Paths to glory

A public listing may be one of the best routes to accelerate a company’s growth.

A public listing may be one of the best routes to accelerate a company’s growth.

A public listing remains one of the best routes to accelerate a company’s growth. Paul Tetlow, a partner at international law firm Hunton & Williams, outlines the most effective ways to raise both finance and profile as a publicly quoted entity.

There has been a cautious return of confidence to the UK public equity markets during 2010. In the first five months there were 57 IPOs (2009: 14) on the Official List and the Alternative Investment Market (AIM), raising £3.9 billion (2009: £226.12 million). Much of the interest was in natural resource production companies, which are regarded as lower risk than many other sectors, but these figures nevertheless mark an improvement in the market when compared with 2009.

Clearly, the public markets can still provide enormous financial firepower for ambitious businesses intent on fast growth. For those companies seeking to raise capital, the most common route is through an admission or listing so that a company’s shares are traded on a capital market. This is often coupled with a fundraising (usually a placing) and generally referred to as an initial public offering, or IPO (although it may not actually be “initial”, as the company may have raised seed funding at an earlier stage, and it may not be a “public” offer if it is done by way of an institutional placing).

The process requires the production of a prospectus in the case of a listing on the Official List or an admission document (which may also be a prospectus if it is a public offer) in the case of AIM. One such company that we brought to AIM earlier this year was Bellzone Mining, an iron ore exploration and development company with significant assets in Guinea. It raised £33.6 million by way of a share placing to give it an initial market capitalisation of £184.5 million.


For a placing, whereby shares are issued on a non-pre-emptive basis to institutional and other qualifying investors, a company is required to have requisite authority from its shareholders to issue such shares, which may already exist or be obtained via an extraordinary general meeting (EGM). In addition, companies on the Official List will be required to produce a prospectus if they issue more than 10 per cent of their existing issued share capital.

The Pre-emption Group was set up in 2005 to produce a Statement of Principles to be taken into account when considering share issues for cash other than on a pro rata basis. These guidelines are benchmarks that enable companies and their advisers to know if their actions are reasonable, and whether they are likely to be acceptable to institutional shareholders. The current guidelines state that a routine disapplication under section 570 of the Companies Act 2006 (“the Act”) should, generally, be limited to 5 per cent of a company’s ordinary share capital in any one year, and 7.5 per cent in any rolling three-year period. These guidelines are applied more strictly on the Official List, whereas AIM companies may seek a more generous disapplication of between 10 and 20 per cent depending on the appetite of their existing shareholders.

On the Official List, placings are typically only used by companies issuing less than 5 per cent of their existing issued share capital, thereby taking advantage of the disapplication of pre-emption rights. Very rarely do companies on the Official List issue more than 10 per cent of their existing share capital via a placing as they would have to produce a prospectus and would be encouraged to make the offer to their existing shareholders (via a rights issue or open offer, discussed below). Companies on AIM are not subject to this 10 per cent restriction so may undertake placings for larger equity fundraisings by using pre-existing authorities, or seeking further disapplication of pre-emption rights at an EGM.

In March, we worked with AIM-listed Dominion Petroleum so that it could raise £32.7 million by way of a placing with a wide range of institutional investors, in order to finance its drilling programme. Although Dominion is based in Bermuda, its constitution is tailored to meet the expectations of its investors, and so the pre-emption provisions are worded in a similar way to those that might apply under the Act to an English company. Dominion used its existing disapplication, amounting to some 10 per cent of the then issued share capital of the company, to issue shares raising £4.6 million. Further shares were then issued following an EGM of shareholders to disapply pre-emption rights to raise another £28 million.

Rights issue

A company could also conduct a rights issue. This is an offer of new shares made to existing shareholders on a pre-emptive basis, pro rata to their existing holdings. It takes the form of a provisional allotment letter, which is a right to subscribe for shares. Unlike an open offer, the right to subscribe for the new shares has a value itself that shareholders can realise by selling their rights in the market nil paid (i.e. the buyer still has to pay the company the subscription price). Even if shareholders do nothing, they retain the right to receive any value over and above the subscription price if the shares that they could have taken up are sold in the market at a premium to the subscription price.

In April, oil and gas company Faroe Petroleum asked us to help it raise £69.8 million by way of a rights issue – one of the largest ever on AIM. The company chose to carry out the fundraising by way of a rights issue to enable all of its shareholders to participate, especially those in the Faroe Islands, many of whom have been shareholders since the company first came to AIM in 2003. The deal was transformational for Faroe’s business – although the company’s priority was raising the funds, it was also important to involve all of its shareholders, and the company’s prospectus was therefore approved by the Danish FSA, as well as the UK Listing Authority, so that it could also be sent to the Faroe Islands.

An alternative option is to undertake an open offer to shareholders, which is also made on a pre-emptive basis. Unlike a rights issue, open offers do not include arrangements to sell any shares not taken up for the benefit of shareholders. This means that shareholder who do nothing will not have their entitlement sold on their behalf and therefore will not receive any money in respect of the shares for which they are entitled to apply. In addition, application forms, rather than provisional allotment letters, are used. These must be non-renounceable, which means that the shareholders cannot sell, nil paid, the right to subscribe for the shares offered to them.

Open offers are invariably coupled with a placing and often described as “placings subject to clawback”, meaning that the shares are “soft placed” with investors, subject to the right of the existing shareholders to apply for them.
A more complex mixture, allowing an element of certainty for both the external investors and the company, is to combine a “placing and open offer” (or placing subject to clawback) with a firm placing, whereby a proportion of the company’s shares, for which pre-emption rights will be disapplied subject to shareholder approval, are “firm placed” with investors who are then guaranteed to receive them. Investors may decide to increase their stake in the company by also participating in the placing and open offer, but the number of shares they will acquire through this element is uncertain as it depends on the participation of the existing shareholders.

Central Rand Gold, a Guernsey-domiciled company whose subsidiary has gold exploration assets in South Africa, was admitted to the Premium segment of the Official List and the Main Board of the Johannesburg Stock Exchange in 2007. Subject to shareholder approval at its EGM, it should raise US$35 million through a firm placing, placing and open offer, enabling the company to move on to the next stage of its production strategy.

The transaction was challenging for us due to the unique structure of the company’s offer, which was necessary to enable the global coordinator and bookrunner to underwrite the deal so that the company could satisfy its working capital requirements.

Cash box placing

If a company is already listed and is seeking additional funds for growth, many directors have found value in a cash box placing. A cash box structure is a non-pre-emptive fundraising method by means of a share-for-share exchange – the company raising the money acquires preference shares in a special purpose vehicle (SPV).

The only material asset of the SPV is cash, which is provided to it by an investment bank that subscribes for the preference shares in the SPV. The investment bank funds the subscription for the preference shares out of the proceeds of a placing of equity securities of the company wishing to raise cash. A cash box structure allows an issuer to issue new shares under an exception from the pre-emption requirements of section 561 of the Act because it is not a cash issue as the shares are issued in exchange for shares in the SPV.

In practice, a company on the Official List can use a cash box to issue shares equivalent to up to 9.9 per cent of its issued share capital (less any shares admitted to trading on the same market in the previous 12 months) because above this limit, under the Listing Rules, it would have to produce a prospectus in order to make the offer.

In January, Central Rand Gold also carried out a cash box placing, raising £3 million. It enabled the company to raise funds quickly – in only three weeks – to meet its immediate working capital requirements, giving it time to carry out a larger fundraising, through its firm placing, placing and open offer, later in the year.

Vendor placing

When a company wishes to fund an acquisition, a vendor placing has traditionally been a popular alternative to a rights issue. It involves shares being allotted by the company in exchange for shares in the target company. Instead of issuing the shares directly to the seller(s), the company’s shares are placed with investors by the investment bank in consideration for the acquisition of the target, and the cash is passed on to the sellers.

A key advantage of a vendor placing is that because the shares are issued in consideration for shares in the target (i.e. non-cash consideration), the pre-emption requirements in the Act do not apply to it. Although this means that the issuing company does not need to obtain a section 570 disapplication, the Association of British Insurers (ABI) guidelines on vendor placings do place limits upon the extent to which they can be used.

According to such guidelines, companies on the Official List should obtain shareholder consent where a vendor placing will involve the issue of new shares that represent more than 10 per cent of the company’s issued share capital, or a discount greater than 5 per cent on the company’s share price unless a clawback is offered to shareholders.

On a clawback, shares are placed with placees, subject to the company meeting applications from existing shareholders. These are normally offered in proportion to their existing shareholdings and the clawback usually takes the form of an open offer. The process is much less onerous for AIM companies who are not strictly bound by the ABI guidelines.

Earlier this year, we acted for an AIM company on its proposed acquisition by such route, which unfortunately did not complete due to unforeseen late changes in the vendor’s business. The purchaser did not have sufficient funds to make the acquisition and the state of the debt market made it harder to raise debt finance than has historically been the case. The amount of funds required meant that the company would have had to carry out the fundraising on a pre-emptive basis by means of a rights issue or to have called a general meeting to ask shareholders to waive their pre-emption rights. The pursuit of a vendor placing would have enabled the company to avoid these time-consuming administrative and legal burdens.

Moving markets

While not a means in itself of raising money, a company on one of the junior markets (PLUS-quoted or AIM) may decide that it is appropriate to move to a more senior market. If, as is likely, this happens to be the Official List then the company will be required to produce a prospectus.

Such a move may well have a positive effect on the company’s share price, as it is likely to gain access to a wider range of investors and, in the case of a company moving to the Official List, may become eligible to be included in the FTSE indices. We are currently assisting Medusa Mining with its proposed move from AIM to the Official List, now planned for September. Moving from AIM to the Official List is an attractive way for established companies to increase their share price, although it is imperative that they consider the additional obligations that will be placed on them as a result of such a move. For Medusa, a cash-generating company with secure assets and no immediate plans to acquire, the move is a perfect way to raise the company’s profile among fund managers and further increase the share price for existing investors.

There is no getting away from the fact that the public markets have been hit hard during the past 18 months, but the funds raised by companies, particularly through secondary fundraisings across the junior and main markets, show that significant sums of capital are there to be invested in growth businesses. The rise in M&A and private equity activity is encouraging, and if this trend continues throughout the rest of the year then it will have an important effect on the nation’s economic recovery.

Hunton & Williams offers a range of legal services under both English and US law, serving corporations, financial institutions, governments and individuals, as well as a broad array of other entities.

Paul Tetlow
Partner, Hunton & Williams
Tel: 020 7220 5780

Nick Britton

Nick Britton

Nick was the Managing Editor for when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

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