Contributed By Baker McKenzie (London)
The main market is the London Stock Exchange's ("LSE") flagship market for larger, more established companies, comprising the premium listing and standard listing segments, but also operating the specialist fund and high-growth segments.
The premium listing eligibility requirements are the most stringent in the United Kingdom, as are the ongoing obligations with respect to compliance and disclosure standards.
AIM is the LSE’s international market for smaller and growing companies and its regulatory environment is designed accordingly.
The professional securities market is a market for debt and depositary receipts which are admitted to the Official List.
See 1.1 Main Equity Markets or Exchanges.
A premium listing on the Main Market comes with potential for inclusion in the FTSE UK series of indices, such as the FTSE 100, FTSE 250 and FTSE Small Cap indices.
The key inclusion criterion is for a company to be assigned "UK nationality". For example, a UK company is required to have a minimum free float of 25% and have its sole listing in the UK, whereas a non-UK company must have a minimum free float of greater than 50% and must publically acknowledge adherence to the principles of the UK Corporate Governance Code, pre-emption rights and the UK Takeover Code, as far as practicable.
The regulatory authority for a company listed on the Main Market is the Financial Conduct Authority (“FCA”) in its capacity as the UK Listing Authority (“UKLA”). The FCA makes decisions with respect to the eligibility for admission and regulates compliance with ongoing obligations.
For an AIM-quoted company, AIM Regulation, part of the LSE, enforces the AIM Rules for Companies and the FCA enforces the Market Abuse Regulation.
See 1.4 Regulatory Bodies Governing the Listing Process.
Listing and/or prospectus approval on the Main Market involves the UKLA reviewing the prospectus. The FCA admits the shares of issuers seeking a premium or standard listing to the Official List, and the LSE admits the shares to trading on the Main Market.
Application will need to be made to the LSE for any proposed admission to trading on AIM. The company will need to prepare an admission document to be sent to investors, assuming the admission to trading does not constitute an offer to the public requiring the publication of a prospectus.
Generally, the issue and trade of equity securities are governed by the Financial Services and Markets Act 2000 (“FSMA”), the Companies Act 2006, the FCA's Rules (Listing Rules, Prospectus Rules, Disclosure Guidance and Transparency Rules), and the EU Market Abuse Regulation.
AIM-quoted companies must comply with the provisions of the AIM Rules for Companies.
No response provided.
For companies incorporated in UK ("UK companies"), only public limited companies are permitted to offer shares to the public. Companies that are not incorporated in the UK ("non-UK companies") must be validly incorporated and established under any relevant local laws in their jurisdiction of incorporation/registration.
For the Main Market, a company must have an aggregate share value of at least GBP700,000. AIM-quoted companies have no minimum size or market capitalisation requirements, except for “investing companies” (also known as “cash shells”), which must raise at least GBP6 million.
For the Main Market, a minimum of 25% of the class of shares to be listed must be in public hands in one or more European Economic Area (“EEA”) Member States. AIM-quoted companies have no minimum free float requirement, but their nominated adviser ("Nomad") must consider liquidity.
For the Main Market, the prospectus must include audited historical financial information for three financial years and any interim financial information published since the last audit. For AIM-quoted companies, the admission document must include audited accounts for the past three financial years (or fewer if the company has been in existence for less than three years).
For the Main Market, an operating history of three years is generally required (subject to certain modifications to these requirements for mineral companies, scientific research based companies and property companies). For AIM-quoted companies, there are no requirements to demonstrate any length of operating history.
Premium listed companies must offer pre-emption rights to existing shareholders (however, these can be, and commonly are, disapplied with shareholder approval).
A company seeking a premium listing must appoint a sponsor to provide to the FCA confirmation of the company's eligibility, whilst AIM-quoted companies must appoint a nominated adviser, who is responsible to the LSE for assessing the appropriateness of an applicant for AIM.
Under the FCA's Listing Rules (“LRs”), there are a number of types of specialist companies for whom the basic eligibility conditions for a premium listing are modified. Mineral companies, scientific research based companies and property companies can meet alternative requirements.
The LSE makes no distinction between primary and secondary listings or quotations in respect of admission to the main market or to AIM.
The IPO process typically takes between four and six months from beginning preparations to the start of trading, and would typically include the following steps.
Getting IPO-ready: an issuer should consider which entity to list and which companies and assets are to be in and out of the IPO perimeter. The issuer should undertake an assessment of corporate governance arrangements, including board composition, independent directors and committee structures, as well as the current remuneration and compensation of directors and executive management. The issuer should also prepare three years of full audited financial statements and interim financial statements (where necessary), under International Financial Reporting Standards.
Preparing the IPO: as part of the kick-off and structuring process, an issuer should appoint relevant advisers and finalise the structure of the offering. The issuer, together with its legal counsel, should then begin to drafting the prospectus, in accordance with legal and management due diligence. The investment banks will prepare marketing materials and analyst research, test the market for investor interest (including through early look presentations and pilot fishing), and begin to determine the initial price range.
Executing the IPO: once the offering has been announced, undertake an investor roadshow, a bookbuilding exercise and determine the final price. Execute the underwriting agreement and other transaction documents.
Closing and settlement: delivery of comfort letters from external auditors, legal opinions and disclosure letters from counsel, undertake bringdown due diligence, complete the delivery of shares against payment and admission to listing and trading.
The key difference between UK and non-UK companies relate to settlement. All shares listed or admitted to trading on the LSE must be capable of electronic settlement. Although UK companies are eligible for direct participation in CREST, the UK electronic settlement system, non-UK companies need to establish a depository arrangement with a UK bank or other provider which will issue depository interests representing the company’s underlying shares because depository interests are eligible for settlement within CREST.
Foreign issuers can list either shares or depositary receipts, and the choice between the two is usually driven by market practice in the originating jurisdiction of the issuer.
The use of a UK entity for listing purposes is more common, principally because of the easier route to FTSE index inclusion. In most cases, offerings will involve a primary element, often coupled with a secondary element. IPOs which are purely secondary in nature are less common. There are no mandatory retail or local offer requirements.
The main types of follow-on offering used in the UK are rights issues, open offers and private placings or accelerated bookbuilds. These procedures do not differ in the event of a primary or secondary listing of the listed company.
Rights issues: pro rata offer of new shares for cash, made to existing shareholders by way of an issue of rights, where the rights to subscribe for new shares are tradable.
Open offers: pro rata offer of new shares for cash, made to existing shareholders by way of an issue of entitlements, where the entitlements are not tradable.
Placing or accelerated bookbuild: the non-pre-emptive issue of new shares (or sale of treasury shares) for cash to institutions only.
See 4.1 Structuring Subsequent Equity Offerings.
See 4.1 Structuring Subsequent Equity Offerings.
The key advisers usually appointed in connection with an equity offering include:
In the context of an IPO specifically:
Under section 85 of the Financial Services and Markets Act (“FSMA”), a prospectus is required if:
As AIM is not a regulated market, no prospectus is required to be drawn up or approved by the Financial Conduct Authority (“FCA”), provided that there is no offer to the public. Instead, an AIM admission document will be published in accordance with the AIM Rules for Companies.
The prospectus must include the information prescribed by the FCA’s Prospectus Rules, and as an over-arching requirement, must also contain all of the information necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profits and losses and prospects of the issuer of the shares, and of the rights attaching to the shares. This includes disclosure of risk factors.
In addition, the prospectus should include audited historical financial information for the latest three financial years, as well as any quarterly or half-yearly financial information that the company has published since its last audited financial statements, together with all audit or review reports with respect thereto.
The main categories of information include historical financial information, risk factors relating to the company and its industry, a description of the company’s business, a description of the company’s operating and financial history for the periods covered by the financial statements and overview of the terms of the offering.
Under section 90 of FSMA, the "persons responsible" for a prospectus are liable to pay compensation to any person who has acquired securities and suffered loss as a result of any untrue or misleading statement in the prospectus or the omission of any matter required to be included.The categories of persons who are responsible include thecompany, the directors and each person who has authorised the contents of or accepts responsibility, either for the whole prospectus or any part of it (but in that case, only for that part).
In addition, a director may be liable for a negligent misstatement in (or omission from) the prospectus as a matter of common law. They may also be liable for fraudulent misrepresentation or deceit.
Under the Market Abuse Regulation (“MAR”), if a statement in the prospectus would give, or is likely to give, false or misleading signals about the securities, the company and the directors could be liable under MAR.
As the prospectus forms part of a contract between the company and investors, such investors may have a claim for damages against the company for breach of contract or rescission on the grounds of misrepresentation if any statement is untrue.
The company and the directors may have liability to the underwriter in respect of loss arising from an inaccurate or incomplete prospectus or under any warranties and indemnities.
A person is liable under section 1 of the Fraud Act 2006 if (among other things) they dishonestly make a false representation or dishonestly fail to disclose information which they are under a legal duty to disclose and, in either case, they intend thereby to make a gain for themselves or another or to cause loss to another.
If an officer of a company, with intent to deceive members or creditors of the company about its affairs, publishes or concurs in publishing a written statement or account (which could include a prospectus) which to their knowledge is or may be misleading, false or deceptive in a material particular, they may on conviction be liable to imprisonment under section 19 of the Theft Act 1968.
Under sections 89 and 90 of the Financial Services Act 2012, any person (including the company and its directors, employees and advisers) could be subject to criminal proceedings for any false or misleading statement or for dishonestly concealing material facts or for conduct which creates a false or misleading impression as to the market for or value of the equity securities.
Under section 398 of FSMA, it is an offence for a person to provide information which they know to be false or misleading, or to provide information recklessly which is false or misleading, in connection with an application for admission to the Official List or in purported compliance with any other requirement of FSMA.
Under LR, rule 6.12, a property company applying for a premium listing on the Main Market must include a property valuation report in the prospectus indicating that it has three years of development of its real estate assets represented by increases of the gross asset value of its real estate assets.
Once a prospectus has been approved by the UKLA, an applicant company is required to:
The main exemptions to the prospectus requirement, found in section 86 of FSMA, are if:
Section 21 of FSMA provides that a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity unless that person is an authorised person or the content of the communication is approved by an authorised person. A financial promotion communication would include every type of marketing material.
It is a criminal offence for a person to contravene the financial promotion restriction. However, there are a number of principal exemptions,including communications made only to shareholders of the company, in certain circumstances to employees of the company and related persons, and to, or directed at, various categories of sophisticated investors.
Under sections 89 and 90 of the Financial Services Act 2012 and common law, any person could be subject to criminal or civil proceedings for any false or misleading statements, dishonestly concealing material facts, or conduct which creates a false or misleading impression as to the market for or value of any securities, including the equity securities.
The giving of advice to potential investors on the merits of the securities may constitute a “regulated activity” for the purposes of FSMA. If any person who is not authorised under FSMA gives such advice, a criminal offence may be committed under section 19 of FSMA.
Under section 85(1) of FSMA, it is unlawful for transferable securities to be offered to the public in the United Kingdom unless an approved prospectus has been made available to the public before the offer is made.
Advertisements (ie, announcements which aim to specifically promote the potential subscription or acquisition of securities) must not be issued unless they meet the requirements listed in Prospectus Rule 3.3.2.
Research reports are typically prepared by analysts at the investment banks participating in an offering - "connected" research reports.
The key potential liability issues or regulatory/legislative requirements applicable to connected research reports include:
Typically, the banks/underwriters’ legal counsel will prepare research guidelines memorandum which provides guidance on minimising the risks associated with the preparation and dissemination of research reports (“Research Guidelines”).
The Research Guidelines set out the procedures and content restrictions for preparing the research reports to ensure the substantial consistency of factual information between the research reports and the prospectus. These will also require the imposition of a “blackout period” ahead of the publication of the prospectus (during which no research is published by the banks/underwriters).
Under the FCA's new COBS Rules (applicable only to IPOs on the Main Market), connected analysts are to be given access to the same information on an IPO candidate as unconnected analysts, and a prospectus or registration statement must be published before connected research can be published.
Bookbuilding is the standard method by which equity offerings are priced and allocated in the United Kingdom.
The underwriting for an equity offering can be structured either as a firm commitment or on a best efforts basis, although this will typically depend on the value of the proposed equity offering, the relative negotiating positions of the issuer and underwriters and the perceived market “appetite” for an equity offering.
As the key agreement between the issuer, any selling shareholders and the underwriter(s), this records the commitment of the underwriters, managers or placement agents to underwrite the securities for the company and/or the seller(s), and to place them with the investors for agreed fees and expenses. It will also allocate the commercial and legal risks between the parties in relation to the offering and placement of the securities, including with respect to the indemnification for underwriters by the issuer and shareholders. The agreement will include material undertakings, representations, warranties given by the issuer and selling shareholders, lock-up provisions and establish closing conditions precedents and termination rights.
Underwriting commissions are typically structured with a base percentage commission and an additional incentive fee payable at the discretion of the issuer or based on specific pricing targets for the transaction.
Although there are prohibitions on price stabilisation in UK and EU legislation, each of these provide either exemptions, defences or safe harbours for price stabilisation undertaken in accordance with Article 5 of MAR, as matter of public policy.
With respect to market manipulation more generally, the civil prohibition on market abuse is contained in MAR and works in tandem with the criminal sanctions against insider dealing and market manipulation. Broadly speaking, market abuse under MAR consists ofinsider dealing, unlawful disclosure of inside information and market manipulation under the Criminal Justice Act 1993. The FCA has published a set of provisions (“MAR 1”) which give guidance to assist in establishing what type of conduct would be permitted and prohibited as market abuse for the purposes of MAR.
There are no special rules regarding “block trades”, but these must comply with the relevant civil prohibitions on market abuse and criminal sanctions against insider dealing and market manipulation.
Any equity issuances in the UK will be subject to English law, as well as the customary US securities law requirements and the securities law of any other jurisdiction into which the securities are offered.
Subject to its compliance with English securities laws, an underwriting agreement can be governed by either English or New York law.
The general principle is that an express choice of law and/or jurisdiction will typically be upheld by the English courts, which do not lightly override the parties’ autonomy to choose the governing law or the forum in which to settle their disputes (particularly where parties have agreed exclusive jurisdiction should apply). However, for contracts concluded after 17 December 2009, under EU Regulation 593/2008 (“Rome I”), the freedom of the parties to choose a governing law is subject to a number of carve-outs, and the determination of the governing law applicable to any non-contractual obligations (those obligations which arise from outside the scope of a contract) is subject to Regulation 864/2007 (“Rome II”). In addition, for proceedings instituted after 10 January 2015, EU Regulation 1215/2012 (“Recast Brussels Regulation”) will apply to claims within its domain, even if the parties are not domiciled in an EU Member State, and contains a number of carve-outs from this general principle.
Foreign judgments and arbitration awards are generally enforceable in the UK.
Recognition of an application for the enforcement of a foreign judgment is usually granted ex parte. The other party has one month from service to apply to set aside registration (two months if the other party is outside the UK). The limitation period for registering a foreign judgment for enforcement is six years for enforcement by action on the writ, 12 months for judgments from Australia, Canada, Guernsey, Isle of Man, Jersey, India, Pakistan, Surinam and Tonga and six years for most other Commonwealth countries.
Recognition of an application for the enforcement of a foreign arbitration award is usually granted ex parte. The other party then has 14 days from service to apply to set aside registration (sometimes longer if the other party is outside the UK). The limitation period for registering a foreign arbitration award is 6 years.
A shareholder being domiciled in a foreign jurisdiction is not likely to affect its ability to enforce any of the transaction documents related to an issuance of equity securities.
Subject to their compliance with the relevant English securities laws (which may have differing eligibility criteria and/or requirements for foreign entities versus UK entities entering into equity transactions or offering their equity securities in the UK), there are no restrictions on foreign entities entering into equity transactions or offering their equity securities in the UK.
The key tax issues in the UK are (i) stamp duty and stamp duty reserve tax (“SDRT”), (ii) taxation of chargeable gains and (iii) taxation of dividends.
The UK applies no domestic withholding tax to the payment of dividends by a UK company regardless of the residence of the shareholders holding the shares in respect of which the dividend is paid. In addition, the receipt of dividends by both UK companies and non-UK resident companies carrying on a trade in the UK through a permanent establishment will usually (subject to satisfying a number of conditions) be exempt from UK corporation tax.
No stamp duty or SDRT will generally be payable on the allotment and issue of shares in a UK company.
An instrument used to transfer UK shares will generally be liable to stamp duty at 0.5% (rounded up to the nearest multiple of GBP5) of the chargeable consideration, which includes cash, shares and certain other types of consideration paid.
Transfers of shares within CREST are liable to SDRT (at 0.5% of the amount or value of the consideration payable) rather than stamp duty, and SDRT on relevant transactions settled within the system or reported through it for regulatory purposes will be collected by CREST.
There should be no stamp duty or SDRT charged on transactions in shares that are admitted to trading on AIM.
Stamp duty and SDRT are normally paid by the purchaser.
Following recent announcements in the Autumn Budget 2018, it is anticipated that new legislation will be introduced in the Finance Bill 2018-19 to provide for a new market value rule where listed securities are transferred to a company (whether or not for consideration), and the person transferring the securities is connected with the company.
Special rules and exemptions are available which grant relief from stamp duty/SDRT for market makers, brokers, dealers and intermediaries dealing in UK shares (where certain conditions are met), and in relation to certain transactions involving depositary receipt systems and clearance services (where certain conditions are met).
A non-UK resident corporate shareholder will generally not be liable for corporation tax on chargeable gains accruing on the disposal of its shares unless it carries on a trade in the UK through a permanent establishment. The rate of corporation tax for the 2018/19 tax year is 19%.
The UK generally treats the non-UK resident company's obligations and liabilities as if they were obligations and liabilities of the company's "UK representative". The permanent establishment is the non-UK resident company's UK representative in relation to the profits attributable to that permanent establishment. The permanent establishment's obligations include notifying Her Majesty’s Revenue & Customs of the non-UK resident company's liability to corporation tax, completing a self-assessment tax return and making interim and final payments of tax. These obligations can be met however by either the permanent establishment or the non-UK resident company itself.
A company with a premium or standard listing is subject to a continuous disclosure requirement designed to prevent the creation of a false market in the company’s securities.
Under MAR, the company is required to publicly disclose any inside information without delay. A company may delay the disclosure of inside information in certain circumstances, provided that to do so is not likely to mislead the public and the issuer is able to ensure the confidentiality of the information. Where an issuer delays the disclosure of inside information, it must inform the FCA that disclosure of the information was delayed immediately after the information is disclosed to the public. The FCA may request that the issuer provide a written explanation of how these conditions were met.
A shareholder in a UK company must notify the company (which in turn notifies the market) when its interest is in respect of 3% or more of the voting rights (and every 1% threshold thereafter) as soon as possible (and not later than two trading days) after learning of the relevant acquisition or disposal.
Directors, other senior managers and persons closely associated with them (collectively known as “PDMRs”) must notify the company (which in turn notifies the market) and the FCA of the occurrence of all transactions conducted on their own account relating to certain financial instruments, including shares in the company. PDMRs must not conduct transactions on their own account (or on the account of a third party) during any closed period (30 calendar days before the announcement of the annual or interim financial results) or any period where there exists any matter which constitutes “inside information” in relation to the company.
Other disclosure requirements include a requirement to disclose the total number of voting rights attaching to shares for each class admitted to trading at the end of every month in which there has been a change. A company that has a controlling shareholder must have in place at all times a relationship agreement with the controlling shareholder and comply with certain other ongoing obligations to ensure the independence of the issuer. Transactions with a related party (including substantial shareholders, previous directors and associates of these parties) must be notified to the FCA and, in some instances, approved by shareholders.
Under AIM Rule 11, an AIM-quoted company must announce without delay new developments which are not public knowledge and which, if made public, would be likely to lead to a significant movement in the price of its AIM securities (and must also comply with Article 17 of MAR).
An AIM-quoted company must publicly disclose proposed substantial transactions, proposed related-party transactions, any transaction classified as a reverse takeover and disposals resulting in a fundamental change of business.
An AIM-quoted company must also publicly disclose details on certain types of transactions including any changes passing through a percentage point, so far as is known to the company, to any person’s holding 3% or more of the company’s shares, directors’ and their family members’ holdings and dealings in the company’s shares, any material change between actual trading performance or financial condition and any public forecast, projection or estimate and any change in the nomad or corporate broker.
Typically, most continuing obligations apply equally to foreign incorporated issuers, however the key differences between a UK and non-UK company are that:
Under FSMA, the FCA can impose unlimited fines, public censure, a temporary or permanent prohibition on an individual holding certain positions in an investment firm, a temporary prohibition on an individual acquiring or disposing of financial instruments and/or other penalties for engaging in market abuse. The FCA also has the power to require a company to publish specified information or a specified statement in certain circumstances.
100 New Bridge Street
+44 20 7919 1000
+44 20 7919 1999www.bakermckenzie.com