Baffled by IPOs, dazzled by takeovers and floundering when it comes to private equity? Fear not, CheekyLittleCareers’ bluffer’s guide will make understanding City law jargon a cinch.
Let’s start with initial public offerings (IPOs), aka, flotations (note spelling – there is no ‘a’), listings or going public.
In a nutshell, an IPO involves a privately owned company ‘listing’ its shares on a stock exchange (in the context of a listing on the London Stock Exchange the options are the Main Market or the Alternative Investment Market (AIM)), enabling it to raise money. The listed shares can then be bought and sold by institutional investors (eg pension funds, asset managers and insurance companies) and retail investors (aka members of the public). The money that the share issue raises is called equity. It is risk capital because if the company goes bust, the investors risk losing their stake along with the money they initially paid to get their hands on it.
As well as raising money, there are numerous other benefits of going public, including the kudos and hiring power. In other words, once listed, a company can use shares and options as part of its remuneration package to help attract and retain star employees.
An IPO also offers existing shareholders an opportunity to exit their investment, whilst in the case of future purchases a listed company can use its shares towards the cost of the acquisition.
The stock exchange does not promise that the companies listed on it are good investments, simply that they’ll provide timely financial information on an ongoing basis, allowing investors to make up their own mind. If a company listed on a stock exchange does not fulfil its reporting obligations trading in its shares can be suspended.
Interesting fact: Deliveroo’s £1.5bn debut on the London Stock Exchange (LSE) on 31 March 2021 is so far the biggest IPO of 2021. The online food delivery business was advised by the London office of US law firm Proskauer. Meanwhile, Clifford Chance and Gibson Dunn advised The Hut Group on its 2020 float on the LSE, which saw the UK online retailer raise £920m. The deal was not only the first major IPO since the start of the Covid-19 pandemic it was indeed the biggest listing of 2020.
Once a company is listed on a stock exchange, it can come back and raise more equity. This is aptly known as a rights issue because existing shareholders have the right to be offered a bite of the cherry first.
Typically, a company will get its share issue underwritten by an investment bank (the “underwriter”), meaning on the day of the issue the underwriter will mop up any shares that aren’t taken up by investors. This ensures the company reaches its fund-raising target and doesn’t fall short.
Enter the lawyers!
Where do lawyers get involved, you might be asking? Well, their role is to advise the company (the “issuer”) on its legal and regulatory obligations as it prepares to float. This includes conducting a detailed investigation (due diligence) into the issuer to determine its overall health and to identify any hidden nasties. Incidentally, the lawyers will receive backup from accountants who will offer insight into the company’s financial affairs. Lawyers also get involved in a separate process, known as verification, which involves going through the issuer’s prospectus (as the name suggests – this is a marketing document used to lure potential investors in) with a fine-tooth comb to ensure any statements and claims it makes about its past and future performance, including risks and opportunities, are accurate.
The underwriter will also have its own team of lawyers advising on the various legal documents, including the underwriting agreement. Under the terms of this agreement the underwriter may make a firm commitment to buy issued shares and re-sell it to the public. If this is the case, the underwriter guarantees that the issuing company’s shares in an IPO will be sold and holds on to any unsold shares. On the other hand, the underwriter may play hard ball and only agree a “best efforts” underwriting, where it agrees to do its best to sell shares to the public.