Contributed by Shearman & Sterling.
1. Market Overview
London has long been considered one of the preeminent locations for a company considering listing of equity or debt securities. The London Stock Exchange’s (LSE) Main Market is the world’s most international market for the admission and trading of equity, debt and other securities, and despite the difficult market conditions, challenges of Brexit and current conditions relating to the spread of COVID-19, London has retained its leading position in 2019 and 2020 in terms of initial public offering (IPO) deal count, debt listings and deal volume as compared to all other European listing venues. The city’s deep and knowledgeable pool of institutional investors and stable and developed legal environment have laid the foundation for a thriving venue for primary and secondary offerings.
London’s equity and debt markets are relatively sector-agnostic and attract companies from a broad range of industries and geographies. In April 2019, Saudi Arabian Oil Company issued its inaugural USD 12 billion of bonds on the Main Market of the LSE, which is thought to be the most oversubscribed debt offering in history, while Abu Dhabi’s sovereign bond issuance raised USD 10 billion a few months later. Also in 2019, Airtel Africa plc, Trainline plc, Network International plc, Huatai Securities Co, Ltd, Finablr plc and Helios Towers plc each debuted on the LSE, with IPO pegging their initial valuations in excess of GBP1 billion.
However, despite a string of large IPOs, 2019 was generally a slow year for the equity markets in London, with PwC’s IPO Watch Europe 2019, reporting a 60% decrease in the number of IPOs reported on the LSE from 68 in 2018 to 27 in 2019. Similarly, the amount raised through those IPOs fell by 39% over the same period, from GBP9.6 billion in 2018 to £5.9 billion. This was largely precipitated by a significant reduction in the number of companies joining the LSE’s AIM, with only 10 admissions in 2019 compared to 34 in 2018, reflecting political instability surrounding Brexit, increased risk aversion on the part of investors and greater availability of growth capital in private markets. In contrast to slow IPO activity, the secondary equity markets were relatively active with placings increasing 19% year-on-year.
In 2019, 897 bonds were issued on the London Stock exchange with $377.4 billion in debt capital raised. These figures represent a slight increase in the number of bonds issued compared to 2018, but a corresponding decrease in the volume of debt capital raised year-over-year. That being said, 2019 saw a greater share of international debt issuers on the London Stock Exchange, with 53% of debt capital raised being for international companies, compared to only 48% in 2018. Moreover, listings on the LSE’s newly formed International Securities Market (ISM) have risen substantially since the ISM’s inception in 2017. In 2019, 131 bonds were listed on the ISM, with debt capital raised on the exchange increasing by 127% year-over-year to £36.6 billion.
2. Overview of the local stock exchange and listing segments (markets)
The LSE is the primary stock exchange in the United Kingdom, although there are also a small number of companies listed on other exchanges, including NEX Exchange and Euronext London (which is primarily used in cases where a company is pursuing a dual IPO on one of Euronext’s other European exchanges).
The LSE operates four main markets: the Main Market, the Alternative Investment Market (AIM), the Professional Securities Market (PSM) and the ISM. Equity securities are primarily listed on the Main Market or the AIM, while debt securities are primarily listed on the Main Market, PSM or the ISM.
The Main Market is the LSE’s flagship market and is a “regulated market” under the EU Directive on Markets in Financial Instruments (No. 2014/65/EC) (MiFID II). Issuers seeking admission to trade securities on the Main Market must ensure that the prospectus is approved by the U.K. Listing Authority (UKLA) and that the securities are admitted to the Financial Conduct Authority’s (FCA) Official List.
The AIM operates as a multilateral trading facility under MiFID II, rather than a regulated market, and currently qualifies as an EU SME Growth Market (which confers on companies traded on such markets certain relaxations under the EU’s prospectus and market abuse regimes). The AIM has a less prescriptive regulatory and governance regime. The AIM is the preferred London market for smaller and/or growth companies looking to list equity securities that will have a small free float as there is no formal minimum free float requirement on AIM, whereas companies seeking admission to the Main Market will ordinarily need at least a 25% free float. Issuers seeking admission to the AIM are not required to seek admission to the FCA’s Official List.
The PSM and the ISM are exchange-regulated markets which are outside of the scope of the Transparency Directive 2004/109/EC (the “Transparency Directive”) and the Prospectus Regulation (EU) 2017/1129 (the “Prospectus Regulation”), however the issuers with securities admitted to the trading on the PSM or ISM are subject to the Market Abuse Regulation ((EU) 596/2014) (MAR).
Like the Main Market, application for admission to trading on the PSM is a two-stage parallel process in which application must also be made to the UKLA for approval of the listing particulars and admission of the securities to the FCA’s Official List.
The ISM was established in 2017 to provide a simplified admission process for issuers seeking to either restrict their offering to qualified investors or offer a high denomination of debt securities, which therefor affords them the ability to rely on certain exemptions in the prospectus regime. Admission to the ISM does not require that a prospectus or listing particulars are approved by the UKLA, but rather, the offering document need only comply the ISM rules and be approved by the LSE. For these reasons, issuers listing on the ISM are required to comply with a far less stringent regulatory scheme.
2.1. Listing Segments
As noted above, issuers seeking admission to trading on the Main Market or PSM generally undertake a two-stage parallel process in which application is contemporaneously made to list the securities on the FCA’s Official List. However, in certain instances, issuer’s seeking admission to the Main Market may forego the Official List requirements by seeking admission to the “high growth” segment (HGS) or the “specialist fund” segment of the Main Market. The HGS is a transitional segment designed to attract high growth companies, in particular internet and technology businesses, seeking access to the Main Market due to their size and stage of development, but who are not able to meet all the requirements for being on the FCA’s Official List at the time of their IPO. A HGS company is typically larger than an AIM company and is contemplating to ultimately join the premium segment of the Main Market. In order to be admitted to the HGS, the company must be incorporated in the U.K. or the European Economic Area (EEA), must have a minimum free float of 10% at IPO and must demonstrate historic revenue of compound annual growth rate (CAGR) over the past three years of 20% or more, among other requirements.
An issuer seeking admission to the Official List must decide early in the process whether to seek admission to the “premium” listing segment of the Official List or to the “standard” listing segment. A premium listing is only available to equity shares issued by trading companies or closed or open-ended investment entities, while standard listings cover the issuance of equity securities, Global Depositary Receipts (GDRs), debt securities and securitised derivatives that are required to comply with the minimum requirements in the European Union (EU). Both segments are available to U.K. and non-U.K. incorporated companies; however, a ‘premium’ listing will require the company adhere to the U.K.’s super-equivalent rules which are more stringent than the EU minimum requirements, both in terms of eligibility criteria and continuing obligations. On the other hand, a standard listing allows issuers to access the Main Market by meeting EU harmonised standards only rather than the U.K. ‘super-equivalent’ requirements.
As the premium listing requirements mandate that a company meet the U.K.’s highest standards of regulation and corporate governance, companies that achieve a premium listing may take advantage of a lower cost of capital through greater transparency and investor confidence. In addition, a premium listing is one of the necessary criteria for inclusion in the FTSE U.K. indices, which may be an important consideration for a company in deciding whether to seek a premium listing.
3. Key Listing Requirements
The listing requirements for the admission of equity and debt securities vary depending on the market. For instance, the HGS and AIM are tailored specifically to permit smaller and growing issuers to access public markets, with lower thresholds for admission and less stringent continuous disclosure requirements. The following table outlines some of the key listing requirements for listing equity and securities on the various markets.
3.1. Equity Capital Markets
The following list outlines some, but not all, of the key listing requirements for premium listings and standard listings and for admission to the HGS and AIM:
- Domicile: Issuers applying for admission to the HGS must be domiciled in the U.K., whereas issuers applying for a premium listing, standard listing or for admission to the AIM may be domiciled in any country. It is worth noting however that for companies planning to undertake a premium listing in order to gain the benefit of inclusion in the FTSE indices, the FTSE index rules may require the issuer be incorporated in the U.K. or a ‘developed country’ as defined under the FTSE index rules.
- Minimum Capitalization and Free Float: For premium listings and standard listings, issuers must have a minimum market capitalization of £700,000 and provide a minimum float of 25% of the securities. The HGS imposes no market capitalisation requirement, but requires a minimum free float of 10% with a value of at least £30 million (the majority of which must be raised at admission). The minimum capitalization and free float for an AIM issuer is subject only to the Nomad’s assessment of appropriateness.
- Historical Financial Information: The requirements for a premium listing, standard listing and admission to the HGS each mandate that three years of audited unqualified accounts are provided. However, applications for a premium listing state that the age of the latest audited financials must be no more than six months before the date of the prospectus or nine months before admission, while the requirements for standard listings and admission to the HGS require that the age of the latest audited financial information is no more than 18 months before the approval of the prospectus where audited interim financials are included or 15 months where unaudited interim financials are included. Issuers applying to the AIM must only provide three years of audited financial information (if available), with the age of the latest audited financial information being no more than 18 months before the approval of the admission document if audited interim financial information is included or 15 months if unaudited interim financial information is included.
- Trading Record: An issuer applying for a premium listing must have published or filed historical financial information that covers at least three years and represents at least 75% of the issuer’s business for that three-year period. Issuers seeking admission to the HGS must demonstrate a 20% CAGR in revenue over a three-year period. There is no trading record or revenue criteria applicable for standard listings or for admission to the AIM.
- Sufficient Working Capital (Main Market (Premium Listing and Standard Listing)): An issuer applying for a standard listing must include a statement that the issuer and its subsidiary undertakings have sufficient working capital available for the group’s requirements for at least the next 12 months from the date the prospectus is published and this statement may be qualified. An issuer applying for a premium listing must also include a similar statement which can be qualified.
- In light of COVID-19 crisis and the imposed public health measures, on 8 April 2020 the FCA issued a Technical Supplement related to the working capital statements in prospectuses and circulars during the COVID-19. The FCA recognizes the significant uncertainty and disruptions that the COVID-19 is causing. The FCA advised issuers preparing working capital statements and model a “reasonable worst-case scenario” to highlight the underlying assumptions related to the disruptions caused by the COVID-19 to their business and such assumptions can be disclosed in an unqualified working capital statement.
- Sponsor: An issuer applying for a premium listing must appoint a sponsor approved by the FCA to act as an adviser in its application for a premium listing and on certain subsequent events.
For issuers applying to the HGS, a “Key Adviser” is required to provide confirmation of the company’s eligibility and in the case of specific transactions, but there is no need to maintain a Key Adviser on a continuous basis. Issuer’s seeking admission to the AIM must appoint a nominated adviser (“Nomad”) for admission and throughout the issuer’s life on AIM.
- Free Transferability: The requirements for a premium listing, standard listing and admission to the HGS each stipulate that securities must be freely transferable, fully paid and free from any liens or restrictions on the right of transfer. The AIM rules stipulate that Securities must be freely transferable except where: (i) in any jurisdiction, statute or regulation places restrictions upon transferability or (ii) the company is seeking to limit the number of shareholders domiciled in a particular country to ensure that it does not become subject to statute or regulation.
- Electronic Settlements: Each market requires that securities are eligible for electronic settlement.
- Directors’ Independence: An issuer applying for admission to each of the segments of the main market must ensure that the election of independent directors is approved by majority of shareholders, and the majority of non-controlling shareholders. There is no such requirement for the election of independent directors for AIM listed companies.
- Additional requirements applicable to premium listing issuers: Issuers that have a premium listing must carry on an independent business as its main activity at all times, and must demonstrate that it exercises operational control over the business it carries on as its main activity. Moreover, whereas each of the other segments or markets allow for the domestic law of the issuer to govern pre-emption rights, premium listed issuers must comply with U.K. law requirements related to pre-emption rights. In addition, the total of all issued warrants or options to subscribe for equity shares in a premium listing (excluding rights under employees; share schemes) must not exceed 20% of the issued equity share capital. Finally, applicants for a premium listing with a controlling shareholder must enter into a relationship agreement with that shareholder, whereas applicants for a standard listing, or to the HGS or AIM are not required to enter into any such agreements.
3.2. Debt Capital Markets
For the admission of debt securities to the Main Market, the UKLA must approve securities and prospectus to the Official List, while the LSE must admit the debt securities to trading on the Main Market. For the admission of debt securities to the PSM, the UKLA must approve securities and listing particulars to the Official List, while the LSE must admit the debt securities to trading on the PSM. The admission of debt securities to the ISM is significantly different, as the LSE only approves the admission particulars, while the securities are not listed on the Official List.
The following list outlines some, but not all, of the key listing requirements for admission to the Main Market, PSM and ISM:
- Historical Financial Information: For admission to the Main Market, issuers must have audited IFRS accounts, published or filed for a two-year period. The date of the latest audited financials must be no more than six months before the planned issuance. For admission to the PSM, issuers must have audited accounts, published or filed for a two-year period (or shorter where the issuer has not been in operation). Where the issuer does not have IFRS accounts, a narrative description of the differences between IFRS and the local accounting principles adopted by the issuer should be provided (although this requirement may be waived). The date of the latest audited financials must be no more than six months before the planned issuance. For admission to the ISM, an issuer must have published audited financial statements that cover two years at a minimum. The date of the latest audited financials may not be more than 18 months before the date of the admission particulars. The LSE may, in certain circumstances, accept financial statements for a shorter period or waive the requirement for financial statements.
- Electronic Settlements: Each market requires that securities are eligible for electronic settlement.
- Disclosure Regime: Where a prospectus is submitted for admission to the Main Market, that prospectus is governed by the Prospectus Regulation (which is fully implemented in the U.K. law) and the FCA’s Prospectus Rules, which differ depending upon the minimum denomination of the debt securities. Where listing particulars are submitted for application to the PSM, the disclosure rules are based on the wholesale regime of the Prospectus Regulation. The admission particulars submitted in connection with an application to the ISM should contain all information prescribed by the ISM Rulebook.
4. Prospectus Disclosure
4.1. Regulatory regimes and local market practice
For the purposes of this section, we will focus on the disclosure requirements applicable to a company seeking listing of its securities on the Official List of the FCA and admission to trading on Main Market. The AIM Rules for Companies are applicable to companies seeking admission to AIM (assuming that they do not conduct an ‘offer to the public’) and in which case the key disclosure document is an ‘admission document’.
When the company is seeking admission to the Main Market the key disclosure document is a prospectus. The prospectus regime in the U.K. is currently governed by the Prospectus Regulation (which is fully implemented in the U.K. law) and the delegated legislation which includes the Commission Delegated Regulation (EU) 2019/980 (PR Delegated Regulation) relevant for the format, content, scrutiny and approval of the prospectus and the Commission Delegated Regulation (EU) 2019/979 (Prospectus RTS Regulation) relevant for the technical standards on key financial information in the summary of a prospectus, the publication and classification of prospectuses, advertisements for securities, supplements to a prospectus, and the notification portal. In addition, the PR Delegated Regulation imposes specific minimum information requirements for a prospectus as set out in the Annexes of the PR Delegated Regulation. The relevant Annexes that will apply in each particular case are prescribed by Articles 2 to 23 of the PR Delegated Regulation and will depend on, among others, the type of securities being issued, the type of issue (in certain cases), the nature of the issuer, whether the issuer has a complex financial history or has made a significant financial commitment. The U.K. government has made a large number of changes to U.K. law (as it currently implements and includes EU law), including in relation to the prospectus, listing, transparency and market abuse regimes to ensure that, in the absence of some new legal and regulatory relationship with the EU taking their place, those regimes will continue to operate effectively and broadly in line with the way in which they operated before the U.K. left the EU. In addition, following the full implementation of the Prospectus Regulation, the FCA has replaced much of the content of the Prospectus Rules in its Handbook (which also contains the FCA’s Listing Rules, Transparency Rules and disclosure requirements with respect to MAR (together, the “Listing, Transparency and Disclosure Rules” or LTDRs)) with appropriate extracts from the relevant, directly applicable EU regulations. These FCA rules are now referred to as the Prospectus Regulation Rules (PRRs).
The Prospectus Regulation requires a prospectus to be written in an easily analysable, concise and comprehensible form and to contain the necessary information which is material to an investor for making an informed assessment of the financial position, etc., of the issuer, the rights attaching to the securities being offered and the reasons for the issue and impact on the issuer. It may be published in a single document (which is the typical U.K. practice) or in three separate documents comprising a registration document (containing information relating to the issuer), a securities note (containing information concerning the securities being offered) and a prospectus summary.
Key information that the Prospectus Regulation requires to be included in a prospectus includes:
- risk factors informing potential investors of the material risks to the issuer, its industry and the securities being offered. These should be specific to the issuer or shares being offered, be grouped into a limited number of categories with the most material factor listed first and, where possible, there should be a quantitative assessment of each risk;
- the last three years’ audited financial information prepared in accordance with IFRS or, in the case of a non-EEA issuer, in accordance with national accounting standards where these standards are considered equivalent to IFRS, such as US GAAP. This minimum three-year period can be relaxed by the FCA for certain mineral or scientific research-based companies seeking a premium listing and which have been operating for a shorter period of time, subject to certain conditions and does not apply to companies seeking a standard listing;
- details of any significant changes in the financial or trading position of the company since the date of the latest published audited or interim financial information included in the prospectus;
- a working capital statement covering the 12-month period from the date of the prospectus, although in practice the company and its sponsor will normally ask the reporting accountants to cover a period of 18 to 24 months in its working capital exercise as a precaution;
- an operating and financial review (OFR) describing the company’s financial condition, changes in financial condition and results of operations for the periods covered by the historical financial information included in the prospectus. This is similar to, but not quite as broad as, the management discussion and analysis required in a US IPO;
- summaries of material contracts entered into outside of the ordinary course of business by the company’s group in the past two years (or longer if material obligations or entitlements remain outstanding);
- details of any significant shareholders of the issuer, whose interest is notifiable under the issuer’s national laws;
- details of any related party transactions that the company has entered into during the period covered by the historical financial information and up to the date of the prospectus;
- details of any legal proceedings that the company has been party to in the last year;
- prescribed information on the company’s directors and senior management, including remuneration, benefits and interests in the shares of the company (including share options) and also with respect to the company’s corporate governance; and
- responsibility statements from the company, the directors and any proposed directors, confirming that they accept responsibility for the information contained in the prospectus and that, to the best of their knowledge (having taken all reasonable care to ensure that such is the case), such information is in accordance with the facts and contains no omission likely to affect its import.
The prospective issuers can omit information from a prospectus in limited circumstances where the FCA may authorise that disclosure of such information would be contrary to the public interest, seriously detrimental to the issuer (provided that the omission would not be likely to be misleading the public) or the information is of minor importance in the specific situation and would not influence the assessment of the financial position and prospects of the issuer.
A supplementary prospectus will need to be published if any significant new factor, material mistake or inaccuracy relating to the information included in the original prospectus arises during the period after publication of the original prospectus but before the later of the securities being admitted to trading and the closing of the offer to the public. Significantly, the issuance of a supplementary prospectus triggers withdrawal rights for any investor who had previously agreed to purchase shares in the offering. Such rights are exercisable before the end of the second working day after the day on which the supplementary prospectus was published.
5. Prospectus Approval Process
5.1. Competent Regulator
The FCA is the ‘competent authority’ in the U.K. for reviewing and approving prospectuses and the company will need to follow the formal admission requirements set out in the London Stock Exchange’s Admission and Disclosure Standards (ADSs) Chapter 3 of the Listing Rules.
With respect to an AIM IPO, the applicants must submit to LSE an admission document disclosing certain information required by the AIM Rules and they must comply with the admission requirements as set out in Rules 2 to 6 of the AIM Rules (as discussed in further detail below).
5.2. Timeline, number of draft submissions, review and approval process
The IPO prospectus review and approval process takes approximately 3-4 months, assuming 3-4 submission of drafts. Each submission of the draft prospectus should be made by no later than 16:00 in electronic form via the Electronic Submission System of the FCA. The review of the initial submission will be subject to ten clear working days and each subsequent submission will take five clear working days. As a matter of practice, the objective will be for the issuer’s counsel to submit an advanced initial draft of the prospectus to minimise the number of comments and turns of the draft while each subsequent submission will also include a blackline showing changes from the previous draft to facilitate the review process. For a premium listing IPO, the appointed sponsors will be submitting the review package as opposed to the issuer’s counsel in the standard IPO process. In the case of an AIM IPO, the NOMAD is responsible for the submission.
Issuers contemplating drawdowns under approved prospectuses, submission of supplemental prospectuses or further issuances of GDRs will benefit from a shorter review process as it takes five clear working days for FCA to review the initial draft and three clear working days for each subsequent submission. On the other hand, debt offerings (plain vanilla) and Medium Term Note Programmes are subject to four clear working days for the initial submission and two clear working days for each subsequent submission.
The approval of the prospectus can follow once the FCA clears the prospectus of comments.
6. Listing Process
6.1. Timeline, process with the stock exchange
As mentioned above a company seeking listing should follow the formal admission requirements. The LSE regulates the admission of securities to trading on the Main Market, and in doing so it is responsible for publishing the ADSs. The listing approval process runs in parallel with the prospectus approval process and has no effect on the overall timetable of the offering.
In the case of an AIM IPO, the Listing Rules and the ADSs will not be applicable. Instead, applicants will be required to comply with the AIM Rules for Companies published by the LSE and their Nomads with the LSE’s AIM Rules for Nominated Advisers. The PRRs will generally not be relevant to an AIM IPO, since it will usually be structured so as to avoid being an ‘offer to the public’ under FSMA (i.e. it will be an offer which, under the Prospectus Regulation, is exempt from the obligation for a prospectus to be published because it is only made to ‘qualified investors’ (e.g. institutional investors)). The eligibility criteria for an AIM admission are similar to those for a standard listing on the Main Market; however, as mentioned above there is no formal minimum free float for an AIM admission.
The ADSs require that an issuer contacts the LSE no later than 10 business days before the application for admission is to be considered, using a prescribed form titled ‘Form 1’ and accompanied by a draft copy of the prospectus. The application will, however, be considered provisional at this stage and will only be deemed to be a formal application once the prospectus has been approved by the FCA. The formal application and the final prospectus must be submitted to the LSE by no later than midday at least two business days prior to the consideration of the application for admission. Written confirmation of the number of securities to be allotted must also be provided by no later than 16:00 on the day before admission is expected to become effective, unless the LSE has agreed in advance to extend this to no later than 07:00 on the day of admission.
The requirements of Chapter 3 of the Listing Rules include submitting certain documents by midday two days before the FCA is to consider the application for admission (the ‘48 hour documents’). These include a prescribed form of application for admission and a copy of the prospectus that has been approved by the FCA (or another relevant authority in the company’s ‘home member state’ (ordinarily the member state of the EEA in which the company has its registered office), in which case a certificate of approval from such authority and a translation of the summary of the prospectus will be required) and written confirmation of the number of shares to be allotted. In addition, a prescribed Shareholder Statement, confirming the number of shares to be admitted and the number of those shares which are in public hands, and a prescribed Pricing Statement, confirming the pricing of the new shares being issued, will need to be signed by the sponsor and submitted to the FCA on the day of admission.
For a premium listing IPO, in accordance with Listing Rule 8.4.3R the company’s sponsor will also need to make a declaration to the FCA in the prescribed form (the “Sponsor Declaration”) either on the day the FCA is to consider the application for approving the company’s prospectus (prior to its approval) or at another time agreed with the FCA in certain circumstances. The Sponsor Declaration will (as mentioned above), among other things, confirm that: (i) the sponsor has taken reasonable steps to satisfy itself that the directors of the company understand their responsibilities and obligations under LTDRs; (ii) the company has satisfied all requirements of the Listing Rules relevant to an application for listing; (iii) that the applicant has satisfied all applicable requirements set out in the PRRs; (iv) the directors have established procedures which will enable the company to comply with the LTDRs on an ongoing basis; (v) the directors have established procedures which will provide a reasonable basis for them to make proper judgments on an ongoing basis as to the financial position and prospects of the company and its group; and (vi) the directors of the company have a reasonable basis on which to make the required working capital statement. In order to support this declaration, the sponsor will require the reporting accountants and the legal advisers to provide it with various comfort letters (which will also be addressed to the company) on the matters covered by the Sponsor Declaration.
Rules 2 to 6 of the AIM Rules for Companies require that the company provides the LSE with certain information at least 10 business days before the expected date of admission. This covers similar information to that required by Form 1 for a Main Market IPO but also includes additional information such as a brief description of the business, the names and functions of directors and proposed directors and details, insofar as they are known, of any significant shareholders (i.e. holding 3% or more of any class of shares in the company). At least three business days prior to admission, the company must submit a completed application for admission, in the LSE’s prescribed form, and an electronic copy of its admission document. These final documents must be accompanied by a declaration from the company’s Nomad (“Nomad Declaration”), similar to a Sponsor Declaration, confirming matters such as the company’s appropriateness for admission on AIM and that the AIM Rules for Companies and the AIM Rules for Nominated Advisers have been complied with, in particular that the admission document complies with the content requirements set out in Schedule Two of the AIM Rules for Companies. As with the Sponsor Declaration, the Nomad will obtain comfort letters from the reporting accountants and the legal advisers to support its declaration.
In the case of either a Main Market IPO or an AIM IPO, admission to trading will only become effective once the LSE has announced this on a regulatory information service.
7. Documentation and Other Process Matters
7.1.1. What is over-allotment
An over-allotment is an option available to the underwriters/managers that allows the sale of (i) additional shares or (ii) certain additional debt securities such as convertible and exchangeable debt securities (“Debt Securities”) (as applicable) from what a company plans to issue in (i) an initial public offering or secondary/follow-on offering or (b) debt offering (as applicable).
The over-allotment option gives the underwriters/managers the right, but not the obligation, to purchase from the issuer or the selling shareholder a specified number of additional shares/Debt Securities beyond the number in the original offering at the offering price.
7.1.2. Greenshoe vs Brownshoe structure
There are two different types of over-allotment structures: (i) greenshoe structure and (ii) brownshoe structure, otherwise known as “reverse greenshoe”. In summary, a greenshoe is when the underwriter/manager exercises its option to obtain additional shares/Debt Securities at the initial offering price whilst the brownshoe option gives the underwriter/manager the put right to sell the shares/Debt Securities to the issuer at a later date but only if the share/Debt Security price falls below the offering price.
The greenshoe option customarily used in the United Kingdom is limited to 15% of the size of the original offering and the option can be exercised within 30 days of the relevant offering.
7.2. Stock lending agreement
A stock lending agreement is entered into between one or more of the shareholders and the stabilisation manager and it allows the stabilisation manager to borrow up to 15% of the total number of shares comprised in the offer. The purpose of the stock lending agreement is to allow the stabilisation manager to settle, on admission any over-allotments made in connection to the offer. If the stabilisation manager borrows any shares pursuant to the stock lending agreement, it will be required to return to the shareholder either equivalent securities or the cash equivalent in case the over-allotment option is exercised (“set-off” mechanism).
7.3.1. What is stabilisation?
Stabilisation is the process whereby the market price of a security is supported through the buying of securities up to a certain level for the limited purpose of preventing or slowing down the price decline. A stabilisation manager is appointed to act on behalf of the syndicate, in respect of a new issue of shares or bonds, by buying and selling the securities in the open market. The terms of the stabilisation are usually agreed in the underwriting agreement and are subject to the requirements set out in MAR.
It is important to note that stabilisation may only be used to support the market price of the shares and not to increase the price in excess of the offering. For example, if the price of shares in the aftermarket drops below the offering price, the stabilisation manager, acting on behalf of the syndicate, purchases securities in the market, thereby supporting the share price. However, if the price of the shares in the aftermarket increases above the offering price, the stabilisation manager will not engage in stabilisation. Instead, in the case of equity deals, the underwriters in this case will close their short position by exercising the over-allotment option referred to in 8(a) above.
7.3.2. Stabilisation and MAR
Under MAR, stabilisation is exempted from the prohibition on insider dealing, market manipulation and unlawful disclosure of inside information so long as:
- the undertaking of the stabilisation is for a limited period (in respect of shares the time period is no longer than 30 calendar days whilst in respect of bonds it is no longer than 60 days) ;
- relevant information is disclosed to the competent authority;
- disclosure is made in the offering documents; and
- the undertaking is in compliance with adequate limits with regard to price.
The European Securities and Markets Authority (“ESMA”) indicated that disclosure obligations will include further requirements, namely that (i) prior to the stabilisation, issuers must disclose where the stabilisation measure may occur (whether it be on or outside a trading venue); and (ii) after the stabilisation, issuers must disclose the trading venue on which the stabilisation transactions were carried out.
The government of the United Kingdom has published the U.K. implementation of MAR (the “U.K. MAR”) that will apply following Brexit. The changes are designed to ensure that the U.K. markets and financial instruments continue to be subject to the same level of requirements as under MAR. The FCA will be the U.K. regulator for purposes of U.K. MAR to which the ESMA’ s powers and functions will also be transferred.
8. Corporate Governance
8.1. Corporate governance code / rules (INED, board and supervisory composition, committees)
For a company with a premium listing on the Main Market, this will include either complying with the U.K. Corporate Governance Code (the “Code”) (which is expected by the investor community) or, alternatively, explaining in its annual report why it does not comply. The Code covers matters such as the composition and responsibilities of the board and its committees and executive remuneration. The Code prescribes certain independence requirements for the directors of companies seeking premium listing. Under the Code at least half of the board must be composed of independent non-executive directors. In addition, the chairman should be separate from the Chief Executive Director, independent on appointment and should not act as chair when the committee is dealing with the appointment of his or her successor. In addition, the nomination committee should also comprise a majority of independent non-executive directors, while the remuneration and audit committees should be comprised entirely of independent non-executive directors and have at least three members.
The Code does not apply to companies with a standard listing or companies admitted to trading on AIM; however, they are still required to make disclosures about the corporate governance regime they follow. These companies may choose to follow a specified corporate governance code voluntarily, as investors will often expect them to do so. For example, AIM companies often follow the Corporate Governance Guidelines for Small and Mid-size Quoted Companies published by the Quoted Companies Alliance.
8.2. Any other Environmental, Social, and Governance (“ESG”) considerations
The revised U.K. Stewardship Code 2020 that took effect on 1 January 2020 highlighted the importance of ESG criteria which are becoming more relevant for investors. Investors are expected to consider material ESG matters, including climate change, as part of their investment which is going to have an impact on the corporate governance and internal policies of the issuers. Given the investors increased focus on the ESG criteria, certain issuers, in particular in the context of bond offerings, will typically seek ‘ESG rating’ provided by a third party, such as MSCI, for the purposes of increasing the marketability of the bonds.
9. Ongoing Reporting Obligations (Life as a Public Company)
Listed companies are required to comply with various ongoing reporting obligations, which vary based on whether the securities are included on the Official List, the market on which the securities trade, and the nature of the securities offered. Once a company has been admitted to trading on the Main Market of the LSE and listed on the Official List of the FCA, it will be subject to an additional layer of regulation. Even where the company has not been listed on the Official List, or where has been admitted to trading on the PSM, AIM or ISM, certain ongoing reporting obligations will apply.
In addition to the statutory and common law provisions applicable to all U.K. companies, there are a variety of rules that apply to issuers on U.K. regulated exchanges, including the UKLA Listing Rules (which form part of the FCA Handbook), the LTDRs, Corporate Governance Rules, the PRRs and the ADSs. Issuers admitted to the premium or standard listing segments must comply with each of the above obligations, while issuers on the PSM must comply only with the LTDRs and the PRRs. These rules do not apply to AIM, ISM or HGS companies.
Moreover, both listed and unlisted companies will need to ensure that they meet the ongoing obligations under MAR, as a breach of MAR by an individual or legal person is a civil offence punishable by a fine and administrative sanction. As such, companies admitted to the ISM will be obliged to comply with MAR, although such companies will not be obliged to comply with the LTDRs, Corporate Governance Rules, PRRs and the ADSs. However, the rules prescribed under the ISM rulebook impose similar obligations on ISM companies.
9.1. Annual Reports
For all companies with listed shares, and those with a retail listing of debt, the rules on financial statements are set out in the LTDRs. The LTDRs provide that an issuer must publish audited annual accounts within four months of its financial year end and unaudited interim accounts within three months of the end of the interim financial period. Both annual and interim accounts must be compliant with the requirements set out in the LTDRs. Where a company is domiciled in the EU, the financial statements must be prepared in accordance with IFRS as adopted by the EU.
Issuers of wholesale debt and issuers who only have securities listed on the PSM or ISM are subject to a somewhat more relaxed regulatory framework which provides an extended six-month period for issuers to produce their annual reports and permits the issuer to prepare their reports in accordance with national accounting standards. Issuers on the ISM and PSM are exempted from the requirement to prepare interim reports.
9.2. Periodic Reporting
Periodic reporting requirements for companies listed on the LSE’s main markets vary depending on the market. The following list outlines some, but not all, of the key periodic reporting requirements for premium listings and standard listings and for admission to the HGS, AIM, PSM and ISM:
- Corporate Governance: Issuers with securities admitted to the premium segment of the Main Market must comply with the Code. Issuers with securities that are admitted to the standard segment, the HGS or the PSM are not by virtue of being admitted to these markets subject to the Code, but must disclose (i) the corporate governance code to which they are subject, (ii) the extent of compliance with such code (iii) and a description of internal controls and risk management arrangements. Issuers with securities that are admitted to the PSM must include similar disclosure, but are not required to disclose the internal controls and risk management arrangements. There are no specific corporate governance requirements that attach to issuers under the ISM rules.
- Cancellation: 75% shareholder approval is required for the cancellation of premium listed securities and for securities on the AIM. No shareholder approval is required for securities on the other listing markets and segments.
- Transfer Between Listing Categories: 75% shareholder approval is required to transfer securities from a company with a premium listing. No shareholder approval for transfer between listing categories of any of the other aforementioned listing segments and markets, save for the fact that 75% shareholder approval is required when transferring from the HGS to a listing segment other than the premium segment of the Main Market.
- Prospectus Supplement: Where greater than 10% of the securities of same class are admitted to trading, a prospectus supplement is required for securities listed on the Main Market, including premium listings, standard listings, and securities on the HGS. No such requirement exists for securities on the AIM, PSM or ISM, subject to the caveat that a prospectus is required where a public offer is made under the Prospectus Regulation.
- Significant Transactions: There are no specific disclosure requirements for significant transactions for ISM or PSM issuers. Issuers with securities admitted to the standard segment and high growth segment of the Main Market also generally do not have any specific requirements for significant transactions, although reverse takeovers require re-admission to the respective market.
Where securities have been admitted to the premium segment of the Main Market: (i) an announcement is required for significant transactions exceeding 5% of any class tests, (ii) shareholder approval, a circular and appointment of a sponsor is required for significant transactions exceeding 25% of any class tests and (iii) shareholder approval, a circular and appointment of a sponsor is required for related party transactions exceeding 5% of any class tests. All reverse takeovers require re-admission.
Where securities have been admitted to the AIM: (i) an announcement is required for significant transactions exceeding 10% of any class tests or related party transactions exceeding 5% of any class test and (ii) disposals in a 12-month period exceeding 75% in any class tests require publication of a circular and shareholder approval. All reverse takeovers require re-admission.
The Shearman & Sterling team also included Michael Scargill, a counsel and a Head of UK Knowledge Management in the London M&A practice, as well as the associates Evangelia Andronikou and Alex Despotovic (both London-Capital Markets).