs. It is unlikely to mean,however, that now is the time to relax.

Keep up the good workThe regulatory rules are clear on what is requiredfrom listed companies in terms of disclosure andcommunications – and the mindset which should beadopted throughout the IPO marketing process isno less meaningful once a company is on market.

In order to achieve and retain an optimumvaluation for your shares, only those companieswith the highest reputation for transparency willsucceed. Put simply, increasing cynicism frommedia and investors alike means that merelycomplying with the minimum levels of disclosurerequired is not likely to be enough. Investors andthe media are only too ready to judge companies,not just on the accuracy and completeness ofdisclosure, but on their whole approach to

communicating with the market. Any sense thatthe market is being informed of anything less thanthe full story will be punished by a lower valuationthan might otherwise be achievable.

There is, of course, a balance to be struck here.Investor and analyst appetite for information onlisted companies is potentially limitless. You mustdecide what information is most relevant, mosthelpful and which – vitally – will not be damaging toyour business if it were in the hands of competitors.

There is an increasing and welcome trend forinformation given to investors in corporatepresentations to be made available more widely,often via a dedicated Investor Relations section onthe company’s website. Making informationavailable in this way limits the scope foraccusations of selective briefing of institutionalinvestors in advance of the dissemination ofinformation to the wider market.

Make disclosure work for youIn the early meetings with your new investors, andin the information that is released more widely atthe same time, you will set the benchmark for whatinvestors can expect from you on an ongoing basis.Bare compliance with the rules will be noticed andmay well be marked down. In contrast, fulsomedisclosure in a style that indicates the value youplace on stakeholders’ understanding of yourbusiness and the role it plays in its variouscommunities, will stand you in good stead.Remember, too, that the market may well besuspicious of those companies that start withadmirably high levels of disclosure but backtrackover time.

Take advantage of the communicationsopportunitiesHaving set the tone and content for earlycommunications, what are the opportunities fortelling your story? Well, the good news is that thefinancial calendar offers plenty of chances to


update the market throughout the year (see chartabove).

There are of course the annual and six-monthresults announcements, when full disclosure ismade of the financial results for the period. Thesealso offer the opportunity to provide an update oncurrent trading and the outlook for your business.

In addition, you can update the market in InterimManagement Statements twice a year and againat your Annual General Meeting.

Keep up the dialogueFollowing the formal announcement of your results,analysts will expect a presentation from the

company, expanding on the information in the pressrelease and offering an opportunity for questionsaround your strategy and details of delivery. Thesepresentations – and the dialogue that they generate– are pivotal in developing relationships with theanalyst community and ensuring that those analystsunderstand your company and the markets in whichyou operate sufficiently well to provide realisticestimates of your expected financial performance.

But while investors, analysts and the media willwant regular communication, beware of issuing toomany press releases. You will want the market tolisten closely to what you have to say; that is farmore difficult if they become used to a frequentstream of largely inconsequential announcements

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

Key datesInterim

Management Statement

Trading update

Pre-close meetings

with analysts

Monthly meetings with key media

Corporate and personal profi le opportunities

Positive share price movement

Promoting analyst research

Bylined articles

Feature opportunities

Proactive/reactive commentary

Site visits

Introduction to new analysts

Site visitsOne-to-one briefings Individual visits to broking houses

to addr ess sales teams

Conferences

Roundtables/seminars

Annual drinks event

Corporate hospitality

Pre-close meetings

with analysts

Developing messagingDrafting statements

Agreeing media strategy

Drafting Q&AsRehearsals

Analyst feedbackOrganising media

interviewsOrganising

analyst briefing

AGM

Interim Management

Statement

Trading update

(30 Sept half-year

end)

Half-year results

announced

Comms review of the

year and look ahead to next year

Full-year results

announced

Results

Media engagement

Analyst engagement

Events

(31 March full-year

end)

Developing messagingDrafting statements

Agreeing media strategy

Drafting Q&AsRehearsals

Analyst feedbackOrganising media

interviewsOrganising

analyst brie fi ng

MAY

Typical financial calendar

about your latest customer win. Consult closelywith both brokers and financial PR advisers on thisto ensure you get the balance right.

You should also think carefully about yourapproach to social media and how to managemessaging in the digital age. News travels fast andcan cross from customers to investors, and fromanalysts to financial journalists, in seconds. Thepower of the internet means that theseconversations are increasingly conducted in public,via social media channels.

Invest in PR and reap the rewardsMost of all, the media demands transparency andready access to the senior management of yourcompany. You should expect to commit your owntime to building relationships with importantjournalists and analysts. By helping them tounderstand your business and the challenges itfaces, you are far more likely to get a fair hearingwhen things are tough – or to get the coveragethat you want on a busy news day.

Taking communications seriously from thebeginning of the IPO process, right through to yourlife as a listed company, will add value to yourbusiness and pay dividends. Done correctly, it willallow you to take advantage of all the benefits ofthe raised profile that a listing on the Main Marketcan bring.

Page 79Managing the company’s profile

Section titleThe role of the registrar in an IPOPaul Etheridge and Phil Roberts

Capita Registrars

We work in partnership with our clients to ensure they are totally satisfied throughout the project and beyond, delivering innovation, flexibility and a wide range of services.

– Full range of receiving agent and corporate action services

– Specialist support from an experienced team of company secretaries

– Extensive investor relations capability

– Market leading employee share plan expertise

– And the strength and reliability of a FTSE 100 parent company

Fifty six appointments in the first nine months of 2010, are proof that we offer the IPO service that issuers are looking for.

More companies choose Capita than any other registrar. So far in 2010 we have managed more IPOs* than any of our competitors. No one offers a better combination of value, service and reliability.

Make the right choice for your IPO and share registration services

Shaped to fit your business

www.capitaregistrars.com

To find out why so many companies choose Capita Registrars to handle their IPO, please contact Paul Etheridge on +44 (0)20 7954 9706 or email [email protected]

*In the UK, Ireland and Channel Islands. Source: Euroclear UK and Ireland. Figures correct as at 09 Sept 2010. Capita Registrars Limited, Registered office: The Registry, 34 Beckenham Road, BR3 4TU. Registered in England No. 2605568.

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For companies considering an IPO, what a shareregistrar actually does might be something of amystery. Simply put, the role of the registrar is toupdate and maintain the official register ofmembers (or shareholders) of the company whilstreconciling the total number of shares authorisedand issued by the company on a daily basis. Butputting this apparently simple objective intopractice requires a great deal of careful planningand specialised work – and this is where a goodregistrar will prove its worth many times over.

Early involvement

The complex and painstaking work that registrarsneed to complete ahead of an IPO cannot becarried out overnight, or as part of a last-minuterush. So whether you approach the registrardirectly or through your advisers – be they a lawfirm, investment bank or another adviser – youshould leave a minimum of four weeks betweeninvolving the registrar and the proposed date ofthe flotation. Be aware that more complicatedcases may require an additional four to six weekson top of that. For this reason, it is alwaysadvisable to get your registrar involved as earlyas possible in the IPO process.

Because the relationship with your registrar is along-term one and does not end with thesuccessful flotation of your company, you shouldlook for a registrar that has strong capabilities inboth project management (a dedicatedimplementation manager to oversee your listingplans is strongly advised) and relationshipmanagement, which can be of enormous value inmeeting future goals throughout your life as alisted company.

Accuracy is also paramount. Your registrar islooking after an integral part of your business onyour behalf, so you need to be confident that solidplanning and attention to detail is present withinits organisation.

Engagement periodAs soon as it is brought into the IPO process, theregistrar should begin by finding out as muchabout your company as it can so that it can bestadvise you on the correct course of action. Thefirst – and initially most important – question is toevaluate the structure of the company coming tomarket. From a registrar’s point of view these cantypically be divided into three categories:

l UK-incorporated entities,l offshore companies, usually established in

the Channel Islands, Isle of Man or Ireland;or

l international companies, incorporatedoverseas.

As we will discuss later, the third of these optionsrequires a very different approach to the first twoand, as a result, a longer lead time should betaken into account.

But the engagement period does not begin andend with your choice of location. The type of offeryou are wanting to bring to the market is alsocrucial. You may opt for an IPO targetinginstitutional investors, but it is possible to launchto a mix of institutional and retail investors.Alternatively, you may only be interested in anintroduction to the market that does not involveraising any capital. The answers to these initialquestions will dictate the core registrationservices your registrar provides on your behalf.

As with any major project, a good understandingbetween all the parties is vital if your goals are tobe met successfully. The registrar will want toknow a lot of detail about your business – yourgrowth strategy, your sector profile and yourgoals, both short term and further ahead. It willalso want to get an insight into your companyethos and values so that it can better advise you.For example, if your firm has a strong onlinepresence or a brand commitment to protecting

The role of the registrar in an IPO

Page 83The role of the registrar in an IPO


the environment, the registrar may well suggestrunning an online IPO. This kind of information isbest exchanged in an early project meeting – withyou and all your advisers present.

This initial period of discussion is very valuable asthe accuracy and clarity of the informationprovided at this stage will greatly assist theregistrar – both in meeting your needs goingforward and in avoiding potential pitfalls later inthe implementation phase. Based on yourresponses, your registrar should be able to assignan appropriate relationship manager with relevantsector knowledge and experience.

Supporting your company secretary

This is also an excellent time to consider, indiscussion with your advisers, the impact theflotation will have on your company secretariat. Agood registrar will consider itself to be anextension of your company secretary’s office, buteven with its assistance, you will find that thecompany secretary’s role expands hugely in theperiod before, during and especially after the IPO.

That is why it is advisable to look for a providerthat can offer value-added support for companysecretaries in the form of pre- and post-IPOhealth checks. These will rigorously examine yourarticles of association and even the structure ofyour secretariat team to ensure that you areready to deal with the increased scrutiny andgovernance that comes with being a listedcompany.

This kind of company secretarial advice isparticularly valuable for rapidly growingcompanies that may not have had experience ofthe kind of requirements involved in running apublic company. It also applies to internationalcompanies that may not be familiar with therequirements of a London listing and the level ofgovernance that is necessary.

Other early considerations

This is also a good time to talk about share plansand other share-based employee incentives. Theregistrar will take into account your future plansfor such schemes at the IPO stage, even if theshare plans are not going to be put in place untillater. This will help smooth the process when theplans actually commence.

Moving to a successful implementation

Following the engagement period and now armedwith a complete picture of your business and itsfuture goals, your registrar will work, whereapplicable, with your other advisers, to establishthe mechanics of effectively transferring theshareholdings of the selling shareholders –typically the founders of a company or privateequity investors – to the buying institutions (orretail shareholders, if applicable) at the IPO. Theregistrar will make sure all the documentation isin place if new shares are being issued and on theday of the float it will ensure an effective deliveryof shares.

When acting as a receiving agent to a publicoffer, your registrar will help write and commenton the prospectus and application forms to beissued and provide despatching or onlineservices. Once the offer opens the registrar willprovide banking facilities, and keep you and youradvisers up to date with the number of applicantsand the value or amount of stock applied for.

In addition there are various technical andoperational aspects of bringing a company tomarket. These are described in more detailbelow.

CREST set-up

Operated by Euroclear UK & Ireland Ltd, CRESTis the electronic settlement system for the UKand Ireland. Your registrar will guide you throughthe process of setting this up and ensuring thatall Euroclear requirements have been complied

with so that the shares can be electronicallysettled from Day One.

Share certificates

In a world of electronic trading of shares it mightseem old-fashioned to have to arrange for papershare certificates to be produced. However, itremains an essential part of the IPO process.Your registrar will create, proof and print sharecertificates as required.

Articles of Association

Your registrar will undertake a careful review ofyour company’s Articles of Association, especiallywith a view to identifying any transfer restrictionsthat might appear and the possible effect theymight have on the IPO.

Due diligence

Like all your professional advisers, your registraris required to carry out due diligence.

Electronic communications

Increasingly, companies coming to the market areopting to use electronic communications. As wellas saving on the costs associated with printingand postage, this is considered to be the‘greener’ option. E-comms also coversestablishing an online portal that will give youconvenient access to consolidated registerinformation via the web, as well as the ability togenerate management information.

Investor relations strategies

As part of the value-added services that it offers,a registrar will typically provide investor relationsservices . It will then be able to work with you todevelop appropriate IR strategies, particularly inrelation to fund manager and beneficial ownershipinformation, combined with peer group and sectorcomparisons. If you already have an IR provider,the registrar will work alongside them to assistyou.

Closing the deal

Throughout the progress of the IPO, yourregistrar should be keeping you up to date withweekly progress meetings or conference calls toensure that everyone is aware of key milestonesand what remains to be done.

As the IPO heads towards listing and admissionof the securities to the Main Market, the registrarensures that everything is up and running for thefirst day of trading.

Ahead of that date, the registrar will need to havetaken on the existing register of shareholdersincorporating any capital reorganisation requiredon the register. The registrar will also make surethat any deadlines issued by CREST Euroclearare understood, and adhered to, by everyoneinvolved in the deal.

Once the IPO is complete and shares have begunto be traded and settled, the registrar will updatethe register to keep a record of the legal owner ofthe shares.

After the IPO

After the dust has settled and your company hasbeen successfully brought to market, theregistrar’s function does not stop – indeed youshould aim to form a long-term relationship withyour registrar. As well as being able to assist youwith your growth strategy by managing theoperational aspects of key corporate tasks, suchas takeovers, your registrar should also keep youabreast of industry matters through regular newsupdates and meetings.

The compliance requirements can be one of thebiggest challenges for a company post-IPO, andyour registrar’s relationship manager should beable to help you to meet some aspects of theseobligations. This will involve assisting with regularreview meetings, reporting accounts, annualgeneral meetings and dividends.

Page 85The role of the registrar in an IPO


As well as relying on your registrar for advice andsupport, you should also ask it to put you in touchwith other clients who are in the same position asyou now find yourself. These peer networks canbe an excellent source of practical advice fromother firms that have already faced and overcomesimilar challenges, and a good registrar should bemore than happy to use the strength and diversityof its client base to help you.

In summary, while you may not have worked witha share registrar before the point at which youconsider an IPO, you will find it an invaluableadviser and ally as your listed company grows.

Depositary interests: a specialist solution for overseas companies

Shares of international companies cannot always besettled in CREST. As a result, some internationalcompanies choose to issue Depositary Interests (‘DI’).

What is a DI?The DI is a method that allows overseas companiesissuing shares to benefit from the competitiveadvantages of being electronically traded on one of theworld’s leading equity exchanges, such as the LondonStock Exchange. This is achieved by a subsidiary ofyour registrar (authorised by the Financial ServicesAuthority) acting as custodian and depository. Thatbody will then hold all the shares related to the DI forthe shares that are listed in London.

The instrument that is actually traded through CRESTis a security in its own right, known as a DI – literallyan interest in the depository shareholding. TheInternational Security Identification Number (‘ISIN’) ofthe share is identical to that of the DI, so there is norequirement to list the DI separately from the share.

Why is a DI important?The advantage of a DI is that it looks, feels andbehaves like a share. In addition, it gives you fulltransparency so that, for example, when it comes toinvestor relations, looking at a DI register is exactlylike looking at a share register.

Your registrar will need to set up the necessary legalframework ahead of the IPO. That requiresconsiderably more documentation – and time – than inthe case of a UK or offshore company (which can becovered by a straightforward registrars’ agreement

because the relevant processes are all UK standardpractice). In the case of a DI, the additionalrequirements can include a trust deed and depositaryagreement, as well as a registrars’ agreement ifappropriate. Furthermore, Euroclear requires variouslegal opinions, such as a UK tax opinion and two legalopinions from the country in which the company isincorporated – for example the Netherlands, theBritish Virgin Islands or another jurisdiction.There are further considerations around complying withlocal laws about where the share register (if one isallowed) can be kept, along with other compliance anddisclosure requirements. There are also licences,takeover provisions and threshold limits to take intoaccount. These considerations vary from jurisdiction tojurisdiction, so the registrar must undertake a gooddeal of preparatory work – both in London and thechosen country.

In essence then, the DI is an alternative solution foroverseas entities, but one that requires an enormousamount of careful implementation on the part of theregistrar to get right. So while it is a proven method– around 250 international companies have DIs inLondon – it is advisable to choose a registrar that haslong experience of bringing DIs to market and,particularly, developing new and existing jurisdictions.While the timeline for an IPO will usually be set by thelead adviser, it is always the case, as we noted earlier,that the sooner you can get the registrar involved thebetter. And this is especially the case for DIs.

Section titleLondon: a unique investment opportunityFTSE Group

London: A unique investment opportunity

London: a unique investment opportunity

Given London’s vibrant and varied trading history, itis not surprising that many UK companies listed onthe London Stock Exchange are themselvesgeographically diverse with a broad range ofbusiness interests. In recent years, this dynamic hasbeen reflected in the origin of profits and thelocations of operations for companies listed on theMain Market. What this means for London as afinancial centre is a dramatically different offeringfrom most other markets, which primarily featuredomestic securities and provide a snapshot of thelocal economy.

The UK’s headline tradable index – the FTSE 100Index (the ‘FTSE 100’)– is a prime example of thediverse nature of the companies listed on the MainMarket. Most of its constituents’ operations are notlimited to the UK, with companies, includingGlaxoSmithKline and Vodafone, instead having acorporate structure which reaches across the globe.

Although the FTSE 100 is often thought of as ayardstick for the UK economy, its purpose isactually to capture the returns of the largest 100companies domiciled in the UK. This index hasfulfilled this purpose since its inception in 1984,providing a global measure that spans far beyondthe UK economy.

Setting standards

As companies in the UK continue to expand andadapt their business models against a globalbackdrop, the UK stock market is set to grow anddiversify further, creating a unique opportunity forLondon. The following section covers some of thekey elements that underpin the UK market and setit apart from other financial centres across the globe.

A diversified investment landscape Situated in the middle of the world day, the UKmarket enjoys unique exposure during its tradinghours to investors around the world. As a globallyrecognised index provider, FTSE’s UK Index Series

is by no means confined to domestic investment,being widely followed by both retail andinstitutional investors.

This ensures that no single group of investorsdominates the share registers of UK listedcompanies. The combination of this globaleconomic exposure and attraction of global fundsensures that the UK is less exposed to specificconditions pertaining to any one economy. Inrecent years, such factors have led to a wealth ofcompanies showing an interest in PremiumListings to qualify for the FTSE UK Index Series,particularly the top two tradable indices – theFTSE 100 Index and FTSE 250 Index.

Inspiring investor confidence As a financial market, London imposes some of thehighest standards in the world for governance andinvestor protection. This inspires confidence ininvestors following the UK market and its majorindices. Governance comes in the form of listingrules, company law and market practice, all ofwhich are designed to protect shareholderinterests and allow them to hold management toaccount.

This includes rules such as pre-emption rights,which offer shareholders any new issue of sharesbefore being offered to non-shareholders. Thepurpose of this rule is to ensure that shareholdersare able to prevent their stake from being dilutedby new issuance.

Similarly, factors such as strict disclosure, whichare included in company law and the UK’s ListingRules, are important, as they allow investors toassess companies in an accurate and timelymanner. This focus on transparency remains thekey to building trust amongst investors, which inturn leads to strong market activity, creating amore liquid market.

London: A unique investment opportunity

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Ensuring liquidity As an award-winning index provider, FTSE createsmarket-leading indices using robust data andmethodologies, keeping tradability front of mindthrough the use of tough liquidity and marketcapitalisation screening. By doing so, FTSE ensuresthat its indices are highly suitable for the creation offinancial products such as Exchange Traded Funds(‘ETFs’), derivatives and structured products. Theavailability and proliferation of these products hasnot only increased opportunities for investors to

.access the UK market, but has also provided afurther catalyst for the increase in liquidity withinthe market.

The FTSE UK Index Series has been one of themost sought-after indices upon which productssuch as ETFs are built. The year 2000 saw the firstETF listed on the Exchange and based on theFTSE 100 Index. Many have followed since then.There are now over 350 ETFs admitted to the MainMarket from major global providers including i-shares, Lyxor and db-X trackers, with £58.4 billionin Assets under Management.

The engagement process

Companies incorporated in the UK looking to beincluded in the FTSE UK Index Series, and inparticular the FTSE 100 Index, need to complywith the requirements of a Premium Listing, whichgo beyond the minimum standards set out by EUlegislation.

For companies domiciled overseas which aspire tobe constituents of the FTSE UK Index Series, theprocess works a little differently and involves aprogramme of engagement with FTSE, through thecompany’s chosen corporate broker. FTSE iscommitted to working closely with a company to

FTSE indices – July 2000 - 30 July 2010

Throughout the years, and on the advice ofinvestors, FTSE has taken governance veryseriously. Indeed, alongside the FinancialServices Authority (‘FSA’), FTSE has led thedebate on improving market quality through itsstringent requirements to include securities withPremium Listings (previously known as PrimaryListings), as well as its treatment of non-UKcompanies. These publicly available rules areset out in the index series’ ground rules. Theyare reviewed regularly, together with marketconsultation, to ensure the FTSE UK IndexSeries remains robust and in line with investors’requirements.

All indices in the series are market capitalisation-weighted and currently priced off trading on the London Stock Exchange.

Committed to market quality

assess it against the relevant requirements. Thisprocess is normally undertaken well before thepublication of the prospectus, giving the companyenough time to understand the steps it may needto take to ensure its eligibility for inclusion in theindex series.

The requirements these companies must meetinclude a wealth of reporting requirements,compliance with the UK Corporate GovernanceCode and the City Code for Takeovers andMergers. By meeting these criteria, companiesshow their ability to adhere to good practiceacross several elements of business including:board structure, accountability and relations withshareholders. In order to be included in an index inthe FTSE UK series, companies without a UKincorporation must be incorporated in a developedmarket or other domicile approved by FTSE, aswell as having a minimum 50 per cent free float.

Though the requirements for a Premium Listing arethe toughest in Europe, the benefits of enteringthe liquid and internationalised UK market, as wellas achieving FTSE 100 status, often far outweighas well as justify these, especially amongst moreambitious companies.

The FTSE UK Index Series

The FTSE UK Index Series has been designed torepresent the performance of UK-domiciledcompanies with a Premium Listing on theExchange’s Main Market. Investors are providedwith a comprehensive and complementary set ofindices that measure the performance of a range ofcapital and industry segments within the UK equitymarket. In addition to the standard UK seriesdetailed below, FTSE has also launched a range ofinvestment strategy versions, such as the FTSE 100and FTSE 250 Short and Leveraged indices. Theseenhanced indices are created with FTSE’squantitative expertise and provide investors withnew passive strategies and risk managementopportunities.

Page 90 London: A unique investment opportunity

FTSE 100 Index The FTSE 100 Index is one of the world’s mostrecognised indices and accounts for 7.8 percent of the world’s equity market capitalisation.It represents the performance of the 100 largestUK-domiciled blue chip companies which meetFTSE’s size and liquidity screening. The Indexrepresents approximately 85.2 per cent of theUK’s market and is currently used as the basisfor a wealth of financial products available onthe Exchange and globally.

FTSE 250 Index The FTSE 250 Index is comprised of mid-sizedcompanies. This index is designed to measurethe performance of the mid-cap capital andindustry segments of the UK market which falljust below the FTSE 100 Index in both size andliquidity. The FTSE 250 Index representsapproximately 12.5 per cent of the UK marketcapitalisation.

FTSE Small CapThe FTSE SmallCap consists of companiesoutside of the FTSE 350 Index and representsapproximately 2 per cent of the UK marketcapitalisation.

FTSE All-Share Index The FTSE All-Share Index represents theperformance of all eligible companies listed onthe Exchange’s Main Market. It is considered tobe the best performance measure of the overallLondon equity market, with the vast majority ofUK-focused money invested in funds which arebenchmarked to it. The FTSE All-Share Index isthe aggregation of the FTSE 100, FTSE 250 andFTSE Small Cap Indices and currently covers630 constituents with a combined value ofnearly £1.6 trillion – approximately 99 per centof the UK’s market capitalisation.

The FTSE UK Index Series

Preparing to list depositary receiptsRaj S.Panasar and Stephen Glasper

Cleary Gottlieb Steen & Hamilton LLP

www.clearygottlieb.com

Preparing to list depositary receipts

Depositary receipts (‘DRs’) are negotiableinstruments issued by a depositary bank thatessentially repackages shares in another company.DRs are securities in their own right and can belisted and traded on the capital markets.

DRs are typically listed by companies incorporatedoutside the EU, frequently from emerging marketssuch as Russia and India. For such companies, alisting of DRs on an international exchange such asthe London Stock Exchange can provide access toa significantly wider pool of internationalprofessional investors than a listing of shares on acompany’s domestic exchange.

Advantages of listing depositary receiptsCompanies issue DRs principally to raise capital.DRs provide a particularly effective means for non-EU issuers to raise capital because of their appealto international professional investors: they offer ameans to invest in non-EU issuers while avoidingsome of the inconveniences often associated withdirect investments in the underlying shares,particularly as regards settlement.

Structure of a depositary receipt listing

The depositary mechanismSetting up the requisite mechanics for a DR listingrequires close coordination between the issuer, itsadvisers (principally its legal counsel andunderwriters) and its chosen depositary bank (see‘Establishing a depositary receipt programme’chapter on page 105).

The deposit agreementThe deposit agreement sets out the legal rightsand obligations of the depositary and the issuer.More importantly, the deposit agreement detailsthe rights of the DR holders, set out in the termsand conditions of the depositary receipts, whichare typically annexed to the deposit agreementand reproduced in the listing prospectus.

‘Listing’ of depositary receiptsThere are two distinct aspects to the process of‘listing’ DRs in London, which occur simultaneouslywith each other:

l Admission to the Official List (the ‘OfficialList’) of the United Kingdom Listing Authority(‘UKLA’), the United Kingdom regulator forthe purpose of securities listings. DRs will beadmitted to the Standard segment of theOfficial List – Premium Listings are onlyavailable to issuers of shares (the Premiumand Standard Listing taxonomy is discussedin full in the UKLA’s chapter on page 14)


A typical DR listing will adopt the followingstructure:

l issuer’s shares (either newly-issuedshares, existing shares currently in thehands of a shareholder, or both) aredeposited with the custodian bank of theissuer’s depositary

l depositary becomes legal title holder ofshares and is entered into issuer’s shareregister

l depositary issues to investors DRsrepresenting a certain number of issuer’sshares

l depositary holds the underlying shares onbare trust for the holders of the DRs

l depositary will exercise its rights as ashareholder – including voting rights andrights to unpaid dividends – in accordancewith investors’ wishes, subject to theterms and conditions of the DRs

l investors are free to sell DRs in thesecondary market, or, alternatively, toinstruct the depositary to cancel the DRsand deliver the underlying shares instead,subject to the terms and conditions of theDRs and relevant securities laws.

Structure of a typical DR listing


l Admission to trading on the London StockExchange’s Main Market (the ‘MainMarket’) or the London Stock Exchange’sProfessional Securities Market (the ‘PSM’).

The admission of DRs to the Official List and totrading on the Main Market will usually (thoughnot always) be conducted in conjunction with anoffering of DRs to investors, to create therequisite ‘public float’ of 25 per cent of the DRs.If a listing of DRs represents the first time anissuer has offered securities to investors, it willbe commonly referred to as the issuer’s initialpublic offering (‘IPO’).

Block listings It is common for a DR issuer to request admissionto the Official List of a greater number of DRs thanit intends to have admitted to trading on the MainMarket at the time of its IPO. This is sometimesknown as a ‘block listing’. A block listing of DRsenables an issuer to have additional DRs admittedto trading on the Main Market, up to the aggregatesize of the block listing, without having to publish anew prospectus or submit new applications to theUKLA or the London Stock Exchange. For an issuerplanning to issue DRs on an incremental basis orwho cannot control secondary deposits into the DRfacility, a block listing is important.

US considerationsUS securities law is relevant to any listing of DRs.The US Securities Act 1933 (the ‘Securities Act’)requires any issuer that proposes to offersecurities anywhere in the world to undertake alengthy US Securities and Exchange Commission(‘SEC’) registration process, unless an exemptionis available.

For issuers that do not intend to market DRs toinvestors in the US, an exemption from the SECregistration requirement is typically available underRegulation S of the Securities Act (‘Reg S’). Sucha transaction would be referred to as a

‘Reg S only’ deal. The main requirements ofRegulation S are that (i) the offer or sale of DRs ismade outside of the US in an offshore transaction;and (ii) no marketing of the DRs takes place in theUS (referred to as ‘directed selling efforts’).

For issuers that intend to market DRs toinvestors in the US (to access demand from USinstitutional investors), the US portion of thetransaction is typically framed within the scope ofRule 144A of the US Securities Act, whichprovides an exemption for resales of securities tosophisticated institutional investors, known asqualified institutional buyers (‘QIBs’). Such atransaction, which would also need to rely onRegulation S in respect of sales to investorsoutside of the US, would be referred to as a‘Reg S/144A’ deal.

l issuer applies for up to 100 DRs to beadmitted to the Official List but limits theIPO to 25 DRs (ie only 25 of the DRs will beadmitted to trading on the Main Market)

l issuer is permitted to have up to 75additional DRs admitted to trading on theMain Market at any time following the IPOand in as many increments as it wishes(provided the initial listing on the OfficialList is maintained)

l no requirement to apply to the UKLA orLondon Stock Exchange for subsequentDRs admitted to trading (up to the upperlimit of the block listing)

l no requirement for a new prospectus forsubsequent DRs admitted to trading (up tothe upper limit of the block listing)

l to enable the UKLA to monitor the statusof a block listing, the issuer is required tosubmit a form on a six-monthly basisstating how many of its DRs are admittedto trading.

Example of a block listing


Whether the DR listing is a Reg S only, or a RegS/144A deal, great care must be taken to ensurethat the conditions of the relevant exemptions aremet; sanctions for breach of US securitieslegislation can be severe and concerns aboutcompliance with the Securities Act can impede theability of legal counsel to deliver the requisiteopinions to underwriters, which can result insignificant delays in the IPO process. Hence theimportance of complying with the ‘publicityguidelines’ drafted for the issuer and the partiesworking with the issuer on its IPO.

Assessing suitability and eligibility for listing

depositary receipts

Eligibility criteriaIssuers seeking admission of DRs to the OfficialList in connection with a Main Market listing mustsatisfy both the general eligibility requirementsthat apply to all applicants to the Official List andthe specific eligibility requirements that apply toissuers of DRs (set out in Chapters 2 and 18 ofthe Financial Service Authority’s (‘FSA’) ListingRules, respectively):

l issuer must be duly incorporated andoperating in accordance with its constitution

l DRs must (i) conform to the law of theissuer’s place of incorporation; (ii) be dulyauthorised according to the requirements ofthe issuer’s constitution; and (iii) have anynecessary statutory or other consents

l DRs must be admitted to trading on the MainMarket

l DRs must be (i) freely transferable; and (ii)fully paid-up and free from all liens and fromany restriction on the right to transfer

l DRs, once listed, must be expected toachieve an aggregate market value of at least£700,000

l application must relate to the entire class ofthe relevant DRs (ie the application mustcover all DRs in issue or to be issued at the

time of admission to the Official List) l at least 25 per cent of the DRs for which

application is made must be in public hands(ie part of a public float, not held by majorshareholders or persons connected with theissuer) at the time of admission to the OfficialList and for the duration of the listing. Incertain limited circumstances the UKLA willagree to lower the 25 per cent threshold

l issuer must publish a prospectus approved bythe UKLA. This requirement works inconjunction with the FSA’s Prospectus Rules,which set out the circumstances in which anissuer must publish a prospectus. Note thatthe issuer’s ability to meet the disclosurerequirements for a prospectus – in particular,in relation to financial statements –effectively operates as an additional criterionfor eligibility.

As noted above, issuers of DRs are not required tosatisfy some of the more demanding eligibilitycriteria that apply to an issuer conducting aPremium Listing of equity shares. For example, aDR issuer is not required to produce a three-yearfinancial track record that relates to at least 75 percent of its business, nor is a DR issuer required topublish audited accounts no older than six monthsfrom the date of the prospectus, or satisfy theUKLA that it has sufficient working capitalavailable for at least the next 12 months. Theprospectus does, however, need to contain allmaterial information, so financial statementrequirements still need serious consideration,particularly where the issuer has made significantacquisitions or disposals.

Eligibility letter To demonstrate compliance with the UKLA’seligibility requirements, the issuer must submit tothe UKLA an ‘eligibility letter’ no later than on thedate of the first filing of the prospectus (seeexample transaction timetable on pages 96 and97). In addition, although not required by the rules,

continues on page 98

Stage Timeline Action

Planning 24 weeks prior topricing (referred toas T) (date onwhich price of DRsis agreed,underwritingagreement is signedand conditionaldealing in DRscommences)

• issuer and underwriters to plan strategy and structure of listing• underwriters and legal advisers commence due diligence• assess issuer’s eligibility for listing• prepare and submit UKLA pre-eligibility letter (if appropriate)• prepare and submit UKLA eligibility letter (no later than on date of first

submission of draft prospectus)

Documentdrafting

T - 16 weeks • begin drafting prospectus • conduct diligence meetings and drafting sessions

• when draft prospectus is substantially complete, submit to UKLA withannotations (directing the UKLA as to how the issuer has complied withits specific disclosure obligations) with:o cover letter (drafted and signed by issuer’s legal counsel)o prospectus disclosure checklist (not signed) o application for prospectus to be approved by the UKLA (Form A)(signed by issuer)

o UKLA listing and document vetting fees • UKLA requires 10 full working days for review of first submission and 5

full working days for subsequent reviews• work towards clearing UKLA comments on draft prospectus; make

further submissions of the prospectus by filing: o comparison document showing amendments to prospectus sincepreviously submitted version

o updated prospectus disclosure checklisto completed document response sheet (demonstrating how UKLAcomments have been resolved)

T-8 weeks • begin negotiating underwriting agreement (‘UA’)

Marketing T- 2-6 weeks • obtain ‘no further comments’ clearance on prospectus from UKLA • arrange date for UKLA approval of the prospectus (‘stamp off’)• ensure ancillary UKLA listing documents are submitted at least 20

business days prior to desired date for stamp off (10 business days forissuers with securities already admitted to the Official List):o issuer contact details formo prospectus publication formo issuer board resolution authorising listing

• liaison with London Stock Exchange:o submit draft application for admission of securities to trading (Form 1 ),draft prospectus and other documentation requested by London StockExchange

o underwriters to discuss conditional dealings (if required)with London Stock Exchange

• print preliminary prospectus (with all information finalised save for price)• marketing/roadshow

Example transaction timetable for listing DRs

Page 96 Preparing to list depositary receipts


Pricing T • issuer and underwriters to agree price • issue press release to announce price• finalise and sign UA • DRs allocated to investors / conditional dealing (if required) begins• obtain UKLA stamp off on prospectus by submitting:

o two clean copies of final prospectus dated with the date of approvalo comparison document showing any changes to prospectus since previousUKLA review

o completed prospectus disclosure checklist (signed by issuer, dated dateof approval)

• print and publish final prospectus

• arrange listing hearing with UKLA (for no sooner than 48 hours followingprospectus stamp off) by submitting:o application form for listing hearingo application for admission to the Official List (signed by issuer)o stamped final prospectuso issuer board resolution confirming number of DRs to be issued

• arrange for London Stock Exchange to consider application for admission ofDRs to trading (at least two business days before unconditional trading inDRs is requested to begin, if applicable) by submitting:o completed Form 1o copy of final prospectuso front cover of prospectus with UKLA stampo London Stock Exchange fees to be paid following admission to trading

Closing T+2 • DRs delivered to investors, payment transferred to issuer (‘settlement anddelivery’)

• Listing admission hearings:o UKLA considers the application for admission of the DRs to the OfficialList

o London Stock Exchange considers application for admission to trading ofthe DRs to trading on the Main Market

Admission T+3 • DRs are admitted to listing and trading from 8:00am (when London stockExchange publishes its dealing notice)

• settlement of trades with investors• unconditional dealing in DRs begins• announce admission of DRs via Regulatory Information Service (RIS) /

press release

Example transaction timetable for listing DRs (continued)

Not all DR transaction timetables include a period of Conditional Dealing (also known as When Issued Dealing (WID)). Issuersshould assess whether a period of WID dealing is required in conjunction with their advisers. WID is a period of conditional dealingwith deferred settlement ahead of full admission. Trades during the WID period, are conditional on the security being listed and canonly settle once trading has become unconditional. Where the security does not list, all transactions effected during the period ofWID are void. WID is made available by the Exchange on request and at its discretion. WID will normally last for a period of threebusiness days.


it may be prudent to submit a pre-eligibility letterto address any particular issues unique to theissuer, for example, issues related to the financialdisclosure the issuer plans to present in theprospectus.

Since DR issuers are not required to appoint asponsor, the issuer’s legal counsel will typicallyliaise with the UKLA on the issuer’s behalf, initiallyto establish its eligibility for listing and ultimately toachieve the admission of its DRs to the Official List.

Admission timetable

The timetable for a DR listing will differ from dealto deal and will depend on each company’sindividual circumstances. For illustrative purposes,the table on pages 96 and 97 presents an exampletransaction timetable for an IPO of DRs on theMain Market, based on a total transaction lengthof 24 weeks.

The prospectus

Requirement for a prospectusIn connection with an application for DRs to beadmitted to trading on the Main Market an issuermust publish a UKLA-approved prospectus. Thepreparation of the prospectus requires a significanteffort on the part of the issuer and its advisoryteam and is one of the principal determinants ofthe deal timetable.

Due diligenceDue diligence is typically undertaken by theunderwriters and, particularly if the deal involves aplacement in the US, both the issuer’s andunderwriter’s legal counsel. Due diligence helpsprotect the issuer, its directors, and theunderwriters from liability and reputational damage.

The due diligence process might include:

l meetings with senior management and otherkey personnel

l meetings with key shareholdersl review of material documents relating to the

issuer and its group (usually the issuer willcreate a physical or electronic data room forthis purpose)

l site visits to view the issuer’s principalassets and operations

l prospectus drafting sessions, at whichfurther questions are put to the issuer’ssenior management in the context of theactual text of the draft prospectus

l preparation of specialist reports, such asmineral experts or property valuationreports, or a report of financial reportingprocedures

l representations and warranties from thecompany and selling shareholders

l delivery of comfort letters from theaccountants

l delivery of legal opinions from counsel.

General content of the prospectus

The overriding disclosure obligationThe principal purpose of a prospectus is to providepotential investors with the information necessaryto make an informed assessment of the issuer andthe rights attaching to the DRs. In other words, theprospectus must contain all information that couldbe relevant to an investor’s investment decision –this is the overriding disclosure obligation. Itsupplements the equivalent overriding disclosureobligation under US rules if the transactionincludes a placement in the US.

Detailed disclosure requirementsIn addition to satisfying the overriding disclosureobligation, the prospectus must meet a number ofdetailed contents requirements, which are set outin Annex X to the FSA’s Prospectus Rules.

The detailed disclosure requirements that applyto prospectuses for DR listings differ in certainrespects from those that apply to prospectuses


for share listings. For example, unlike in aprospectus relating to a share listing (either aPremium or a Standard Listing), there is norequirement for a DR prospectus to include aworking capital statement (to the effect that theissuer and its group has sufficient working capitalavailable for its requirements for the 12 monthsfollowing the date of the prospectus), and therequirements relating to financial disclosure canbe more demanding in the context of a shareprospectus, particularly where the issuer has acomplex financial history.

Despite these differences, the disclosure in a DRprospectus is likely to look very much like that in ashare prospectus, largely because of the overridingdisclosure obligation to ensure that it contains allmaterial information (an obligation which appliesequally to shares and DRs). This is particularly thecase in DR deals that will be marketed to USinvestors – Reg S/144A deals – where thedocument is likely to be drafted with a keen eye onthe stringent disclosure requirements in the US.

Financial disclosure The issuer’s consolidated financial statements andthe accompanying analysis set out in the operatingand financial review section of the prospectus arecritical to an investor’s investment decision. UnderAnnex X, a DR prospectus must include:

l audited financial statements prepared inaccordance with International FinancialReporting Standards (‘IFRS’), covering thelatest three financial years, or such shorterperiod that the issuer has been in operation.Non-EU issuers that do not prepare IFRSfinancials will be spared the requirement torestate their financials into IFRS if they havebeen prepared in accordance with generallyaccepted accounting standards (‘GAAP’) thatare ‘considered to be equivalent to IFRS’ (asof the date of publication the GAAP ofCanada, China, India, Japan, South Korea

and the US are considered equivalent for thispurpose)

l interim financial statements (which may beunaudited) covering at least the first sixmonths of the year if the last audited annualfinancial statements will be older than ninemonths from the date on which theprospectus will be approved.

In certain cases, however, it is not sufficient for anissuer to limit the financial disclosure in theprospectus to the Annex X requirements. Theissuer also must meet the overriding obligation todisclose all material information, which in certaincircumstances will demand the disclosure ofadditional financial information, above and beyondthat required under Annex X.

For example, it is not uncommon for an issuer tohave been incorporated as a new holding companyfor the listing. Such an issuer might not have anyfinancial history of its own. In such circumstances,investors would reasonably expect to see thefinancial history of the underlying business in orderto make an informed investment decision.Alternatively, the issuer might have recentlypurchased, or agreed to purchase, another largebusiness. The disclosure will likely need to dealwith that new business, perhaps through pro formaand/or separate financial statements related tothat business depending on its materiality andother information that can be provided about thatbusiness.

To ensure that an issuer in circumstances such asthese meets the overriding disclosure obligation,one typically cross-refers to the rules that apply toshare listings. An issuer of shares whose financialstatements do not provide investors with a fullpicture of the underlying business is deemed tohave a ‘complex financial history’.

Such an issuer is required to disclose (i) thefinancial statements of another entity (for


example, the entity that operates the issuer’sunderlying business); and/or (ii) pro formafinancial statements that demonstrate the impactof a recent or anticipated transaction (such as theacquisition or sale of a large business) on theissuer’s financial statements.

While the complex financial history regime for shareissuers does not apply to DR issuers, it is notuncommon for DR issuers to look at it by analogy tohelp satisfy the overriding disclosure obligation – inparticular, by including the financial statements ofan entity other than the issuer. The issuer and itslegal counsel would usually address issues relatingto the financial statement package with the UKLAby means of a pre-eligibility letter and agree anapproach at an early stage in the transaction.

Drafting stylel the prospectus should be drafted in a manner

that is comprehensible and easy to analyse l it should avoid bullish rhetoric and ‘marketing

speak’ in favour of neutral language, balancedand complete descriptions, and factualstatements that can be substantiated

l discussion of the issuer’s prospects requiresparticular care

l forward-looking statements will to someextent be necessary (for example, to describethe issuer’s strategy or material capitalexpenditure plans). These statements shouldbe drafted carefully to avoid unnecessaryexposure to liability (ie if the anticipatedevent or outcome does not occur)

l drafting should try to ensure that the issuer’sbeliefs and expectations are not construed asstatements of fact and, for material matters,might be accompanied by discussions of thefactors that could cause actual outcomes todiffer from those envisaged

l profit forecasts – statements that could betaken to suggest, for example, that the issuerwill generate a particular income in the future– should generally be avoided.

Responsibility and liabilityA DR issuer is required to make a statement in itslisting prospectus to the effect that it takesresponsibility for the contents of the prospectus. Inaddition, third-party experts who have preparedinformation or reports for use in the prospectus(such as reporting accountants and mineralexperts) are required to accept responsibility forthe contents of their reports. Unlike in a sharelisting, there is no requirement for the issuer’sdirectors to take express personal responsibilityfor the prospectus.

Any party that takes responsibility for aprospectus will be liable under the FinancialServices and Markets Act 2000 (‘FSMA’) to paycompensation to any person who acquires DRsand suffers a loss as a result of any untrue ormisleading statement, or a material omission, inthe prospectus. Depending on the circumstances,investors may be able to bring a claim under adifferent head of liability (for example, under thecommon law either for negligent misstatement, orfalse or misleading pre-contractual misstatement)against the issuer and potentially others; however,the FSMA offers investors a clear, purpose-builtroute to recovery.

In practice, steps will be taken to help guardagainst the issuer’s (and its directors’) potentialliability through the due diligence carried out by itand its advisory team prior to, and in connectionwith, the drafting of the prospectus prior to itspublication.

Advising the issuer after listing

Continuing obligations regimeAn issuer with DRs trading on the Main Market isrequired to comply with a range of continuingobligations. The majority of these requirements areset out under the FSA’s Disclosure andTransparency Rules. The key theme in this contextis disclosure. Disclosure of pertinent information to


the market allows investors to make informedinvestment decisions. This, in turn, promotesinvestor confidence and facilitates the properfunctioning and development of the market.

For many issuers, particularly those conducting anIPO, the practice of disclosing material informationto the market is likely to represent a significantdivergence from previous practice. It is thereforecrucial that the issuer is properly advised ofexactly what it will be required to do once its DRsare listed. This advice must be delivered at asufficiently early stage in the listing process toenable the issuer to introduce procedures toensure that it is able to comply with its continuingobligations immediately after listing.

One of the very first steps a DR issuer needs totake, in advance of listing, is to appoint aRegulated Information Service (‘RIS’), such as theLondon Stock Exchange’s Regulatory NewsService. The issuer is required to make itsdisclosures to the market via its appointed RIS.

Disclosure obligationsIn overview, a DR issuer admitted to trading on theMain Market is required to disclose to the marketvia its appointed RIS:

l information that could affect the price of theDRs (‘inside information’) – as soon aspossible after it arises

l periodic financial reports – DR issuers arerequired to publish an annual financial report,no later than four months after the relevantyear end (six months for issues of DRsadmitted to the PSM). In addition, DR issuerscustomarily publish half-yearly reports.

Disclosure of inside information As soon as an issuer submits its application for itsDRs to be admitted to trading on the Main Marketor the PSM, it is required to notify its appointedRIS as soon as possible of any inside information

which directly concerns it, save in a narrow set ofcircumstances in which the rules entitle it to delaydisclosure.

In the context of DRs, inside information isinformation that:

l is precise l has not been made publicl relates (directly or indirectly) to the issuer or

the DRsl would be likely to have a significant effect on

the price of the DRs if made public (ie is‘price sensitive’).

The issuer must consider each set ofcircumstances on its own merits and reach ajudgement as to whether it is in possession ofinside information and, therefore, whether anannouncement is required (or, alternatively,whether there are grounds to justify delaying anannouncement). Very often, the key considerationis whether the information in question is pricesensitive. The requirement to disclose insideinformation is also discussed in the chapter ‘Thelegal framework for an IPO’ on page 31.

Periodic financial reporting In addition to the requirement to disclose insideinformation on an ad hoc basis, a DR issuer onthe Main Market must publish its annual financialreport as soon as possible after it has beenapproved and, at the latest, four months after theend of the financial period to which it relates (sixmonths for issuers on the PSM).

In summary, the annual report must contain:

l audited consolidated IFRS financial statementsl management report, including a corporate

governance statement (disclosing thecorporate governance code to which theissuer is subject; the extent of itscompliance with such code; and a


description of the issuer’s internal controland risk management arrangements inrelation to its financial reporting process)

l responsibility statement, attesting to theaccuracy of the information in the report.

Unlike issuers of listed shares, DR issuers are notrequired to produce half-yearly reports or interimmanagement statements. However, it is commonfor DR issuers to publish half-yearly reports as aresult of market expectation and best practice.

Disclosure of transactions by personsdischarging managerial responsibilities The requirement to publish details of transactionsin the issuer’s shares carried out by ’personsdischarging managerial responsibilities’(‘PDMRs’) and their connected persons does notapply to DR issuers. However, the UKLA has atleast informally stated that compliance with thePDMR regime by DR issuers would be bestpractice.

Regulation of market behaviour In addition to the continuing obligationsdisclosure regime described above, DR issuers,by virtue of having securities admitted to tradingon the Main Market, must refrain from certainbehaviour – broadly referred to as ‘market abuse’– that could prejudice investors and jeopardisethe efficient operation of the market. Both civiland criminal market abuse regimes apply toissuers with DRs listed on the London StockExchange, as well as to their directors and otherofficers.

Continuing obligations that do not apply toissuers of depositary receiptsAs noted earlier, DR issuers are not subject to thefull demands of the continuing obligations regimethat applies to issuers of shares (particularly thosewith a Premium Listing of shares).

Some DR issuers comply with the PDMRregime on a voluntary basis as a matter of bestpractice.

A PDMR is a director or a senior executive ofthe issuer who:

1. has regular access to inside informationrelating, directly or indirectly, to the issuer;and

2. has power to make managerial decisionsaffecting the issuer’s future development andbusiness prospects.

If the regime were voluntarily followed to theletter, PDMRs and their connected personswould notify the issuer in writing of theoccurrence of all transactions conducted ontheir own account in the issuer’s securities,within four business days of the day on whichthe relevant transaction occurred. Thenotification would include:

l name of the PDMR or, where applicable,the connected person

l name of the issuerl reason for requirement to notifyl description of the relevant securityl nature of the transaction (for example, an

acquisition or disposal)l date and place of the transactionl price and volume of the transaction.

The issuer would then notify the aboveinformation to an RIS as soon as possible (and,in any event, by the end of the business dayfollowing receipt of the information by theissuer).

PDMRs

DisclosureIn terms of disclosures to the market, DR issuersare not required to publish:

l half-yearly financial reports or interimmanagement statements

l details of acquisitions or disposals of majorshareholdings

l details of transactions in the issuer’ssecurities carried out by PDMRs and theirconnected persons.

However, as noted above, many DR issuers makesome or all of the above disclosures on a voluntarybasis as a matter of best practice.

Corporate governanceDR issuers are not required by the rules to followthe expansive corporate governance regime withwhich issuers of Premium Listed equity sharesmust comply, including:

l Listing Principles l UK Code on Corporate Governancel Model Code (while the Model Code does not

apply to DR issuers, the guidance it provideson when an issuer and its senior managementmay conduct trades in the issuer’s shares isinstructive to DR issuers planning to conductsuch trades)

l requirement to obtain shareholder approvalfor related-party transactions

l requirement to prepare circulars and obtainshareholder approval for major transactions.

An issuer might nevertheless give seriousconsideration to complying with certain of thesecorporate governance rules to assist with themarketing of its DR listing and if it has ambitionsto progress to a Premium Listing of equity shares,to acclimatise to the more demanding regime itwould be required to follow as a Premium Listedissuer.

Page 103Preparing to list depositary receipts

Establishing a depositary receipt programme

Alex H.Hickson and Peter Russell

J.P. Morgan

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The products and services featured above are o�ered by JPMorgan Chase Bank, N.A., a subsidiary of JPMorgan Chase & Co. JPMorgan Chase Bank, N.A. is registered by the FSA for investment business in the U.K. JPMorgan is a marketing name for Worldwide Securities Services businesses of JPMorgan Chase & Co. and its subsidiaries worldwide. © 2010 JPMorgan Chase & Co. All rights reserved.

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Global Depositary Receipts (GDRs) have risen toprominence in recent years, becoming the favouredinstrument used by companies from emergingmarkets, such as Russia and India, to raise capitalon western stock exchanges:

l companies from more than 70 countries havedepositary receipt programmes providing themwith new investors outside their home markets

l more than 1,500 issuers have a sponsoreddepositary receipt programme

l more than 350 GDR programmes are listed onstock exchanges, of which 190 are listed onthe London Stock Exchange (the ‘Exchange’).

For investors, GDRs facilitate investment in theseforeign issuers while limiting many of thecomplexities and costs associated with cross-border investments, such as the settlement andcustody of shares and foreign exchangetransactions.

GDRs can carry many attributes of an issuer’s localshares; they can provide similar economic rights(including the right to receive dividends), and ifstipulated in an issuer’s deposit agreement, votingrights in the issuer. For both issuers and investors,there are many more measurable benefits toestablishing a GDR programme and listing on aninternational exchange.

Structuring the GDR programme

GDRs have proven to be very flexible. When usingGDRs to access Western capital markets, issuersinterested in attracting international investors haveseveral options:

Public offering and listingIn a public offering, GDRs are offered toinstitutional investors and listed on an internationalstock exchange outside the issuer’s home market.The offering will be underwritten by an investmentbank. A public offering is generally used bycompanies seeking to raise substantial amounts of

capital and increase their profile in the market inwhich the offering will be conducted. A GDRoffering can be aimed at European investors in asingle tranche under Regulation S (‘Reg S’) whichexempts offerings conducted outside of the USfrom Securities and Exchange Commission (‘SEC’)registration and reporting, or in two tranches: Reg Sto non-US investors and to US institutionalinvestors via Rule 144A (see below). A listing on an


Benefits to an issuer:l offers a flexible mechanism for capital

raising and a currency for mergers andacquisitions

l diversifies the shareholder base, withpotentially greater liquidity for theunderlying shares

l enhances visibility among internationalinvestors, consumers and commercialcustomers

l enables price parity with global peersthrough the provision of internationallyrecognised information

l may increase research coverage outside thehome market.

Benefits to an investor:GDRs also offer tangible benefits to investorsseeking to diversify their portfolios globally:

l easier to purchase and to hold than anissuer’s underlying ordinary shares

l trade easily and conveniently in US dollarsand settle through established clearinghouses

l eliminate unfamiliar custody arrangementsl limit risks associated with limited

transparency or instability resulting fromchanging regulatory procedures in emergingmarkets

l option to acquire the underlying sharesdirectly upon cancellation.

Benefits of GDRs


international exchange provides transparent tradingoutside the usual market hours. GDRs will typicallybe offered to investors in the exchange’s region.For example, a listing on an exchange in Europewould be aimed at attracting a substantial portionof European investors.

Rule 144A trancheTo access a broader pool of liquidity, GDR issuerscan include a US institutional element through arestricted private placement of DRs, which isexempt from US securities law registration andreporting. Institutional investors legally able toparticipate in Rule 144A offerings are known asQualified Institutional Buyers (‘QIBs’).

ListingIssuers can list their GDRs without raising capital – known as an ‘introduction’. By listing, issuers willhave access to a wider group of institutionalinvestors as well as increasing their visibility andname recognition. From a documentation anddisclosure perspective, there is generally littledifference between an introduction and a capitalraising, other than the description of the sale ofshares that would be included in an offeringprospectus. While listing alone does not raisecapital, it does enable companies to enter amarket and get to know the participants withoutincurring the expense and requirements of acapital raising. At the same time, an introductionshould only be considered together with initiativesaimed at raising secondary market liquidity.

Placing (private placement)A placing is usually a more selective processwhereby GDRs are offered to a small number ofselected institutions. While this route gives theissuer more control over the distribution, it canrestrict the shareholder base and naturally limitliquidity. In the secondary market, such privately-placed GDRs would be trading Over-The-Counter(‘OTC’). Unlike in the US, where OTC platformsare regulated, GDR OTC trading in London takes

place outside a dedicated platform and thereforeprovides little visibility to the issuer.

Creating GDRs

A GDR is issued and administered by a depositarybank on behalf of the (underlying) corporate issuer.Depositary receipts can be created or cancelleddepending on supply and demand, with brokerseither bringing additional ordinary shares to thedepositary to create more GDRs, or withdrawingordinary shares to cancel from the GDR facility.GDRs are created when the shares of a foreignissuer – either those currently trading in its localmarket or newly-issued shares in connection withan offering of securities – are deposited with adepositary’s custodian in the issuer’s homemarket. The depositary then issues GDRsrepresenting those shares. At any time thereafter,an investor can sell these GDRs in the secondarymarket (eg the Exchange’s International OrderBook), or deliver the GDRs to the sponsoringdepositary bank for cancellation in order to receivethe underlying ordinary shares for settlement orsale in the foreign issuer’s local market.

Typically, GDR programmes are governed by aDeposit Agreement agreed to by the issuer andthe depositary bank, which, among other things,outlines the terms and conditions of the GDRprogramme.

Setting the GDR-to-share ratio

The initial price of a GDR primarily depends on theratio between the number of GDRs and theunderlying shares (‘GDR ratio’). This ratio can varywidely; one GDR may represent an ownershipinterest in many shares of corporate stock orrepresent only fractional shares, depending onwhether the GDR is priced higher or lower thanthe underlying ordinary shares.

There is no particular rule for setting the ratio, withthe ease of calculation and relevance of the GDRprice to the international norm for share prices


being primary considerations. Most GDRs arepriced comparably to shares of peer companiestrading on the same exchanges. While manysuccessful programmes are established with aratio of 1:1, many issuers with low home marketprices have GDR-to-share ratios of 1:5, 1:10, oreven 1:1000 etc. Companies deciding on a GDRprice and the corresponding ratio should considerthat:

l liquidity is enhanced when there is a significantnumber of GDRs eligible for trading; investorsare more likely to buy GDRs that are perceivedto be liquid and fairly priced

l while the fundamentals may be the same, aninvestor typically prefers to buy 100 shares ofa US$20 stock instead of 10 shares of aUS$200 stock.

The GDR ratio initially selected may affect thetransaction costs that investors will pay. Forinstance, since fees for issuance (and cancellation)are assessed in cents per GDR, a GDR that ispriced ‘too low’ can add incremental transactioncosts for investors (see chart ‘Issuance andCancellation of GDRs’ on page 113 for adescription of the issuance and cancellationprocess). A ratio is established at the outset, butcan be changed at any time by the issuersubsequently if the GDR price moves too faroutside market parameters.

Most of the factors driving GDR prices are thesame as those affecting the underlying shares:company fundamentals and track record, relativevaluations and analysts’ recommendations and, ofcourse, market conditions. The international statusof the company is also a key factor. Investorsbuying GDRs pay in dollars but are investing in anasset that moves in line with a foreign currencyand foreign market. The ratio is simply part of thestructure surrounding the investment that makes iteasier to manage.

The deposit agreement

As a first step toward establishing a GDRprogramme, the foreign issuer and its chosendepositary bank jointly sign a deposit agreement.This contract details the legal relationship andobligations of the depositary bank and the issuer,describes the services the depositary and issuerwill provide, and sets out the rights of GDR holdersand the fees they must pay the depositary bank.While some terms are standard, deposit agreementprovisions may vary from programme toprogramme, depending on the legal requirementsof the foreign issuer’s home market and theobjectives of the issuer.

The deposit agreement includes provisions relatingto the following:

l deposit of the issuer’s sharesl execution and delivery of the GDRsl issuance of additional shares by the issuer in

compliance with applicable securities lawsl transfer and surrender of the GDRsl setting of record dates by the depositary

bankl voting of the foreign issuer’s underlying

shares (ie the shares evidenced by theGDRs)

l obligations and rights of the depositary bankand holders of the GDRs

l distribution by the depositary bank of cashdividends, stock dividends, rights to acquireadditional shares of the issuer and otherdistributions made by the issuer

l circumstances in which reports and proxiesare to be made available to GDR holders

l tax obligations of depositary receipt holdersl fees and expenses to be incurred by the

issuer, the depositary bank and GDR holdersl pre-release of GDRsl protections for the depositary bank and the

issuer (ie limitations on liabilities).


Admission to listing on the

London Stock Exchange

There are two London Stock Exchange marketswhich admit GDRs to trading:

l the Main Market l the Professional Securities Market (‘PSM’).

When applying to the Exchange for admission, thecompany specifies the market on which it wouldlike its GDRs to trade.

Main MarketMost GDR issuers choose to list on the MainMarket. GDRs traded on the Main Market areobliged to follow the rules for EU-regulatedmarkets, which are enshrined in the FSA’sProspectus Rules, Listing Rules and Disclosure andTransparency Rules. As in the case of any otherissuer, the FSA requires full disclosure of all majorrisk factors in the prospectuses of GDR issuers.GDR issuers are also required to comply with theLondon Stock Exchange’s Admission & DisclosureStandards. For full details of the prospectuscontents requirements see ‘Preparing to listdepositary receipts’ chapter on page 91.

Listing requirements for entry include:

(i) a prospectus prepared in accordance with theProspectus Directive, including IFRSaccounting (this applies to both a capitalraising or listing by introduction)

(ii) three years of trading history (or such shorterperiod for which the issuer has been inoperation)

(iii) a minimum GDR market capitalisation of£700,000; and

(iv) a minimum of 25 per cent of floated DRs inpublic hands.

By listing on the Main Market the company isagreeing to abide by the relevant continuingobligations. These include:

l publishing an annual financial report, withinfour months of its fiscal year-end. The annualfinancial report must include audited financialstatements, a management report andresponsibility statements and must remainpublicly available for at least five years

l publication of inside or price-sensitiveinformation via a Regulated InformationService (‘RIS’). By keeping the marketinformed in a timely manner through pressreleases and other announcements, the issuerallows all investors on all its markets to tradein a knowledgeable manner and on an equalfooting. Further, if the issuer believesinformation has been leaked regarding aconfidential or price-sensitive corporatematter, it is required to communicate with themarket to remove uncertainty regarding thestock.

It should also be noted that American DepositaryReceipts (‘ADRs’) can also be listed on theExchange. For example, several Russian ADRshave been listed by way of an introduction on theLondon Stock Exchange.

The Professional Securities Market The Professional Securities Market is operated bythe Exchange within the scope of its status as aRecognised Investment Exchange.

The PSM is only accessible by ‘wholesale’investors and, as such, the FSA is able to exerciseflexibility in the application of European directives.Issuers wishing to list on the PSM must meet thefollowing criteria:

(ii) latest three years of audited accounts (orsuch shorter period for which the issuer hasbeen operating)

(iii) minimum GDR market capitalisation of£700,000; and

(iv) national GAAP may be used in the preparationof the prospectus.


Flexibility with respect to accounting requirementsmay be a cost saving for many companies asreconciling to IFRS, or providing additionaldisclosure as required by the Prospectus Directive,could be very expensive. However, issuers mayneed to provide a description of the key differencesbetween their local accounting standards and IFRS.

Issuers choosing the PSM will have their listingparticulars approved by the UK Listing Authority(the ‘UKLA’, a division of the FSA). Although IFRSdoes not apply, disclosure obligations for listedcompanies do apply to companies represented onthe PSM.

Issuers admitted to trading on the PSM must meetcertain continuing obligations, including:

l disclosing price-sensitive information andtrading matters to the market as soon aspossible

l publishing an annual report and financialaccounts within six months of the year-end;and

l preparing and maintaining a list of personsconsidered ‘insiders’.

Notable examples of celebrated GDR listings onthe Exchange include Tata Steel’s US$500m capitalraising in July 2009 on the PSM and Rosneft’sUS$10.6bn offering on the Main Market in July2006.

Trading in GDRsGDRs, on both the Exchange’s EU-regulated MainMarket and the PSM, are traded on separatesegments of the Exchange’s International OrderBook (‘IOB’).

The IOB trading matches and executes incomingelectronic orders in DRs from over 46 countriesranging from Central and Eastern Europe, Asia andthe Middle East. Central Counterparty (‘CCP’) isprovided for over 70 of the most liquid DRsmitigating counterparty risk and ensuring both pre-

and post-trade anonymity. Firms wishing toadvertise their presence on the book can choose toidentify themselves by using Named Orders. Anoptional netting service is available on the IOB,provided by LCH.Clearnet, which enables firms tonet same-day, same-security trades at the CCPlevel for trades in cleared securities. Trades in DRsexecuted on the Exchange’s Cleared IOB servicesettle within Euroclear.

GDRs (including those that are constituents of theMain Market and the PSM) can be traded inparallel on alternative platforms – quotationplatforms of other exchanges as well as multilateraltrading facilities (MTFs) such as Turquoise.

Parties involved in establishing a GDR

programme

Establishing a GDR programme requires closecoordination between the issuer, its chosendepositary bank and each firm’s legal advisers.When raising capital, the issuer also relies onaccountants, investment bankers and investorrelations firms. The table ‘Key roles andresponsibilities of parties to a GDR programme’ onpage 112 summarises the roles and responsibilitiesof each programme partner.

GDR certificate

GDR certificates are typically not issued toinvestors holding GDRs or those holding 144ADRs. A master certificate is issued either directlyto a securities depositary, such as the DepositaryTrust Company, or to a Common Depositary whichwill hold the master certificate on behalf ofsettlement systems such as Euroclear andClearstream, investors and the depositary bank. AsGDRs are issued and cancelled, the number ofGDRs represented by the master GDR is adjustedup and down accordingly.

Euroclear and Clearstream are the two centraldepositaries in Europe, through which the tradingand settlement of GDRs is documentedelectronically. These two entities work under the


Depositary bank

• provides advice/perspective on type of programme, exchange or market on which to list or quote

• advises on ratio of depositary shares to ordinary shares

• appoints custodian

• coordinates with all parties to complete programme implementation steps on schedule

• coordinates with legal counsel on Deposit Agreement and securities law matters

• announces GDR programme to market (brokers, traders, media, institutional investors via news releases and internet)

• works with issuer to maintain active GDR programme

• coordinates with issuer to announce and process corporate actions such as dividends and shareholders’ meetings

Custodian

• receives local shares in issuer’s home country

• confirms deposit of underlying shares

• holds shares in custody for the account of depositary in the home market

Issuer

• provides depositary and custodian with notices of dividends, rights offerings and annual and special shareholder meetings

• interacts with listing authority and responds to all questions

• IR/PR targeted programme

• adheres to stock exchange regulations and accepted corporate governance standards, including reporting and transparency

Legal adviser (for the depositary and for the issuer)

• reviews draft deposit agreement received from depositary bank

• submits requisite documents to local regulatory authorities and exchanges

• manages compliance with securities laws, rules and regulations and perfects any securities law exemptions

• provides corporate action support, as appropriate

Accountant

• prepares company’s accounts for insertion into prospectus

• reviews prospectus and interacts with authorities

• annual audit and prepares accounts in accordance with accepted standards such as IFRS

Investor relations adviser

• develops long-term plan to raise awareness of issuer’s programme in the markets in which GDRs will trade

• develops communications plan and information materials for launch activities (roadshow and presentations to investors,

meetings with financial media)

• coordinates with issuer’s advertising and public relations teams on specific programme plans to support and develop

company image

Investment banks/Underwriters

• advise on size, pricing, marketing of offering, type of programme and selection of exchange or market, and ratio of DRs to

ordinary shares

• act as placement agent or underwriter in offering

• conduct roadshows with management/introduce issuer to institutional and other investors

• lines up dealers and co-underwriters

• cover issuer through research reports/promote DRs to investors

• advise on roadshows, investor meetings, investors to target

Key roles and responsibilities of parties to a GDR programme


rules of ‘client confidentiality and non-disclosure’and consequently neither the issuer nor thedepositary is able to obtain and confirm informationregarding the identity of beneficial holders of GDRs.Specialist vendors may assist with shareholderidentification using proprietary databases ofcustodian accounts and regulatory methods ofengagement with institutional investors.

Corporate actions and dividends

With respect to corporate actions, the depositarybank acts as a bridge between the issuer and GDRholders outside its home market. To the extentpossible, the depositary provides GDR holders withbenefits comparable to those received by theissuer’s domestic shareholders.

If dividends are to be paid on the underlyingsecurities, the depositary bank provides fordividends to be converted and net proceeds, afterdeduction of any taxes and fees, to be paid out inthe currency of the GDR, (typically US dollars). TheGDR investor carries the foreign currency risk, asthe amount of the dividend will be affected by anymovement of the US dollar against the investor’shome market currency.

When the dividend record date and payment datefor the domestic shares have been established bythe issuer, the dates are given immediately to thedepositary so that it can:

l set the record and payment dates for the GDRbased on the agreed-upon calendar andmarket requirements, and then communicatethese dates to the markets. For example, theExchange expects at least three businessdays’ notice of any record date. This allows itto notify the market and properly announce theex-date

l announce preliminary (estimated) dividendpayment amounts based upon the exchangerate between the issuer’s domestic currencyand US dollars on the date of theannouncement

l arrange for the dividend, received from theissuer directly or via the depositary’scustodian, to be converted from thedomestic currency into US dollars. The finalrate per GDR will be announced once thedividend has been converted and the actualrate per GDR has been calculated

l distribute to GDR holders the dividend, net ofany required tax withholding and/or any fees.

Issuances Cancellations

1. Investor calls broker with an order to buy 100 GDRs in anissuer.

1. Investor calls broker with an order to sell 100 GDRs in anissuer. At settlement (usually T+3), the investor will deliverthe GDRs to the broker.

2. Broker can fill order by either buying GDRs on theinternational exchange on which they trade, or purchasingordinary shares in the local market and having themconverted into GDRs.

2. Broker completes the sell order by either selling GDRs on theinternational exchange on which they trade, or converting theGDRs to ordinary shares and selling such underlying sharesin the local market.

3. If the broker chooses to buy in the local market, they willconduct their trade via a local broker. The broker will thennotify the depositary bank to expect the delivery of shares atthe local custodian.

3. If the broker sells in the local market, they will conduct theirtrade via a local broker. If the broker converts the GDRs toordinary shares, the broker will deliver the GDRs to thedepositary bank for cancellation and provide the necessarydelivery instructions for the ordinary shares.

4.The custodian notifies the depositary bank when the sharesare credited to its account and instructs it to deliver theGDRs to an account specified by the broker.

4. The depositary bank instructs custodian to deliver localshares to account provided by broker, subject to seller’spayment of GDR cancellation fees and any other applicablecharges.

5.The depositary bank delivers GDRs to the investor’s broker,subject to the buyer’s payment of GDR issuance fees.

5. Custodian delivers shares as instructed.

6. Broker delivers GDRs to investor. 6. Local broker receives shares.

Issuance and cancellation of GDRs


Where possible the depositary bank will alsofacilitate dividend tax reclaim or relief at source toallow GDR investors to benefit from favourable taxrates under double taxation treaties.

For more complex corporate actions, such as rightsissues and corporate restructurings, the depositaryis typically made a party to the transaction so thatit can work with the issuer and its advisers todevise the appropriate structure and distributionchannel for the GDR investors.

Shareholder meetings

The deposit agreement outlines the issuer’sresponsibilities, if any, to GDR holders with respectto shareholder meetings. For good corporategovernance purposes, issuers typically give theirGDR holders the right to vote at the shareholdermeeting. The issuer’s depositary bank providesguidance as to the timing and mechanics fordistributing information and voting cards to GDRinvestors.

The issuer provides the depositary bank with thenecessary information as far in advance as possibleof a shareholder’s meeting. Six to eight weeks’notice is optimal. This timeframe enables thedepositary bank to prepare the voting instructioncard, distribute it through the clearing systems tothe GDR holders, receive voting instructions fromthem and arrange to have the underlying sharesvoted at the meeting in accordance with thoseinstructions.

The depositary bank also assists the issuer withpreparation and review of the documentationrequired to comply with general GDR marketpractices. This includes coordination with the localcustodian and regulators to prepare authorisationsand documentation to comply with local marketregulations and procedures for GDRs.

Some issuers are keen to get a high level ofparticipation from their overseas holders. In thiscase, issuers may contact their GDR investors

directly using proxy solicitation vendors to discussany questions they have regarding the resolutionsand to encourage them to submit their vote.

Investor relations (‘IR’)

As a company transitions to a publicly-listed entity,it must provide the investment community withincreased transparency into the organisation,comply with regulations and communicate goals,market opportunities and growth strategies. Inpractice, this requires the issuer to develop itsreadiness for IR in the pre-IPO phase and sustainclear and consistent communications after theGDRs begin trading.

Driving sufficient demand for a company’s GDRs,over time, requires a comprehensive IR strategyaimed at continually raising the company’s visibilityamong GDR investors and effectivelycommunicating its investment story. It is importantthat the depositary bank is well placed to provideIR advisory services in support of the issuer’s GDRprogramme.

A depositary bank can help enable the issuer tomake the best first impression in the capitalmarkets, immediately begin building trust withGDR investors and set the stage for optimalvaluation over the long term. The services providedby a depositary bank’s IR advisory team include:

l IR strategy and calendar – assistance in thedevelopment and execution of an IR actionplan aimed at achieving specific goals

l investor targeting, with a focus on GDR-specific investors (analysis to identifyinvestors for roadshows)

l best practice advice on investorcommunications, including performanceguidance and disclosure

l internal IR reporting procedures.

Sample timetable for establishing a GDR programme

Issuer UKLA LSE Broker Sponsor Depo A L IR

12-24 weeks before admission

Establish/organise transaction team √ √ √ √ √ √ √

Detailed timetable and responsibilities agreed √ √ √ √ √ √ √ √ √

6-12 weeks before admission

Draft preliminary offering circular (Note: depositary bank provides‘description of GDRs’ for offering circular) √ √ √ √ √ √

Initial review of pricing issues √ √ √

Begin planning US and European roadshow and ongoing investor relations:create communications materials and target institutional investors √ √ √ √

Select GDR/ordinary share ratio √ √ √ √

3-6 weeks before roadshow

Due diligence on prospectus √ √ √ √ √

Roadshow meetings √ √ √ √ √

Formally submit and agree all documents with UKLA √ √

Print pathfinder prospectus for Regulation S component if required √ √ √

Negotiate Deposit Agreement √ √ √

Translate Deposit Agreement, if applicable √ √

Specific to Russia-incorporated issuers:

Prepare applications to FSFM and FAS, if applicable √ √ √ √

Apply and receive FSFM approval for GDR programme establishment andFAS clearances √ √ √ √

1 week before admission

All documents completed and approved by UKLA √ √ √ √

Pricing and allocation meeting √ √ √ √ √

Register prospectus √ √ √

Admission week

Formal application for London Stock Exchange listing and admission totrading √ √ √ √

Apply for PORTAL system eligibility (for Rule 144A programme in the US) √ √ √ √

Arrange Euroclear, Clearstream and DTC eligibility for book-entrysettlement and delivery √ √ √ √

Closing: execute Deposit Agreement; placement agent delivers cashproceeds to issuer; depositary bank’s custodian receives underlying shares;depositary delivers GDRs to lead placement agent through DTC,Clearstream and/or Euroclear

√ √ √

Where permitted, send announcement of programme to broker community √ √ √ √

Post-Closing

40 days after the last closing of the Regulation S-only issuance, the issuerand depositary bank may file a Form F-6 with SEC to establish a Level IADR programme

√ √ √

Timeframes are indicative. Regulator’s involvement and issuer’s programme specifics may vary and can materially affect timing. The UKLA’s listingrules require that the minimum amount of time between the initital submission of documents and approval is 20 working days.

Key to parties involved: UKLA = UK Listing Authority, I = Issuer, Depo = Depositary Bank, A = Accountant, L = Legal adviser; IR=Investor relations.Other parties, specific to Russian-incorporated issuers: FSFM = Federal Service for Financial Markets, FAS: Federal Antimonopoly Service.

Publishing editor: Nigel Page

Publisher: Tim Dempsey

Design: London Stock Exchange plc

Printing and binding: Argent Litho Ltd

A guide to listing on the London Stock Exchangeis published by:

White Page Ltd, 17 Bolton StreetLondon W1J 8BHUnited KingdomPhone: + 44 20 7408 0268Fax: + 44 20 7408 0168Email: [email protected]: www.whitepage.co.uk

First published: November 2010ISBN: 978-0-9565842-1-2

A guide to listing on the London Stock Exchange© 2010 London Stock Exchange plcand White Page Ltd

Copyright in individual chapters rests with theauthors. No photocopying: copyright licencesdo not apply.

This guide is written as a general guide only. Itshould not be relied upon as a substitute forspecific legal or financial advice. Professionaladvice should always be sought before takingany action based on the information provided.Every effort has been made to ensure that theinformation in this guide is correct at the time ofpublication. The views expressed in the articlescontained in this guide are those of the authors.

London Stock Exchange, AIM and the coat ofarms device are registered trademarks ofLondon Stock Exchange plc. The publishersand authors stress that this publication doesnot purport to provide investment advice, nordo they bear the responsibility for any errors oromissions contained herein.

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Copyright November 2010 London Stock Exchange plcLondon Stock Exchange, the coat of arms device and AIM are registered trademarks of the London Stock Exchange plc.

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Whatever your company’s size or sector, we can put you at the heart of one of the world’s most sophisticated financial communities.

The Main Market is home to approximately 1,400 companies from over 60 countries, including some of the world’s most successful and dynamic organisations. So far this year £20.8 billion has been raised on the London Stock Exchange, of which £17.9 billion has been raised on the Main Market.

Here at the London Stock Exchange we help companies to access the deepest pool of international capital. Premium Listed companies on the Main Market meet the highest listing standards helping to raise their corporate profile and increase their exposure to investors.

Learn more about the Main Market and why leading companies choose to list on the London Stock Exchange – www.londonstockexchange.com/mainmarket

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