14 May 2012

Russia and CIS news: Issues to consider for founders/controlling shareholders of companies considering an IPO on the London Stock Exchange

Ben Simpson
Special counsel | UK

1. Obligations in relation to the IPO

1.1 Lock In

You will be asked to enter into a lock-in arrangement pursuant to which you are not able to sell your shares for a period of time (usually 6 months). You would usually want to negotiate in some carve outs to any such lock-in (e.g. to allow moving shares into a family trust or to family members).

1.2 Representations and warranties under the underwriting agreement

The bookrunners will require warranties from the founders/existing controlling shareholders stating that they believe that the prospectus contains all necessary information to enable investors to make an informed assessment of the company. A raft of other warranties relating to the IPO process and the company’s business are also usually included.

1.3 Statutory liability as a director of the company

If you are a director of the company, you will be required to take responsibility for the information in the prospectus and be a party to the underwriting agreement as the bookrunners will require the directors to give warranties.

1.4 Service agreement/letter of appointment

Normally, a new arm’s length service agreement or letter of appointment would be put in place in anticipation of the IPO. Typical issues to negotiate in a service agreement include termination provisions, gardening leave, the scope of your duties and your compensation package.

2. Your role in the management of the company after the IPO

Where you and your family will retain a controlling stake in the company post IPO, the bookrunners may require a relationship agreement to be put in place. You may also want to have a control agreement in place to avoid the disposal of a group of family holdings.

3. Structure of your holding prior to the IPO

It is important that you take steps in advance of the IPO to adopt the optimal structure for your holding. One way to do this is by ensuring that the jurisdiction chosen for the IPO vehicle does not jeopardise your personal tax position. Failing that, setting up a structure that will shield you from any unwanted liabilities should be considered. If you remain a significant shareholder in the company following the IPO, any restructuring is likely to need to be disclosed to the market, which could cause other investors to question your actions. It may also be restricted by the terms of the listing. For this reason, it is advisable that any new holding structure is adopted before the listing.

Ben Simpson Special counsel | London