The UK Financial Conduct Authority (FCA) is consulting on wide-ranging changes to the UK listing regime which would replace the current standard and premium listing categories with a single listing category. In this post, we explain where the requirements may change as a result of the consultation, although the final rule changes and timings are still to be confirmed.
1. Share structure and cap table
A key eligibility requirement for the London Stock Exchange’s main market is that not less than 10% of the issuer’s shares must be ‘in public hands’ at the time of listing and post-IPO; owners of stakes of greater than 5% and directors, amongst others, will not be considered in public hands. In addition, in order to be eligible for the FTSE UK indices, a premium listed issuer currently would need to meet the FTSE free float requirements of 10% minimum free float for UK incorporated issuers and 25% minimum free float for non-UK incorporated issuers.
A limited form of dual-class voting structure is now permitted for a premium listing on the London Stock Exchange, although there may be more flexibility on other UK markets (e.g., a standard listing on the London Stock Exchange). The FCA’s proposed single listing category would allow for dual-class voting structures, but the high-vote shares could be held only by directors of the company – and these structures would be subject to certain other restrictions, including a mandatory sunset provision of no longer than 10 years.
Make sure that your capitalisation records accurately reflect all share issuances, transfers and cancellations, as well as option and warrant issuances, exercises and cancellations. Do not underestimate the work involved on a cross-functional basis between legal, HR and finance on managing the cap table and equity platform, as well as the transition to the registrar on an IPO.
2. Financial statements and accounting issues
You will need to include consolidated financial statements for three years in the prospectus for your IPO. For a premium listing, currently the latest audited financials must not be more than six months old, so depending on your financial year-end and the IPO window you are targeting, audited interim financial statements also may be required. The financial statements included in the prospectus – known as the historical financial information (HFI) – for a UK-incorporated issuer will need to be prepared in accordance with UK-adopted international accounting standards and the accounting policies to be adopted by the company going forwards, as well as remain consistent throughout the financial track record period. You will need to hire reporting accountants to report on the HFI in the disclosure document, but it does not need to be issued by the same accounting firm that issued the previous audit opinions. Consider whether you will appoint your existing firm of auditors or a different firm as reporting accountants and, if the latter, focus on how they will work with your existing auditors to ensure timelines can be met.
For a premium listing, currently the HFI must:
- Show a revenue earning track record and put prospective investors in a position to make an informed assessment of the business.
- Represent at least 75% of the company’s business for the full financial track record period.
Where acquisitions have been undertaken, meaning that the second requirement has not been met, separate audited HFI for the acquired entities – prepared on the same basis as the rest of the HFI – will be required, which can necessitate significant work. The FCA’s proposed single listing category would not have either of these additional requirements.
You will need to identify any sensitive issues or any fine-line determinations in your significant accounting policies or practices, then discuss them with your reporting accountants. Key financial statement issues include segmentation, consistency across reporting periods, disclosure in the notes to the financial statements, and the disclosure of alternative performance measures (APMs) and adjusted metrics.
The UK has reporting accountant workstreams which are not typically seen in other jurisdictions and will impact the overall IPO timetable, including the preparation of:
- A long-form report, which is a private financial due diligence report on significant aspects of the business.
- A working capital report, which is a private report that considers the basis for the statement in the disclosure document that the company has sufficient working capital for at least 12 months.
3. Key metrics
Public investors will be looking for operating metrics, beyond the International Financial Reporting Standards (IFRS) financials, that management uses to measure and run the business. Investment bankers are very helpful, but a company should have its own perspective on the metrics that will work best over time. Ensure that you document the metrics consistently and are able to thoroughly support any ‘add backs’. Be sure to consider how your business might evolve and how that might affect your key metrics. For at least a few years following the IPO, you want your key metric disclosure to be as consistent as possible with your IPO disclosures. In addition, consider any non-IFRS financial metrics or APMs early – and how the FCA may view these during your IPO review process.
4. Marketing activities
Investor marketing begins very early in the UK IPO process – with early-look meetings which can follow soon after the formal IPO kickoff – and requires the company to have a finessed and verifiable equity story to present to investors at that stage. That typically would be followed by pilot-fishing meetings later in the process and potentially deeper dive or ‘gold card’ meetings where an advanced draft of the disclosure document may be made available on a confidential basis to certain key accounts before the formal announcement of the IPO. In addition, in some IPO processes, companies give a limited number of investors additional access to management and due diligence material in an attempt to secure one or more ‘cornerstone investors’ who typically agree to purchase a substantial and disclosed portion of the company’s shares at the time of the IPO’s launch. These activities take up a lot of management time and focus, so it is important to plan and agree upfront on sensible timings and deliverables with your investment banks to minimise the strain on the management team.
5. Pre-IPO research
On UK IPOs, research is prepared and distributed by analysts employed by the underwriting banks, with the analysts then using their research to discuss the company with potential investors ahead of setting the price range and commencement of the roadshow (the ‘pre-deal investor education’ process). This is an important part of the IPO process, and it will be a key area of focus for lawyers and bankers, given the regulatory requirements and potential legal and practical problems associated with distribution of research reports in the lead up to an IPO. The pre-IPO research process – including preparing the presentation to be delivered to the syndicate analysts, presenting to analysts, dealing with follow-up questions, reviewing the research reports for factual accuracy and now dealing with unconnected analysts to the extent they want to have access to management – can take up a lot of management time and focus during the IPO process. Rules that came into effect in the UK in 2018 impose additional regulatory requirements, including obligations to give access to third-party unconnected analysts to allow them to produce research on your company. There is pressure on the FCA to reform these rules, which generally are acknowledged not to have achieved their aims while also putting the UK equity markets at a disadvantage.
6. Board, committee requirements and management team
Reassess the composition of your board of directors (executive and non-executive) and board committees to identify any changes necessary to ensure an appropriate board of directors for a listed company. Beyond the legal requirements, seek out directors with diverse backgrounds and skills who can help you build a listed company and contribute in a meaningful way to the company’s culture, as well as support and challenge the management team. We believe strongly that diversity – including gender, racial, sexual orientation and neurodiversity – creates a stronger board and a healthier company.
It also is important to understand the requirements for independent directors that will apply after your IPO. For IPOs on the premium segment of the main market, the corporate governance regime is currently to ‘comply or explain’ with the UK Corporate Governance Code, which allows for a degree of noncompliance at IPO, although investors will expect to see a path to full compliance for premium listings in most cases. Recruiting capable directors and ensuring they are sufficiently onboarded ahead of an IPO can take time, so start early. Similarly, determine whether you need to build out your senior management team to operate as a listed company (common areas of focus include financial reporting and investor relations). Run background checks on new significant hires to avoid surprises during the IPO process. Consider whether newer members of the team, particular executives who will be interfacing with public investors, have been with the company long enough to truly understand business trends and convey the company’s story – and deliver financial results to investors.
7. Corporate governance
Begin to act like a listed company. Focus on corporate governance appropriate for a listed company and develop a culture of compliance. Transitioning a workforce from a private company to a heavily regulated listed company takes time and effort, and the example should be set at the top. Work with your lawyers to adopt state-of-the-art corporate policies and codes of conduct that comply with the rules and best practice, but also work for your organisation. Consider strategies to ease the transition, such as mock investor presentations on financial results, closing the relevant reporting on listed company timelines and/or establishing board committees akin to a listed company. If you share key financial or operating data broadly within the company, consider a strategy to begin to limit this disclosure, so that post-IPO you are limiting the number of people who will need to be included on insider lists. Taking the time during the IPO process to train management and employees on the important aspects of corporate governance and ongoing obligations – from insider dealing to external communications – will make the transition to a listed company much easier following the IPO.
8. Financial position and prospects procedures
Discuss with your advisers any material weaknesses or significant deficiencies in your internal financial controls – and understand their impact on your IPO process. Be prepared to discuss these forthrightly with your investment bankers and their lawyers, as well as to disclose them publicly. Even if there have been resource constraints or other problems in the past, investors want to see that you have a plan of remediation and a path to strengthening your financial controls in the future. Consideration of financial position and prospects procedures (FPPP) is critical in determining your company’s suitability for listing. You will need to have established systems, controls and procedures to enable you to achieve this, and your reporting accountants will need to prepare a private report on the company’s FPPP as part of the IPO process.
9. Directors and officers (D&O) liability insurance
The exposure to liability is significantly greater for director and officers of listed companies than it is for private companies, and a private company D&O insurance policy will not be appropriate once your company is listed. There has been increasing growth in securities claims in the UK in the past few years, with a number of high-profile cases being pursued. Choose an experienced D&O insurance broker and coordinate with the broker early in the process to ensure that your officers and directors are adequately protected. We also see companies take out public offering of securities (POSI) insurance or policies for the company and its directors, alongside traditional D&O policies, which provide ring-fenced coverage for liabilities relating to the IPO.
10. Executive remuneration
Consider engaging a remuneration consultant to assist in analysing remuneration practices, including equity and non-equity incentives, comparison to peer companies and potential reactions from investors and shareholder activists and compliance with guidelines issued by institutional investor bodies. Begin to develop a remuneration structure appropriate for a listed company. Talk to your lawyers about adopting employee share schemes and long-term incentive plans that will meet the future needs of the business and investor expectations, as doing so after an IPO can be decidedly more difficult and may require shareholder approval. Focus also on personal financial planning for executives: Senior management should consult with personal financial advisers regarding wealth maximisation alternatives.
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