This update will be relevant to institutional investors and other market participants including issuers, investment banks and independent advisers involved in IPO’s and secondary fundraisings.
The UK models for IPO’s is not fundamentally broken. However, the ABI’s report on “Encouraging Equity Investment” considers that:
- a UKLA approved prospectus, save for pricing, should be published at the same time as the intention to float (ITF) announcement;
- there should be a limit of three bookrunners for transactions exceeding £250m;
- controlling shareholders should have liability for the IPO prospectus for companies seeking a Premium listing; should include responsibility statements for certain statements in the prospectus; and have direct regulatory responsibility to the UKLA for adherence with their relationship agreement;
- the ABI and the Pre-Emption Group should review their guidance; and
- there should be deeper discounts in rights issues to reduce the level of underwriting fees paid to primary and sub-underwriters.
Set out below are the ABI’s key recommendations.
Information Asymmetry/Price Discovery
Issuers are encouraged to engage earlier on with investors in the IPO process (up to a year in advance). In addition a UKLA approved prospectus, complete save for pricing or price range, should be issued at least one week earlier than currently occurs. This would enable investors to have access to the definitive disclosure document earlier in the process and there is likely to be more published independent analysis ahead of pricing.
To reduce the risk of successful actions outside of the UK, the FCA will need to clarify, amongst other things, that connected pre-deal research will not be regarded as part of the prospectus.
There is strong opinion in favour of smaller syndicates and generally no more than three bookrunners should be appointed for large transactions ie. above £250m excluding any over-allotment option. No more than two in other circumstances. Also, to help create a stable aftermarket and a core of stable long-term shareholders, issuers should scrutinise share allocations.
To create greater transparency on fees paid, syndicate members’ individual fees together with a breakdown of fees as a percentage of the size of the offering and those fees independent of size, should be disclosed.
For incentive fees, a set of criteria should be considered when awarding the fee, to be determined and paid at the later of the release of the first quarterly results of the issuer as a listed company and three months after listing. This would enable the market time to determine whether the IPO was a success or failure. Investors should also be given the opportunity to input into the allocation of the incentive fee, on an anonymous basis.
Corporate governance and controlling shareholders
The ABI acknowledges the FCA’s recent consultation paper, “Enhancing the effectiveness of the Listing Regime” (see our earlier ebrief on the proposed changes, the results of which are due this summer). In addition to these changes, the ABI recommends that:
- controlling shareholders should have liability for the IPO prospectus for issuers seeking a Premium listing;
- controlling shareholders should include responsibility statements in the prospectus covering certain statements regarding the future conduct of the business, including their future relationship with the issuer. They should be liable to the same extent as the issuer unless they can show that they acted in good faith and did not directly or indirectly induce the acts of the issuer constituting a violation;
- the relationship agreement between the issuer and controlling shareholders should require the controlling shareholders to comply with the statements in the prospectus for which they have taken responsibility and to have direct regulatory responsibility to the UKLA for adherence with the agreement. FSMA 2000 would need to be amended to allow the UKLA the power to fine or censure controlling shareholders for beach of the Listing Rules; and
- at least one month prior to the ITF announcement, an independent board should be in place.
SECONDARY FUND RAISINGS
To address concerns about the potentially dilutive effects of non-pre-emptive issues, the Pre-Emption Group should review their Statements of Principles and the ABI will revise their guidance to clarify, amongst other things, the limits for placings for cash (including associated discounts) and vendor placings and the use of the cash box structure.
Issuers should use deep discounts in rights issues and try and obtain firm undertakings from sub-underwriters prior to announcement of the transaction, to reduce the level of underwriting fees.
The gross spread for rights issues and open offers should be unbundled as a matter of best practice and fully disclosed in the offering documents along with the disclosure of other rights issue related fees eg. accountants, lawyers and independent advisers fees.
The UKLA should consider introducing a more expensive fast-track review process for time critical offerings.