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Initial Considerations: Secondary Placings

03/05/2019

At a glance

Once a company has completed the process of listing on a stock exchange, its focus will usually turn to growing its enterprise, increasing profits and delivering value for shareholders. New capital may be required to deliver its business strategy, which could involve making new corporate acquisitions or purchasing new assets. One popular method of raising new funds is by way of a secondary placing, offering new shares to investors in exchange for a capital investment. We have set out below some initial questions that should be considered by a company listed on AIM or the Main Market (Standard segment) looking to raise money through a secondary placing.

Which brokers will the company appoint?

The company will appoint one or more broking houses to assist with the placing process. The brokers will use their reasonable endeavours to procure investors to take part in the secondary placing. Brokers are key to the success of a placing and, together with the company’s lawyers, will help to guide the company through the placing process. Brokers take a commission from the proceeds of the placing and their terms of engagement should be carefully considered – sometimes, for instance, brokers require exclusivity over the company’s equity fundraisings or expect a commission on future fundraises even if their services have not been used. The FCA handbook prevents brokers from locking companies in to certain future services, such as acting for the company on future placings or public M&As, so the broker’s terms of engagement should be checked to ensure they do not include such a lock-in.

Does the company have authority to issue new shares?

Whenever new shares are issued by a company, existing shareholders’ holdings are diluted, unless they subscribe for further shares. To protect existing shareholders from automatic dilution, companies must ask shareholders for authority to issue shares without offering those shares to existing shareholders. Shareholders are usually asked to authorise directors to issue a certain number of shares on this basis at the company’s annual general meeting, but if this does not provide sufficient headroom for the proposed secondary placing, the company will have to go back to its shareholders to approve the issue at a new general meeting.

Will shares be offered to non-EEA overseas shareholders?

Overseas legal advice will be required if the company intends to issue shares to non-EEA shareholders. In certain jurisdictions, precise steps are required to be taken – or certain exemptions need to be relied upon – before shares can be offered into those jurisdictions.

Is the company complying with market abuse requirements?

A company looking to raise funds will usually market itself (with the help of its brokers) prior to embarking on a fundraising by giving presentations to potential investors. As presentations may include sensitive inside information that may not yet have been released more widely, investors must be ‘wall crossed’ before receiving such information, putting them on notice that they are receiving inside information and prohibiting them from dealing in the company’s shares until the information has been released to the market at large. By giving presentations, the company may be delaying disclosure of inside information under the Market Abuse Regulation so will need to consider and record the basis for its delayed disclosure.

The company must keep an insider list with details of the individuals who have been provided with inside information relating to the secondary placing and any connected acquisitions. A ‘leak announcement’ should also be prepared, to be released to the market in the event that there is a leak of information relating to the proposed transaction.

 What main documentation will be required?

A prospectus will be required where shares are being offered by an AIM or Main Market listed company to the public and this prospectus would need to be fully verified. However many companies that we act for are able to rely on an exemption to this requirement, where (a) the offer is made to “qualified investors” and otherwise to fewer than 150 persons in any EEA state; or (b) the total consideration of the offer, and offers made by the company in any EEA state(s) during the past 12 months, amounts to less than €8 million.

A prospectus will also be required where shares are to be admitted to trading on the Main Market (but not AIM) if they represent 20% or more of the shares already admitted to trading on the Main Market over a rolling period of 12 months.

If authority to allot shares is required beyond the authorisations given by shareholders at the company’s annual general meeting, a notice of general meeting will need to be prepared and circulated to shareholders. The notice will only be valid if it is served on shareholders within such time periods as are prescribed under the Companies Act 2006 (or equivalent local legislation if a non-UK company) and the company’s constitution.

The company’s brokers will usually require that the company enters into a placing agreement with the brokers setting out the terms of the placing, commission structures and risk allocation. These agreements are generally negotiated between the company’s and brokers’ lawyers, with principals consulted in relation to the commercial terms.

Will there be an open offer?

Open offers are offers of shares to existing shareholders in the same proportion as their current shareholdings, usually for a discounted price. They sometimes accompany secondary placings to institutional investors, allowing existing shareholders to participate. Companies providing shareholders with the opportunity to subscribe for new shares under an open offer will need to set out in a circular the steps that shareholders must take to participate in the open offer, which the company’s registrars and lawyers will help to co-ordinate.

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Robert Bines-Black
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