An introduction to UK Initial Public Offerings

23 September 2013

Our corporate experts run through the basics of bringing a business to an IPO on the London markets.

The London Stock Exchange (LSE) offers unrivalled opportunities for foreign companies to seek investment from around the world to maximise their potential. An Initial Public Offering (IPO) in London could catapult your business from domestic enterprise to global brand. Expert legal advice is required to ensure that the process runs smoothly.

Why choose an IPO in London?

The high profile associated with becoming a listed Public Limited Company (PLC) in the UK can enhance a Chinese company's brand reputation and expand its customer base. A listing can also improve trust and loyalty from suppliers and customers as the PLC will have to comply with stringent rules on the transparency of information about material business developments in order to maintain its listed status.

As well as having the opportunity to raise significant funds to help grow the business, the PLC will also be able to use shares as consideration for future acquisitions, thereby saving precious cash resources. An IPO is a significant move, tying up large amounts of management time and requiring careful planning, but the potential rewards for a successful flotation on the LSE are significant.

The LSE is the largest stock market in Europe and fourth largest in the world. Companies listed on the LSE have a combined market capitalisation of more than USD 3.2 trillion, around USD 500 billion more than Hong Kong and USD 850 billion more than Shanghai. London has close geographic and business links with mainland Europe and a longstanding position as the go to market for investors from the US.

Around one in five companies listed on the LSE's markets come from overseas. The Exchange has close ties with China, with branches in both Beijing and Hong Kong. There are 54 Chinese companies listed on the LSE with a market capitalisation of £18.3 billion; between them they have raised more than £6.5 billion.

IPO listing requirements

Companies listing on the LSE can choose a premium, standard or high growth listing on the main market, or a listing on the junior Alternative Investment Market (AIM). The most easily accessible market is AIM. AIM offers a less strict regulatory system than a main market listing, with no minimum level of capitalisation and no minimum trading requirements, making it easier for the Chinese company to meet the eligibility criteria.

The main market is operated by the LSE and is regulated by the UK Listing Authority (UKLA), a division of the Financial Conduct Authority (FCA). In order to list on the main market, the Chinese company must comply with the UKLA's Listing Rules (LR).

The company must have a duly incorporated PLC structure in the UK. Its shares must be admitted to trading on a regulated market, the shares must be issued in accordance with the company's constitution and the issued share capital must meet the required minimum. Furthermore, the application for listing must relate to all shares of the same class issued or due to be issued and an approved prospectus must be provided.

The main market listed company will need a stock broking firm or merchant bank to act as sponsor for the initial listing and for certain transactions thereafter, but there is no requirement to permanently retain the sponsor.

The AIM market is operated and regulated by the LSE. The key to regulation of AIM listed companies is the nominated advisor (Nomad) - the equivalent of the sponsor. AIM listed companies are required to retain the Nomad during the initial listing and throughout the lifespan of the listed company.

The Nomad is responsible to the LSE for ensuring that the company is suitable for initial listing and complies with ongoing requirements under the AIM rules. The Nomad will normally be a stockbroking firm, investment bank or accountancy firm but should not be the same as the reporting accountant or auditor (unless adequate safeguards to guarantee independence can be put in place). The Nomad should be independent of the listed company and must comply with their duties to the LSE under the Nomad Rules.

It is important to make sure you work with a sponsor or Nomad that understands the sector in which your company operates and is able to work closely with the management team as the Nomad will have a significant role in the stock market life of the company.

The main differences between the four different types of UK listing are detailed in this table.

Main Market (premium) Main market (standard) High Growth Segment (main market) AIM
Minimum of 25% of shares must be held by the public. Minimum of 25% of shares must be held by the public. Minimum of 10% of shares must be held by the public. No minimum requirements for public shareholding.
Three year trading record required (must show at least 75% of its business is supported by historic revenue earning records for the three years prior to the prospectus and that it has enough working capital to cover the next 12 months). Three year trading record required. Historic revenue growth of 20% for the past three years. No trading record required.
Admission documents will be pre-vetted by UK Listing Authority (UKLA). Admission documents will be pre-vetted by UK Listing Authority (UKLA). Prospectus will be pre-vetted by the UKLA. No pre-vetting of admission documents by the UKLA.
Requirement for minimum market capitalisation of £700,000. Requirement for minimum market capitalisation of £700,000. Value of free float must be £30 million, implying a minimum market capitalisation of £300 million. No minimum market capitalisation requirement.
Sponsor needed for certain transactions. No sponsor or advisor required. Key adviser required to assist with admission and give ongoing advice on certain transactions. NOMAD required at all times.
Prior approval needed from shareholders for substantial acquisitions or disposals. No prior shareholder approval required for transactions. No prior shareholder approval required for transactions. No prior shareholder approval required for transactions except a reverse takeover.
Regulated market (UKLA). Regulated market (UKLA). UKLA listing rules do not apply, EU regulated market. No UKLA regulation, LSE operates and regulates market.
Must comply with listing, transparency and disclosure rules. Must comply with listing, transparency and disclosure rules. Must have its own rulebook governing the admission process, eligibility and continuing obligations. Must comply with AIM rules, but not bound by transparency, listing or disclosure rules (save for DTR 5 which requires individuals to declare the percentage of voting rights they hold as a shareholder).
Must comply with UK Corporate Governance Code or explain against non-compliance. Must comply with EU Company Reporting Directive. Must comply with EU Company Reporting Directive. No need to comply with either code, just the AIM rules.
Overseas companies must have pre-emption rights for existing shareholders. No restriction. No restriction. No restriction.

Due diligence

Due diligence is a vital part of any IPO. The sponsor or Nomad will require a comprehensive report covering all aspects of the company from a financial, legal and business perspective. Effective due diligence is essential to (a) satisfy the sponsor or Nomad that the company is suitable for listing and (b) protect against any inaccuracies or misleading statements in the prospectus (main market) or the admission document (AIM).

Inaccuracies could lead to litigation if investors are misled, and possible criminal charges against directors for false or misleading statements. Legal due diligence will involve a questionnaire prepared by the legal advisors to help assess the strengths and weaknesses of the company, while financial due diligence involves detailed analysis by an independent firm of accountants of the company's accounts for the three years prior to the listing.

Timing and marketing

Timing an IPO well is important because the first few days after the shares start trading can be crucial in determining the success or failure of the offering. Seasonal businesses should time the IPO to coincide with their busiest trading months, while major UK public holidays and the traditional European summer break in July/August should be avoided. Marketing the shares and participating in investor roadshows are important in ensuring a successful flotation and adequate time should be set aside after the due diligence and prospectus preparation have been completed to allow for marketing activities.

Roadshows provide a chance for the management of the company to engage directly with potential investors, gauge demand for the shares and answer questions and address potential problem areas. The roadshows normally take place after a draft or "pathfinder" prospectus (or, for AIM listings, the admission document) has been produced, but before the underwriting agreements are signed and final pricing of the IPO is agreed.

Corporate governance and continuing obligations

Companies seeking a premium listing on the main market need to either comply with the UK Corporate Governance Code or explain in their annual report the areas in which they have not complied. Chinese companies should be aware of the Code and market practice is for companies to comply even though it is not compulsory for standard main market or AIM companies.

The Code is designed to protect shareholders' interests and covers issues including directors' remuneration, equality/diversity policies and the make-up and activities of the audit committee. The Code also requires a full and honest statement of the company's financial position and future prospects.

It is important to note that these are continuing corporate governance obligations and a publicly listed company will have to comply with these throughout its public lifespan. Main Market listed companies will need to comply with the Disclosure and Transparency Rules (DTR) and all significant information pertaining to the running of the company, its finances and proposed dealings should be made public. AIM listed companies must comply with the reduced disclosure obligations in the AIM rules.

In order to comply with the Code, the roles of Chairman and Chief Executive should be split and the board membership should include non-executive directors. These non-executive directors are not full or part time employees of the company; they are effectively independent advisors who devote only part of their time to their role on the board. They provide a measure of independence on issues such as remuneration, compliance with the Code and publication of information.

Reputational issues and disclosure obligations

Protecting the company's reputation and brand is essential in preserving the value of the company's shares. This will require much greater care for a PLC than an unlisted company.

When a company is listed on the LSE it is under a duty to disclose significantly more information than a private company. Not only will financial results and directors' interests be publicised, but the company, its staff and its executives will come under increased scrutiny from the trade press and even national media. An adverse report, even on a small area of the company's operations, can have a significant impact on share prices and it is important to bear in mind reputational issues when making business decisions.

The company must regularly update the market on its progress against financial targets and on major acquisitions or takeover plans in order to comply with the DTR or the AIM rules (as appropriate). AIM listed companies must comply with the AIM rules and certain provisions of the DTR, including the requirement for the company to notify the market of significant changes in voting rights or shareholdings. The company should retain legal advisors to help it understand its disclosure obligations.

Next steps

The benefits of an IPO in London are significant, but they can be realised only if the company plans and executes the transaction carefully. Appointing legal advisors early and taking care over the due diligence, drafting of the prospectus or admission document and marketing of the IPO are all important steps. Chinese companies can enhance their reputation and open up a new source of capital by floating on the LSE.


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