A Q&A guide to equity capital markets law in UK (England and Wales).
The Q&A gives an overview of main equity markets/exchanges, regulators and legislation, listing requirements, offering structures, advisers, prospectus/offer document, marketing, bookbuilding, underwriting, timetables, stabilisation, tax, continuing obligations and de-listing.
To compare answers across multiple jurisdictions visit the Equity capital markets country Q&A tool.
This Q&A is part of the PLC multi-jurisdictional guide to capital markets law. For a full list of jurisdictional Q&As visit www.practicallaw.com/capitalmarkets-mjg.
There are four main markets in the UK, all of which are operated by the London Stock Exchange (LSE).
Main Market. This is aimed at larger, more established companies and is a regulated and listed market. This is an European Economic Area (EEA) regulated market and falls within the ambit of Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading (Prospectus Directive), as amended. It is also subject to other EU Directives, such as Directive 2003/6/EC on insider dealing and market manipulation (market abuse) (Market Abuse Directive) and Directive 2004/109/EC on transparency requirements for securities admitted to trading on a regulated market and amending Directive 2001/34/EC (Transparency Directive) (www.londonstockexchange.com/companies-and-advisors/main-market/main- market/home.htm).
AIM. This is aimed at smaller growing companies and is not a regulated or listed market (www.londonstockexchange.com/companies-and-advisors/aim/aim.htm).
Professional Securities Market. This is a market for specialist securities such as depositary receipts and debt securities, and is a listed, but not a regulated market (www.londonstockexchange.com/companies-and-advisors/psm/about/psm-about.htm).
Specialist Fund Market. This is a regulated, but not listed market for specialist investment funds, targeting institutional, professional and highly knowledgeable investors (www.londonstockexchange.com/companies-and- advisors/sfm/home/sfm.htm).
Equity issues in 2012 on the Main Market and AIM raised approximately GB£14.6 billion, down from approximately GB£22.9 billion in 2011 (although the figures for the equity market in 2011 were distorted by the Glencore IPO, which raised GB£6.2 billion, making it one of the largest IPOs to date on the LSE's Main Market). There were 37 IPOs on the Main Market in 2012 and 71 on AIM, which together raised GB£8 billion, compared to 76 IPOs the previous year, which raised GB£12.87 billion.
Secondary issues (that is, rights issues, open offers and placings) raised approximately GB£4.1 billion on the Main Market compared to approximately GB£6 billion in 2011. On AIM, secondary issues raised GB£2.4 billion compared to GB£3.67 billion in 2011.
The UK equity markets have remained relatively quiet in 2012, mainly because of the macroeconomic environment although a number of market participants have suggested that the IPO process in London could be improved by making changes in a number of areas, for example, pricing and shortening of the timetable.
The UK regulator is currently the Financial Services Authority (FSA), which exercises its powers in relation to the Main Market and the Professional Securities Market through the UK Listing Authority (UKLA). The FSA will be renamed the Financial Conduct Authority (FCA) from 1 April 2013. Although its role will remain largely unchanged, it will cause the focus of the UKLA to be more on retail consumer protection. The remainder of this chapter will refer to the FCA throughout.
The main legislation and rules relevant to listing and trading in the UK are:
The Financial Services and Markets Act 2000 (FSMA).
The Listing Rules (being the rules made by the UKLA under FSMA (Listing Rules), the Prospectus Rules (being the rules made by the UK Listing Authority under FSMA where the Prospectus Directive applies) and the Disclosure and Transparency Rules (being the UK implementation of the Transparency Directive (DTRs)) (together the FCA Rules).
The LSE's Admission and Disclosure Standards.
For UK incorporated companies, the Companies Act 2006.
In the UK, admitting equity shares to trading on the Main Market involves a two-stage process:
Application to the UKLA for admission to the Official List.
Application to the LSE for admission to trading on the Main Market.
In practice, admission to trading and admission to listing is simultaneous. The Main Market is divided into a number of segments. The main ones addressed in this chapter are:
Premium listing (equity shares/commercial company).
Standard listing (shares).
Standard listing (certificates representing securities, that is, depositary receipts).
An issuer of equity shares therefore has the option (depending on whether it satisfies the premium listing eligibility requirements) to elect for a premium listing or a standard listing. A standard listing is the EU minimum whereas premium listing has more onerous eligibility requirements and continuing obligations. Issuers with a premium listing are eligible for inclusion in the FTSE indices, subject to fulfilling a 25% free float requirement.
A prospectus must be drawn up, approved by the UKLA, filed and published containing the requirements set out in Annexes I and Annex III of Regulation (EC) 809/2004 implementing Directive 2003/71/EC as regards prospectuses and dissemination of advertisements (Prospectuses Regulation) unless an exemption applies (see Questions 10 and 11).
Unless securities of the same class are already listed, the expected aggregate market value of all securities (excluding treasury shares) to be listed must be at least GB£700,000. This applies to both shares and global depositary receipts (GDRs).
A new applicant for the admission of equity shares to the premium listing segment must have published or filed historical financial information that:
Covers at least three years.
Has a latest balance sheet that is not more than six months before the date of the prospectus and not more than nine months before the date the shares are admitted to listing.
Includes consolidated accounts for the applicant and all its subsidiary undertakings.
Has been audited or reported on in accordance with the standards acceptable under item 20.1 of Annex I of the Prospectuses Regulation.
Is not subject to a modified report, save for certain exceptions.
The historic financial information must both:
Represent at least 75% of the new applicant's business for the full three-year period.
Put prospective investors in a position to make an informed assessment of the business for which admission is sought.
The new applicant must demonstrate that:
It controls the majority of its assets and has done so for at least the three-year period.
It will be carrying on an independent business as its main activity.
The requirement for a three-year financial track record may be modified for mineral companies and scientific research based companies, or where the FCA is satisfied that it is desirable in the interests of investors and that investors have the necessary information available to arrive at an informed judgment about the applicant and the securities.
An applicant for premium listing must show that it has sufficient working capital for the group's requirements for at least the next 12 months from the date of the prospectus, although the FCA may dispense with this requirement if certain conditions are met (for example, if the applicant's business is that of banking or insurance).
The minimum current percentage of a class of listed shares (excluding treasury shares) that must be in public hands in one or more EEA states is 25%. The FCA may accept a lower percentage if it considers that the market will operate properly with a lower percentage in view of the large number of shares of the same class and the extent of their distribution to the public. However, it indicated in a recent consultation (CP12/25) that it would not lower the percentage below 20% (see Question 26). Certain shareholdings are excluded, for example:
Shares held by a director of the applicant or a person connected with a director.
Shares held by a person or persons in the same group or persons acting in concert who hold 5% or more of the shares.
A secondary listing in the UK is known as a standard listing, which can be of shares or GDRs (see Question 3, Main requirements and Minimum size requirements).
See Question 3.
For a standard listing of shares and GDRs, the applicant must have audited historical financial information under the International Financial Reporting Standards (IFRS) or certain other Generally Accepted Accounting Principles (GAAPs) deemed "equivalent" to IFRS covering the latest three financial years (or such shorter period that the issuer has been in operation). It must also contain a statement that in the issuer's opinion the working capital is sufficient for the issuer's present requirements (or, if not, how it proposes to provide the additional working capital needed) for a listing of shares (though this does not apply to GDRs).
See Question 3.
An IPO is usually by one (or more) of the following methods:
Offer for sale. An offer of securities, which are already in issue to the public, by selling shareholders.
Offer for subscription. An offer of securities not already in issue made by the issuer to the public.
Placing. Shares are sold, usually by an intermediary (such as a bank) to a small group of institutional investors. A placing can be used with one of the other sale methods.
Introduction. Where shares are already held widely, an admission of shares to listing without new shares being issued (often used on "moves" from AIM to the Official List or on a secondary listing).
Recent market practice in the UK has been for offers to institutional shareholders only, with offers to the public (retail offers) being infrequent.
In the UK market, there are two types of subsequent (sometimes called a secondary) offering, pre-emptive and non-preemptive:
A pre-emptive offering is an offering made to existing shareholders pro rata to their existing holdings, usually requiring a prospectus.
Non-preemptive offerings are offers of shares to either existing or potential new shareholders, which do not relate to the number of shares already held, often made without a prospectus.
Pre-emptive offerings consist of:
Rights issues. A rights issue is an offering of shares to existing shareholders where the right to acquire the new shares is tradeable in itself. Shareholders who choose not to take up their entitlement are compensated to the extent that if the shares not taken up can be sold in the market at a premium to the offer price, they get the benefit of the premium.
Open offers. An open offer is similar to a rights issue, except that the right is not tradeable and there is no sale of rights. Open offers are often combined with a placing (see below).
A placing is a non-preemptive offering where new shares are offered to existing or potential new shareholders. Placings can be combined with both rights issues and open offers.
The main disadvantage for both rights issues and open offers is that they are public offers for which there is usually no exemption from the requirement to produce a prospectus, as set out in the Prospectus Directive. This requirement considerably lengthens the timetable as it can take several months to draft a prospectus and receive approval from the FCA. The approval process takes the form of a series of private filings with the FCA and subsequent receipt of comments from the FCA before approval is granted. Both rights issues and open offers may also require shareholder consents and therefore require a general meeting to be convened and held, which will lengthen the timetable by at least 17 days. However, rights issues are particularly favoured by investor bodies as they give existing shareholders the rights to participate in a new issue of shares on a pro rata basis and to obtain the benefit of any premium if they decide not to take up their rights.
Placings can be done very quickly and are often done in just one day, though they cannot be used for bigger capital raisings where the size of the issue is more than 10% of the existing share capital as this would also require a prospectus (see Question 10). Shareholder approval is usually not required, as in the UK it is common practice at annual general meetings of shareholders to seek authority to issue shares up to specified limits during the year.
The main steps for a company applying for a premium listing are as follows:
Pre-IPO reorganisation.
Due diligence.
Prospectus drafting.
Preparation of reporting accountant and specialist reports.
Negotiating legal documentation such as the underwriting agreement and agreeing comfort packages.
Drafting marketing presentations, marketing and bookbuilding.
Pricing and allocation of shares.
Admission to Official List and to trading on the Main Market.
Settlement.
Exercise of any overallotment option/stabilisation.
The procedure is the same for a non-UK incorporated company. The eligibility requirements for a standard listing (whether for equity or GDRs) are less onerous than for a premium listing, but only companies with a premium listing are eligible for inclusion in the FTSE indices. If the non-UK company is incorporated in a jurisdiction where settlement in the UK is not easy (for example, because its securities are not admissible to the UK's electronic settlement system, known as CREST), then they are likely to seek a listing for depositary receipts.
The main advisers on an equity offering (including an IPO) are as follows:
There is usually a syndicate of banks, varying in number, performing different roles as set out below (some banks may perform more than one role):
Global co-ordinator. Co-ordinates the offer on a global basis where there is an offering in more than one jurisdiction.
Bookrunner. Builds the book of demand for the shares.
Underwriter. Underwrites the offering.
Stabilisation manager. See Question 19.
Financial adviser. Advises on the structure and timing, valuation and pricing, marketing and so on.
Sponsor. Required to liaise with the UKLA on a premium listing regarding suitability for listing, prospectus content and so on. Advises the issuer on application of the FCA Rules.
Research analyst. Produces research reports on the issuer.
Issuer's lawyers. Advise on structure of the offering, corporate governance issues, legal due diligence, the prospectus (including drafting and verification) and the underwriting agreement.
Bank's lawyers. Advise banks on the underwriting agreement and other documents to which they are a party and on banks' comfort packages and sponsor obligations to the FCA. Comment on prospectus drafting and structure.
Selling shareholders' lawyers. Advise selling shareholders (if any) on underwriting and lock-up agreements relating to shares held post-IPO.
Financial public relations. Advise the issuer on how to deal with the media.
Reporting accountants. Required to produce certain opinions forming part of the prospectus and financial comfort package on aspects such as working capital and internal controls, and to perform financial due diligence.
Registrars. Set up and maintain the share register.
Specialist advisers. Depending on the nature of the issuer's business, experts providing a "competent person's report", such as oil and gas, and mineral experts.
The main documents used in an equity offering are as follows:
Intention to float announcement.
Prospectus (unless there is an exemption, see Question 11) and verification notes.
Reporting accountants' documents such as long form report, opinions and comfort letters.
Audited accounts.
Ancillary issuer documents such as board minutes, responsibility statements and board memoranda.
Underwriting agreement.
Shareholder relationship agreement.
Lock-up agreements.
Bank comfort package, consisting of letters and confirmations from the issuer and reporting accountants plus opinions from issuer and bank's lawyers.
Unless there is an applicable exemption, a prospectus is generally required on a UK equity offering where there is either:
An offer to the public.
An application for admission to trading on a regulated market.
If the issuer is incorporated in an EU member state, the prospectus must be approved by the competent authority of the issuer's home member state. If the UK is not the issuer's home member state, the prospectus is approved by the relevant regulator and then "passported" into the UK (that is, the regulator sends the UKLA a certificate of approval for the prospectus and the securities can then be offered into and listed in the UK). For issuers incorporated outside the EU, the prospectus is approved by the UKLA in the normal way (unless the UK is not the issuer's home member state).
The approved prospectus must then be filed with the UKLA, which is done by uploading it onto a portal called the National Storage Mechanism. The prospectus must also be made available to the public, usually on the issuer's website.
The obligation to publish a prospectus arises in relation to:
An offer to the public.
An admission to trading on a regulated market.
Each limb has separate exemptions and where an offer is an offer to the public as well as an admission to trading on a regulated market, there must be an appropriate exemption for each limb if the prospectus obligation is to be avoided.
An offer to the public is exempt provided that:
It is an offer to qualified investors only.
It is made to less than 150 persons (other than qualified investors) per EEA state.
The minimum consideration which may be paid by any person is at least EUR100,000.
The securities are denominated in amounts of at least EUR100,000.
The total consideration cannot exceed EUR100,000.
Separately, the prohibition does not apply to offers where the total consideration for securities offered in the EEA is less than GB£5,000,000.
There are also exemptions for certain types of offer, such as shares issued in connection with a takeover offer where a prospectus equivalent document is made available, and shares allotted to employees (if certain conditions are met).
There are exemptions for certain exempt securities. The main categories are as follows:
Securities representing less than 10% of the number of shares of the same class already admitted to trading over a period of 12 months.
Securities issued in connection with a takeover offer if a prospectus equivalent document is made available.
Securities offered to existing shareholders free of charge, or through a dividend, or to employees, or on conversion of other securities, or where shares are already admitted to trading on another regulated market.
The exemptions are wider than those for an offer to the public (see above, Offer to the public).
The main disclosure requirement for a prospectus is set out in section 87A FSMA as follows:
It must contain 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 and the rights attaching to the securities (necessary information).
Necessary information must be presented in a form which is comprehensible and easy to analyse and must be prepared having regard to the particular nature of the securities and the issuer.
Annexes I and III to the Prospectuses Regulation sets out further detailed content requirements for a prospectus, including financial information, and requires that accounts are presented in IFRS as adopted in the EU or a specified equivalent standard if the company is not incorporated in the EEA. The only standards deemed equivalent to IFRS are:
EU IFRS.
US, Japanese, Canadian, South Korean and Chinese GAAP.
Indian GAAP (for financial years prior to financial years beginning on or after 1 January 2015).
The main categories of information for an issuer of equity securities will include:
Three years of audited annual financial statements.
The identity of the directors, their principal activities outside the issuer and conflicts of interest (if any).
The principal activities of the issuer and principal markets.
Material contracts.
Details of any significant change in the issuer's financial or trading position since its most recently published financial statements.
Details of any material adverse change in the issuer's prospects since its most recent audited financial statement.
Details of any significant legal or arbitration proceedings (including any which are pending or threatened over the preceding 12 months).
A supplementary prospectus will be required if a significant new factor arises during the period between the later of either:
Approval of the prospectus by the FCA.
Closure of the offer or admission to trading starts.
The prospectus is prepared by the issuer and its advisers, such as lawyers and specialist experts, with other advisers such as the banks' lawyers inputting into the process. A formal verification exercise is undertaken to test the accuracy of key statements in the prospectus.
The following persons are responsible for a prospectus and therefore may have statutory liability:
The issuer.
The directors of the issuer plus those who have agreed to act as directors and are named as such in the prospectus.
In the case of an issuer with an external management company, each person who is a senior executive of that company.
Each person who accepts, and is stated in the prospectus as accepting, responsibility for the prospectus.
The offeror (where it is not the issuer, for example, a selling shareholder) and each director of the offeror if it is a company.
Each person (not being one of the above) who has authorised the contents of the prospectus.
An issuer can also be liable to investors in contract or tort. Sponsors and other banks involved in an equity offering may also, in certain circumstances, be liable. In relation to the statutory regime, any person who has acquired securities to which the prospectus relates can claim compensation from those responsible for the prospectus if they have suffered loss as a result of the prospectus either:
Containing any untrue or misleading information.
Failing to disclose a matter required under section 87A of FSMA or a matter requiring a supplementary prospectus.
Schedule 10 to FSMA sets out a number of statutory defences (for example, due diligence). A claim may also be brought by those who have acquired shares in the after market.
IPOs are typically marketed by the following methods:
Pre-marketing. This is done at an early stage and is done by a series of meetings with potential investors that the lead banks have identified. The rationale for the meetings is to introduce management and the company, and to identify any possible issues at an early stage.
Roadshows. These are more formal presentations by management to potential investors once the intention to float announcement (and the prospectus) has been published.
"One on ones". Specific targeted meetings with individual investors.
Advertising/other publicity. Advertising is only relevant for retail offers and can be an effective means of generating additional demand.
Participating brokers/dealers may be liable to investors in the following ways:
Legislation. The following legislation applies:
section 397 FSMA (misleading statements) (section 89 of the Financial Services Act 2012 from 1 April 2013);
section 118 FSMA (market abuse and insider dealing); and
section 52 Criminal Justice Act 1993 (insider dealing) (see Question 24).
Contract law. If there is a contract between the investor and the broker, the investor may be able to claim for contractual damages against the broker, using normal contractual principles.
Tort. The investor may be able to claim tortious damages against the broker if he can prove that the broker owed him a duty of care, that the duty was breached and that he suffered a loss as a result.
FCA Rulebook. Participating brokers/dealers will produce non-independent research. Non-independent research must be correctly labelled as such. Brokers/dealers must take reasonable steps to identify and manage conflicts of interest which may arise in producing the research, must fairly present their non-independent research (including the identity of the author of the research) and disclose any relevant conflicts of interest and other information (see Chapters 12.3 and 12.4 of the FCA Conduct of Business Sourcebook for further information). Breach may result in disciplinary proceedings by the FCA and in certain cases, civil claims.
Brokers can minimise their liability in the following ways:
Disclaimers. Disclaimers should be used which, for example, state that any investment should only be made on the basis of the information contained in the prospectus.
Verification. It is common for issuers to check the draft research for factual accuracy.
Research blackout. A blackout for a period prior to publication of the prospectus helps to distance research from the prospectus.
Management of conflicts of interest. Issuers should not be promised favourable coverage by analysts, analysts should not participate in roadshows and their reporting and remuneration arrangements should be structured to avoid conflicts (see Chapter 12 of the FCA Conduct of Business Sourcebook and Chapter 10 of the Systems and Controls Sourcebook).
Forecasts and projections. These should be avoided.
Independence. The analyst writing the report should be independent of others in the same organisation selling the securities.
Distribution. Distribution should be limited to professionals.
Prospectus. The recipients of the research report should be sent the prospectus.
Bookbuilding is used on many securities offerings, whether an IPO or a secondary. The book is built after publication of the prospectus when the banks running the book receive indications of size of demand and at what price. In an institutional offer, the prospectus is sometimes in draft form (that is, a pathfinder) and the final prospectus confirming the price for the shares and the number to be offered is only published once the bookbuild has taken place. Alternatively, a "price range" prospectus is produced (see below).
In a retail offer, the prospectus is likely to be a "price range" and therefore retail investors may be asked to indicate a total amount that they would be willing to invest or a maximum price per share or both. If the price is fixed outside the range set out in the prospectus, this will be considered to be a "material new matter" and a supplementary prospectus is required.
An IPO or secondary offering which is a rights issue or open offer is likely to be fully underwritten, that is, the underwriters will agree in the underwriting agreement to procure subscribers for the new or sale shares and if any shares are not taken up, to subscribe for those shares themselves in agreed proportions. It is less common for a placing to be underwritten and the banks may only agree to use reasonable endeavours to procure subscribers.
The underwriting agreement will contain the following key terms:
Conditions precedent/termination rights.
Indemnity from the issuer to the bank.
Warranties from the issuer (and the directors on an IPO).
Lock up.
Over allotment (on an IPO).
Post-admission undertakings from the issuer.
Commission, usually expressed to be between 2% and 5% of the total amount raised. Sometimes a discretionary separate success fee is payable.
Set out below is an indicative timetable for an institutional bookbuilt IPO. "T" is the date of pricing:
T minus 6 months to T minus 3 months. Preparatory work, for example, advisers are appointed, eligibility for listing is discussed and due diligence is started. Banks submit eligibility letter to the FCA and prospectus drafting commences.
T minus 3 months. First submission of the prospectus to the FCA.
T minus 2 months to T minus 1 month. First draft reports circulated and announcement of intention to float.
T minus 1 month. Connected brokers' research is published. Research blackout period starts.
T minus 14 days. Pathfinder prospectus is published (or price range approved prospectus if retail offer). Underwriting agreement signed (if retail offer). Roadshows and bookbuilding starts.
T. Offer is priced and shares are issued and allotted subject to admission. Approved prospectus is published (or pricing statement if retail offer) and underwriting agreement is signed (if institutional offer). Conditional dealings and stabilisation begin.
T plus 3 days. Shares are admitted to trading and to listing. Unconditional dealings begin.
T plus 30 days. End of stabilisation.
The timetable for a secondary offering will differ from the above as it may be necessary to convene a shareholder meeting in order to obtain consents for the issue and allotment of the new shares.
Stabilisation ostensibly breaches UK rules on insider dealing and market abuse. However, the FCA recognises the need for stabilisation to allow the market to operation more efficiently. Stabilisation must take place under Regulation (EC) 2273/2003 implementing Directive 2003/6/EC as regards exemptions for buy-back programmes and stabilisation of financial instruments (Buyback and Stabilisation Regulation) and/or the FCA Price Stabilisation Rules (Stabilisation Rules) which, among other things, prescribe that:
Only prescribed stabilising action is permitted.
Only specified securities may be stabilised on a specified exchange within specified time limits.
Stabilising transactions must only take place within specified price limits.
Adequate prior disclosure and records of stabilising activities must be maintained by the stabilising manager.
Breach of the Stabilisation Rules may result in the FCA bringing disciplinary proceedings and proceedings for injunctions and restitution.
A number of UK tax issues may arise on an equity issue, requiring specialist tax advice.
Tax issues can arise in the context of an IPO as a result of:
Existing shareholders disposing of shares.
The company being floated leaving a capital gains group.
The unwinding of employee share schemes.
UK shareholders disposing of shares in the company realising a chargeable gain on the sale of their shares will be liable to capital gains tax (individuals) or corporation tax (corporates). It may be possible to reduce this gain by pre-IPO planning to increase the base cost of the shares. The substantial shareholding exemption (SSE) (for companies) or entrepreneurs' relief (for individuals) may be available to mitigate these gains.
Any pre-IPO restructuring involving UK intra-group transfers of assets into the company (or group) to be floated creates the potential for de-grouping tax charges. Provided certain conditions are met, any de-grouping tax charges will be borne by the company (or companies) making the disposal of the company being floated. This may allow the company (or companies) making the disposal to shelter the charge within the SSE.
On a rights issue, bonus issue or trombone issue of ordinary shares, it is generally accepted that the company does not make an income distribution on the issue of either the provisional allotment letter (PAL) (if applicable) or the shares that are eventually issued after the end of the issue period. However, there are two main exceptions to this treatment:
The issue of redeemable share capital or any security in respect of shares or other securities, except the amount of the issue that is equal in amount or value to the consideration received by the company for the issue.
A bonus issue of shares following a previous repayment of share capital.
Unless certain secondary issues of shares are structured as a reorganisation of the share capital of the issuing company, existing UK shareholders may be treated as though they have made a part disposal of their existing holdings.
If the issuer is raising capital through a rights issue or open offer in a currency other than its accounting currency, any foreign exchange gains or losses on currency hedging instruments should be disregarded for tax purposes provided that, in particular, a person unconnected with the issuing company bears the risk of exchange rate fluctuations.
In the context of a trombone rights issue, the company and any corporate shareholders may incur liabilities by reference to any movements in the value of the embedded derivative financial instrument or equity instrument between the issue date and the conversion date.
The issue of shares is a non-supply for VAT purposes. If the capital raised is used for the purposes of a fully taxable or partially exempt business (for the purposes of VAT), the VAT incurred by a UK issuer on supplies made to it in connection with the share issue should be recoverable, either in full or in part.
Transfers of shares in UK companies generally give rise to a charge to UK stamp duty reserve tax (SDRT) or stamp duty, subject to applicable exemptions. The intermediary exemption and stock lending exemption may be available for stamp duty and SDRT that would arise for stabilisation, stock lending and greenshoe option transfers.
The issue of shares (not being a transfer) to persons including places (or to brokers as agent for the places) should not generally give rise to stamp duty or SDRT. A 1.5% SDRT charge previously arose on the issue of shares to persons providing depositary receipt or clearance services. However, following litigation, that charge is no longer applied, provided that such arrangements form an integral part of an issue of share capital.
To ensure that PALs are exempt from stamp duty, rights under a PAL or fully paid letter of allotment will be renounceable only within six months from issue. No SDRT is generally payable on the issue of PALs. No stamp duty will be payable on the renunciation of a PAL or a fully paid letter of allotment. However, SDRT will be payable generally at the rate of 0.5% of the consideration on any renunciation or other dealings.
A company with a premium listing must comply with continuing obligations set out in the Listing Rules. The main areas relate to the following:
Transactions. Certain transactions, depending on size, require either prior shareholder approval or disclosure to the market.
Related party transactions. Transactions with related parties may require prior shareholder approval and disclosure.
Share dealing. All persons discharging managerial responsibility (PDMRs) must comply with the Model Code (set out in the Listing Rules) or a share dealing code with equivalent restrictions on when such a person may deal in the company's securities.
Corporate governance. A UK incorporated issuer is expected to "comply or explain" in relation to the UK Corporate Governance Code and must explain the extent to which it does so in its report and accounts.
It must also comply with the following:
Disclosure and Transparency Rules (DTRs). The main areas relate to the:
disclosure of inside information;
periodic financial reporting;
notification of major shareholdings; and
disclosure of dealings by PDMRs.
LSE Admission and Disclosure Standards. These impose some minor obligations in relation to certain corporate actions (for example, declaration of dividends).
A non-UK incorporated company is subject to the FCA Rules in the same way as a UK incorporated company except that:
There are exemptions from certain DTRs for issuers incorporated in certain countries and issuers incorporated elsewhere in the EEA.
An issuer of depositary receipts on the Professional Securities Market is subject only to Chapter 2 of the DTRs and Chapter 18 of the Listing Rules.
An issuer of a depositary receipt on the LSE Main Market is subject to Chapter 18 of the Listing Rules, but is not subject to the major shareholding notification regime or the requirement to produce half-yearly or interim management statements.
If an issuer or any of its directors or both breaches the continuing obligations set out in the FCA Rules, the FCA can:
Issue a private censure.
Issue a public censure.
Suspend/cancel the company's listing.
Impose a penalty on the company and the director (if he was knowingly concerned in the contravention).
FCA guidance on how it applies these powers is found in the Decision Procedure and Penalties Manual.
Although the UK has implemented Directive 2003/6/EC on insider dealing and market manipulation (market abuse) (Market Abuse Directive), certain elements of the previous UK regime remain and therefore the UK currently has a wider definition of what constitutes market abuse than under the Market Abuse Directive. Market abuse as defined in section 118 of the FSMA is behaviour in relation to qualifying instruments admitted to trading on a regulated market (or in respect of which a request has been made for admission) which falls within any one or more of seven types of behaviour as set out below:
Insider dealing.
Improper disclosure of inside information (tipping off).
Misuse of information.
Manipulating transactions.
Manipulating devices.
Dissemination of false or misleading information.
Misleading behaviour and market distortion.
The FCA has published the Code of Market Conduct which gives guidance to market participants as to what may or may not constitute market abuse. The civil market abuse regime allows the FCA to impose unlimited fines.
There are also separate criminal offences in relation to misleading statements and market manipulation. The maximum penalties are seven years' imprisonment or a fine (fines are not unlimited) or both.
In addition, there is a separate criminal regime for insider dealing under Part V of the Criminal Justice Act 1993 for which the penalties are the same as for the above criminal offences.
An issuer with a premium listing may only cancel its listing if it has obtained the consent of a majority of not less than 75% of shareholders. It must also send a circular, approved by the FCA, to shareholders that gives the anticipated date of cancellation, which must not be less than 20 business days following the passing of the resolution.
Shareholder approval is not required where the issuer notifies the market that:
The financial position of the issuer is so precarious that, but for the de-listing, there is no reasonable prospect that the issuer will avoid formal insolvency proceedings.
There is a proposal for a reconstruction which would ensure the survival of the issuer and the continued listing would jeopardise this.
Cancellation is in the best interests of those to whom the issuer has responsibilities. The issuer must provide an explanation describing why shareholder approval is not being sought.
In any event, the issuer must give at least 20 business days' notice of the intended cancellation.
The FCA may cancel a listing if it is satisfied that there are special circumstances that preclude normal regular dealings in them (for example, the percentage of shares in public hands falls below 25%, or when the issuer completes a reverse takeover). Special rules apply in relation to takeover offers.
There were 84 de-listings from the Main Market in 2012, compared to 40 in 2011.
The FCA is considering a number of changes to the Listing Rules for premium-listed issuers. The changes focus on the following areas:
Increased emphasis on issuers acting independently of controlling shareholders (that is, those who control 30% or more of voting rights attached to the issuer's shares). For example, it is proposed that there is an express provision requiring a relationship agreement governing the interaction between the issuer and a controlling shareholder. Also, an issuer with a controlling shareholder would be required either to have a majority of independent directors or an independent chairman plus other independent directors making up at least half the board of directors.
Free float. No change is proposed to the level of the free float but some changes are proposed to the calculation of which shares are included. It is also proposed that the criteria to be applied by the FCA in considering modifications to the free float requirement are made explicit, for example, modification would be considered where the number of "public shareholders" exceeds 100 and where the expected free float in admission is more than GB£250 million. The percentage would not fall below 20%.
The London Stock Exchange has also announced plans for a High Growth Segment, which would be a new regulated (but not listed) market. The segment is aimed at high growth companies that are seeking an eventual listing on the Main Market. It is proposed that key entry requirements include:
That the issuer is EEA incorporated.
That the securities are equity shares only, issued by commercial companies.
Minimum free float of 10% and a value of at least GB£30 million, the majority of which must be raised at admission by the issue of new securities or sale of existing securities.
Historic revenue growth of 20% over a three-year period.
T +44 (0)20 7859 2058
F +44 (0)20 7638 1111
E nicholas.holmes@ashurst.com
W www.ashurst.com
Qualified. England and Wales, 1994
Areas of Practice. Capital markets; securities; M&A; corporate.
Recent transactions
Languages. English, German (fluent).
Professional associations. Member of the Company Law Committee of the City of London Law Society.
T +44 (0)20 7859 2918
F +44 (0)20 7638 1111
E caroline.chambers@ashurst.com
W www.ashurst.com
Qualified. England and Wales, 1996
Areas of Practice. Capital markets; securities; corporate.
