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The procedures for listing vary according to the circumstances (in particular, whether the company is a new applicant to the exchange and the Financial Services Agency (FSA) or not). However, central to any application is a requirement that, other than in limited circumstances, the company must prepare a disclosure document containing comprehensive information on both the shares to be listed and the company itself. The disclosure document is referred to as a prospectus. The prospectus must be approved by both the FSA and the London Stock Exchange (LSE) and published. Sometimes the information on the prospectus becomes outdated or there is something additional that needs to be disclosed to give investors the full picture. In that case, another prospectus, known as a supplementary prospectus, is required to be published. The process to produce a prospectus is very expensive and would involve a huge investment in employee and adviser time, so companies need to consider the question of whether they do want to offer their securities to the public very carefully.
For more information on the prospectus, see our 'Liability for the prospectus' section
A prospectus is required when an issuer applies for a listing of those securities in circumstances where they are:
i. being offered to the public in the UK; or
ii. on application for admission to trading on a regulated market in the UK.
The main regulated market in the UK is the London Stock Exchange (LSE). In both cases, there are exceptions which can be relied on to avoid the obligation to produce a disclosure document.
A company seeking a listing must:
The stock exchange has a wide discretion to refuse an application for listing. Even if the company has complied with all the procedures, the stock exchange may refuse the application if it considers that the admission of the securities of the applicant would be detrimental to the interests of any investors.
There are some basic conditions that must be satisfied before the securities can be listed on the stock exchange. Some of the rules relate to the applicant itself, while others relate to the securities to be listed. The stock exchange has the discretion to impose additional conditions for admission of securities for listing with a view to protecting the interests of investors.
The following is a summary of some of the main conditions as applied to an application for listing of shares by a UK company that is a new applicant.
Incorporation
The applicant company must be a duly incorporated company. Private companies are precluded from offering their shares to the public so must first re-register as a public company if they want to come into the market.
Accounts
A new applicant company (i.e. a company that doesn't have any of its shares listed) must have published independently audited accounts covering a period of three years ending not more than six months prior to the date of publication of the prospectus.
Duration of business
The applicant company should have carried on an independent revenue earning business as its main activity, either itself or through its subsidiaries, for at least the period covered by the accounts referred to above, and has a historic revenue earning record for at least 75% of the business for the same period.
Directors
The directors must follow a code of practice set out in the listing rules called, 'the model code'. This code regulates how individuals with managerial responsibilities in companies must conduct themselves in relation to share dealing.
Controlling shareholders
If a company has a controlling shareholder, it must be able to operate independently of the controlling shareholder. All the transactions between the company and the controlling shareholder must be at arm's length and on a normal commercial basis.
A controlling shareholder is anyone who can control 30% or more of the votes or who can control the appointment of directors exercising the majority votes on the board.
Transferability of shares
Generally, the securities concerned must be freely transferable. Accordingly, provisions giving shareholders pre-emption rights in the event of proposed transfer of shares, or allowing the directors to decline to register a share transfer, generally have no place in the Articles of Association of a company that seeks a listing of its shares.
Market value
The expected market value of the shares for which listing is sought must normally be at least £700,000. For a new applicant, this minimum figure will not usually cause any difficulty as the market value of shares to be issued on a floatation is normally well in excess of this sum.
Public ownership
A sufficient number of the relevant class of shares must be distributed to the public no later than the time of admission of the shares for which a listing is sought. A sufficient number of shares are deemed to have been distributed to the public when 25% of the shares in respect of which application for admission has been made are in the hands of the public.
A percentage lower than 25% may be acceptable if the market will operate properly with a lower percentage in view of the large number of shares of the same class and the extent of their distribution to the public.
Prospectus rules
One of the documents that an issuer has to spend plenty of time working on before their securities are listed on the stock exchange is the prospectus. A prospectus is required whenever securities are offered to the public in the UK. The definition of 'public' in this case is extremely wide, so companies need to be very careful when working out whether or not a prospectus is required.
In this section, we will examine the contents of a typical prospectus and try to understand why great care has to be taken to verify the accuracy of every statement in the prospectus.
In practice, the extent of information required by the FSA differs between one issue and another, depending on the circumstance of each particular case.
The reason for this is because the aim of a prospectus is to give potential investors sufficient information about the issuer and the securities to be issued so that they can make informed decisions as to whether to invest in the securities or not. The amount of information required for this can vary considerably.
Take, for example, an applicant coming to the market for the first time compared with an issue of shares by way of rights by a company whose shares are already listed.
In the first case, fullest disclosure is required to ensure that the investors' interests are protected. In the second case, however, the company's shares are already listed and what is proposed is that more shares are issued to the existing shareholders. The listed company issuing rights already has a great deal of information in the public domain due to its reporting obligations as an officially listed company. The new applicant will have comparatively little information published, in most cases. Therefore, it must publish the required information in its prospectus.
