Withers Worldwide

Introduction

This note is intended as a general guide to assist a company (the ‘Company') which may be considering an IPO on the main market of the London Stock Exchange (the ‘Exchange'), to identify what steps should be taken towards achieving that aim.  This note also provides a checklist of some of the key considerations that should be borne in mind when deciding whether or not an IPO is right for the Company and/or its shareholders.

Listing in London

More than 3,200 companies are listed on the Exchange with a total market capitalisation in excess of US$9,000bn.  In 2007, 264 companies listed in London compared with 298 on the New York Stock Exchange (NYSE) and Nasdaq combined.  In 2007 companies on the Exchange raised US$87 billion compared to US$15 billion on the NYSE and US$20 billion on Nasdaq.

Why list and why in London?

The main reasons most companies give for obtaining a listing are to:

provide access to capital for growth	encourage employee commitment
create a market for their shares	increase a company's ability to make acquisitions
obtain an objective market value	create a heightened public profile
enhance status with customers and suppliers

A London listing has a number of attractions:

• The Exchange is the largest stock exchange in Europe and the world's most internationally focused.
• London is a global financial centre - all the major banks have offices in London.
• The great majority of all IPOs on Western European exchanges take place in London.
• London is well known for its high standards of regulation.

Main market

A company with an anticipated market capitalisation of £250m or more is likely to be looking at obtaining a listing on the main market rather than the AIM market assuming London is its first choice listing location.  The next issue to consider is whether the Company should undertake a primary equity listing or consider issuing global depositary receipts (‘GDRs')

Listing requirements for the main market - equity securities vs GDRS

The table below compares the key differences for admission for a primary equity listing as opposed to a listing of GDRs or a NYSE or Nasdaq listing.

	London Main Market (equity securities	London Main Market GDRs	NYSE	Nasdaq
Account Requirements	Latest 3 years audited accounts	Latest 3 years audited accounts (or such shorter period that the issuer has been in operation)	Latest 3 years audited accounts	Latest 3 years audited accounts
Recognised accounting standards	IFRS or equivalents	IFRS or equivalent	US GAAP	US GAAP
Market capitalisation	£700,000	£700,000	Earnings of US$100m over past 3 years with US$25m minimum in each year OR previous fiscal year revenues of US$100m plus average global market cap of US$1bn	Generally - 2 years operating history.  Stockholders equity of at least US$1m in Net Income OR a market cap/revenue/total assets of US$75m
Shares in public London	25%	25%	2.5m shares (worldwide)	1.1m shares

A common structure of offering by companies listing in London is to conduct an equity raising in London but also make what is known as a 144A offering of GDRS in the US.  The requirements for an equity offering are more stringent than those for a GDR offering and the table below set out the key criteria for an equity offering in addition to those set out above:

Minimum public float	25% of shares in public hands
Market capitalisation	£700,000 (in reality, ideally £100 - 200m or more)
Trading History	3 years
Accounting standards	IFRS or equivalent
Working Capital	Working capital statement covering 12 months following Admission
Shareholder approval for transactions	Class tests require shareholder approval for a Class 1 acquisition (broadly speaking acquiring or disposing of a company or assets worth more than a quarter of the company's value) or on a reverse takeover
Primary adviser	A sponsor must be appointed
Cost of listing	Minimum: £700,000 - £900,000 Typically 7-10% of funds raised
Ongoing costs	Higher fees for sponsors, auditors, lawyers and non-executive directors in view of greater continuing obligations.  Typical cost of maintaining listing is £300,000 - £400,000 p.a.
Lock-in requirements	None in theory, but in practice at least one year
Insider List and annual information update	Obligation to publish insider list and annual information update
Announce half year results	Within 2 months of end of period
Publication of full year accounts	Within 4 months of the end of the financial year
Interim management statements	Unless the Company publishes quarterly financial reports, its management must release a statement during the first 6-month period of any financial year and also during the second 6-month period
Disclosure of remuneration	Detailed directors' remuneration report
Number of independent non-executive directors (excluding the Chairman of the board)	Three
Limit on non pre-emptive share issues	5% per annum (or 7.5% in 3 year period)
Other conditions for a primary equity listing	At least 75% of the Company's business must be supported by a historic revenue earning record covering the last 3 financial years The Company must control and have controlled its assets for the last 3 financial years The Company must be carrying on an independent business as its main activity The total of all warrants or options to subscribe for equity shares must not exceed 10% of the Company's issued equity share capital The Company's shares must be freely transferable and eligible for electronic settlement

  

What are the key obligations for fully listed companies?

In considering a London listing, the Company should be aware of a number of key obligations:

• The Company's shares must be freely transferable and eligible for electronic settlement.
• Retirement of Directors - in practice, the sponsor will require one-third of the board to retire by rotation each year.
• Notice Period - directors' service contracts to have notice periods of no more than 12 months.
• Remuneration of non-executive directors - non-executive directors not to be remunerated in shares or share options.
• Length of service of non-executive directors - annual shareholder approval required of any non-executive director who has served on the board for more than nine years.
• Shareholder approval - shareholder approval for substantial property transactions with directors and connected persons.
• Restrictions on dealing - no dealing in the two months prior to publication of half year and full year results and insider dealing and market abuse rules apply.
• Filing of accounts - accounts need to be filed within six months of year-end.

Advisers

The Company will need to appoint the following:

• Investment bank - the investment bank will manage the IPO process and co-ordinate the listing with the other advisors. Often, it will also act as financial adviser, sponsor (a supervisory role required by the Financial Services Authority) and underwriter. Normally, the lead bank acts as global co-ordinator and a number of banks will also be appointed as bookrunners.
• Lawyers - lawyers will be required to advise the Company itself, as well as any shareholder who is selling all or part of its stake as part of the IPO. The sponsor and underwriter will also require lawyers. The Company's lawyers will be responsible for drafting the ‘back end' of the prospectus which contains all legal information relating to the company including share capital, material contracts and litigation. They will also manage the ‘verification' process, which seeks to ensure that the prospectus is not misleading in any way, thus protecting the directors of the Company against any claims by investors for misrepresentation or a breach of section 80 Financial Services and Markets Act 2000, which entitles investors to sue for compensation if there is a materially misleading statement or omission in the prospectus.
• Reporting accountants - these must be separate from the Company's auditors, although they may be made up of a different team from the same firm. Essentially, the reporting accountant is responsible for reviewing the Company's financial record and internal systems for potential investors. They will prepare the long form report, the short form report (which is published in the prospectus) and the working capital report.
• PR Consultants - the PR consultants will help to generate positive publicity and interest in the IPO by targeting either investors among the general public or institutions or both.
• Others - the Company will need to appoint registrars, a receiving bank and any other advisors that may be required in relation to its specific business.

Preparing the way for a listing

Careful consideration should be given to the following issues in preparing for a listing:

• Deciding on the method of listing, e.g. an introduction to the market, raising new money, a public offer or a placing to institutional investors.
• Identifying any necessary changes to the board and/or its operations. If the shareholders have identified changes which need be made to the board or the shape of the business these should be enacted as early as possible.
• Ensuring the Company has sufficient internal resources to dedicate to the IPO.
• Beginning the valuation process.

Review of corporate structure and financial reporting

The Company and its lawyers will need to consider how best to approach the listing in terms of the Company's corporate structure and financial reporting history, given that the Company is not registered in the UK. 

Key issues will include:

• Whether the Company itself should be listed or should a UK holding company be created for the purposes of the listing?
• Reviewing and amending, as necessary, the Company's constitutional documents.
• Have the Company's accounts been prepared in accordance with International Financial Reporting Standards (IFRS)?
• Should the Company be seeking a primary equity listing or a listing of GDRs?

Due Diligence

As regards legal and financial due diligence for the IPO, this will understandably be a time consuming process.  Early preparation particularly as regards collating and centralising material contracts is important.

Tax

If the Company needs to be reorganised as part of the review of the corporate structure then any tax impact will need to be considered well ahead of time to ensure that any necessary tax clearances from the relevant fiscal authority can be obtained.

Individual shareholders who are disposing of all or part of their stake as part of the IPO will need to consider their own tax position and obtain appropriate advice.

Contents of the Prospectus

The following information will have to be included in the prospectus:

• Details of the Company's group structure and its subsidiaries.
• History of the Company and its share capital.
• The Company's business and future plans.
• Information about the sector in which the Company operates and its main competitors.
• Financial information for the last three years.
• Any regulatory regimes to which the Company is subject.
• Applicable corporate governance regimes and a statement of the Company's compliance with them.
• Directors' interests in the Company and their remuneration.
• Details of the Company's constitution.
• Details of any share option schemes either in place or proposed.
• Any ongoing litigation of a material value.
• Material contracts - these will include all contracts with advisors in relation to the IPO, as well as any key contracts the termination of which would have a material impact on the Company's business, and any other contracts that are not in the ordinary course of business.
• Details of how the proceeds of the listing will be applied.
• Risk factors affecting the Company's business.

Directors and employees

Directors' service contracts will need to be formalised since details of them will have to be disclosed for the purposes of the prospectus.

As part of the listing, the directors will be required to complete and sign a ‘Directors Questionnaire' setting out, inter alia:

• all directorships (whether executive or non-executive) of any company during the last 5 years;
• the number of shares, options, warrants or other securities held in any company;
• the details of any directorships of any company which has been put into liquidation, administration etc.;
• details of any investigation whether criminal, tax, insolvency or securities related;
• details of any UK or foreign judgements involving civil liability for fraud or other misconduct in connection with any directorships; and
• details of all criminal offences other than minor road offences.

Corporate Governance

The Company will have to be aware of and generally satisfy the ‘best practice' guidelines applicable to public companies contained in the Combined Code which regulate corporate governance.  Disclosure is required in the Company's report and accounts outlining to what extent they comply with the Combined Code. 

Among the more prominent issues raised in the Combined Code are the separation of the role of chairman and chief executive, the need for independent non-executive directors and effective internal controls. 

Best practice also typically includes the adoption by the Company of:

• Corporate governance guidelines; and
• Separate audit, remuneration and nomination committees.

How much does a listing cost?

The total average fees for a main market listing depend on the size, sector and structure of the Company coming to the market as this affects the nature and level of due diligence required.  The base level for admission costs would normally be in the region of £700,000 - £900,000.

On top of these fees, the Company will need to pay the broker's fees for raising the funds (unless listing by way of an introduction) which may be in the region of 4-6% of funds raised.

The Timetable

It is difficult to be precise on the length of time for a listing since the process is influenced by so many variables being the size, sector and structure of the Company, the method of flotation being used and the degree and complexity of due diligence which has to be conducted. Most flotations take approximately 6 to 9 months from the time that the decision is made to admission.

The process is complex and time-consuming and identifying a small team within the Company to commit their time and energies to driving the listing may be worth considering as it may be less disruptive than having all the directors continually interrupted during the course of their normal work.  However, either approach will still require all the directors at some stage or another to provide documentation and information and review the listing documentation.

The following is a rough timetable for a full listing on the Exchange (I-DAY refers to ‘Impact Day' - the day on which the company's prospectus will approved by the United Kingdom Listing Authority (‘UKLA') and published):

Deadline	Event
18 weeks before I-DAY	Board to approve listing in principle Company to appoint advisers Agree timetable for the listing, including the date for any necessary meetings and I-DAY itself Agree documents list for the listing Company's lawyers to review the Company's constitution to assess any internal steps to be taken in relation to the listing Other considerations such as tax clearances
14 weeks before I-DAY	Circulate first draft of prospectus and hold first drafting meetings Accountants to complete first draft of long-form report Company lawyers to finalise any necessary changes to Company's constitution Company lawyers to apply for tax clearances, if necessary
8 weeks before I-DAY	Drafting meetings on prospectus continues Submit early draft prospectus to Exchange for comments Receive tax clearances, if necessary Hold first meeting on underwriting agreement Accountants to begin preparing statement of indebtedness and working capital report
6 weeks before I-DAY	Drafting meetings on prospectus continue Draft prospectus submitted to UKLA at least 20 clear business days before publication Commence marketing and publicity for IPO, make public announcement of intention to list Accountants complete long form and working capital reports Company lawyers prepare first draft of verification notes
4 weeks before I-DAY	Drafting meetings on prospectus continues Accountants finalise short form report to be inserted into prospectus and statement of indebtedness Negotiations on underwriting agreement continue
3 weeks before I-DAY	Drafting meetings on prospectus continues All documents to be substantially agreed with UKLA Verification meeting to finalise verification notes
2 weeks before I-DAY	Finalise underwriting agreement Prospectus in pathfinder form Presentations to potential investors
2/3 days before I-DAY	Close application lists for investors Application for admission submitted to UKLA Completion board meeting
I-DAY	Admission to official list and CREST Trading commences

  

Conclusion

Listing a company on any stock exchange is a complex and time consuming process.  Choosing the right advisers together with early and careful planning will help ensure that the process proceeds more smoothly.