Investor guidelines on transactions
Market reCap September 2014 edition
- AIM Notice 39 – update on directors participating in a fundraising
- Investor guidelines on share capital management
- Investor guidelines on transactions
- UKLA and AIM require sanctions confirmation
- Primary Market Bulletin No.8
- Board appointments and equality law
- The end of quarterly reporting requirements
- Proposed changes to the Takeover Code
- Engagement letters
- "Blocking" a company's shares: How to respond to a notice under s 793 Companies Act 2006
In June 2014, the Association of British Insurers (ABI) published transaction guidelines, setting out the expectations and views of institutional investors on various aspects of equity capital markets transactions. The Investment Management Association has now assumed responsibility for guidance previously published by the ABI.
The transaction guidelines build on the key recommendations in two reports published by the ABI in July 2013: "‘Encouraging Equity Investment" and "Improving Corporate Governance and Shareholder Engagement".
Initial public offerings (IPOs)
In relation to syndicate size, as a rule of thumb, no more than three book-runners should be appointed for transactions above £250m (excluding any over-allotment option) and no more than two book-runners for smaller transactions. Additional syndicate members should be included based on their sector expertise or distributional reach: inclusion on the basis of past or future services is discouraged. Where more banks are appointed to a syndicate due to on-going relationships, companies should clearly specify the roles and responsibilities of each syndicate member.
Companies should scrutinise share allocations carefully, with the assistance of independent advisers if appropriate, to ensure that shares are being distributed to those most likely to be long-term shareholders.
Retail tranches are encouraged when listing in the premium segment.
There remains a significant concern with the overall level of fees for IPOs and there should be greater disclosure of fees in the prospectus.
The final determination and payment of incentive fees should be made three months after listing or, if later, on the release of the company's first quarterly results after listing. The amount paid should be disclosed to the market at the time of award.
When awarding an incentive fee, consideration should be given to the stability of the share price following listing, the allocation of shares to a long term shareholder base as evidenced by the stability of the share register in the aftermarket, the extent and quality of syndicate research and the continuation of research coverage after listing. Investors should be able to give input into the allocation of the incentive fee on an anonymous basis.
The market view is that prospectuses are too detailed to be understood by retail investors and contain too many generic or boilerplate risk factors. Companies and their advisers are encouraged to provide a document that is more succinct in providing the important information relevant to an investment decision.
The sponsor regime is considered to be fundamental to ensuring the effectiveness of the premium segment of the Official List.
Institutional investors expect clarity on the role of the sponsor in an IPO process, so that the appointment is clear to market participants and distinguishable from the role of the lead book-runners.
Sponsors should consider including an institutional ‘stamp of approval’ in relation to the suitability of the company for listing.
Potential conflicts of interest may arise if a sponsor is also one of the lead distributors of an IPO. Such conflicts should be managed and mitigated.
Where a company seeks admission to the London Stock Exchange's high growth segment, its "key adviser" should already be an approved sponsor under the Listing Rules.
In recent years, there has been an increase in the use of independent advisors by management teams or vendors who have limited or less frequent experience of equity capital markets, or require extra resources to help them through the IPO process.
Independent advisers should ensure that a syndicate is well managed; that the right information and advice is provided both to and by the company; and that the syndicate and company's interests are protected.
Underwriting capacity and fees and discounts
Companies should use deep discounts in rights issues in order to reduce the level of underwriting fees paid to both primary underwriters and sub-underwriters. They are also encouraged to reduce primary underwriting fees where possible, by getting firm undertakings from sub-underwriters before announcing the transaction.
Fees for advice, including document preparation, primary underwriting and sub-underwriting should be unbundled and shown separately in offering documents along with other fees. Tendering for both primary and sub-underwriting should be pursued only if the unbundling of fees does not lead to a lowering of the overall fee levels.
The ABI encourages the development of standard sub-underwriting agreements to help make the sub-underwriting process more efficient.
The aggregate fees charged, and the discounts to the mid-market price at the time of agreeing the placing, should be disclosed in the pricing announcement for non-pre-emptive placings.
Efforts should be made to shorten a pre-emptive timetable further by examining ways to eliminate the physical distribution of documents and reducing the time needed by custodians to enact their clients’ instructions to exercise.
Corporate governance during corporate transactions
Corporate transactions and independence
Non-executive directors should be given sufficient time and information to give proper consideration to the merits of a transaction, and the opportunity to provide their views to shareholders when they are first made insiders.
Executive directors should inform the appropriate non-executive director when an approach is received from a possible bidder or management first actively considers a transaction requiring shareholder approval. The non-executive directors should be provided with a narrative description of discussions between the company and the transaction counterparty and this narrative should be disclosed in summary form in the circular to shareholders.
Non-executive directors should be given direct access to the company's financial and legal advisers and should consider whether it is appropriate to seek separate, independent advice on a transaction. Any such separate adviser should be paid on a fixed fee (as opposed to a "success" or incentive") basis.
The practice of non-executives having discussions without the executives present is encouraged. The non-executives should confirm to the Chairman, prior to publication of any circular or recommendation to shareholders, that they are satisfied they have received sufficient time and information to consider the relevant transaction.
Where a company is subject to a management buy-out or similar transaction, or engaging in a transaction with a controller or a group of controllers, or where a conflict may otherwise arise, a special independent committee comprising only un-conflicted directors should always be formed to consider the transaction.
The committee should always take independent financial and legal advice. It is not acceptable for a ‘Chinese Wall’ to be established within the existing advisers to the company.
The committee should ensure its mandate is clear and is disclosed in any circular to shareholders or annual report. The mandate should normally extend to considering the terms of the transaction and whether the transaction itself (as opposed to the other courses of action) is in the best interests of the company and shareholders as a whole.
Jonathan Brooks is a Partner in Fieldfisher's Corporate Group in London.