UK: Thinking Of "Going Public"? The Process Explained

The process of listing a company on a UK stock exchange can seem daunting, and the amount of effort required should not be underestimated. This note seeks to summarise what will need to be done, from before the formal process has even "kicked off", so that companies and their advisers can begin to put proper planning and organisation in place and allocate the various tasks among the team.

The Preparation Phase

The old adage, "failing to prepare is preparing to fail", applies as much to a company proposing to list on a UK stock exchange as to anything else. These days, when there is often only a short market "window" for a flotation, it really does pay to be ready to go promptly as soon as the broker advises there is an opportunity.

For a successful flotation, a company will need a good business, a good management team and a good story. From the moment a company begins to contemplate a listing - which could be from very early in its life, in some cases - this should be borne in mind and appropriate action taken.

Preparation of a good business plan is essential. Not only will this form the heart of the business case in the public documents (see below), but also any broker considering advising the company on its IPO will want to analyse it to make sure it is robust before taking the company on as a client in the first place. The business plan will need to address in particular how much money should be raised from investors and how that money will be used, or the "use of proceeds", and how the company will satisfy its working capital requirements. Of course, the generation of the business plan may reveal issues which need to be addressed, in which event early corrective action can be taken.

The board will also need to think about the company's management team and whether it is the right group to lead the business into the public arena. It may also be necessary to recruit one or more non-executive directors, ideally well-regarded and well-known individuals with deep sector experience or long-standing City connections who will add to the company's credibility with institutional investors. Thought should also be given to management incentivisation and advice taken as to the solutions available, including share option schemes.

A listed company needs appropriate financial systems and controls in place so that the management can monitor its performance and update the market as necessary. Existing arrangements will need to be reviewed and updated where required.

The existing shareholders should think about tax planning at an early stage. Often it is simply too late to take effective action if this is left until the start of the formal "IPO Phase". They should also appreciate that they may be required to sign up to "lock-ins" at IPO limiting the speed with which they can sell down their holdings.

Most companies require some form of reorganisation before they can be listed. Normally, as a minimum, the articles of association will need to be updated, and this can be typically be left until later in the process, but if corporate tax restructuring or a group reorganisation needs to be implemented, this can take much longer and is worth starting in good time. Similarly, the preparation of accounts and "expert reports", for example by a mining or oil & gas competent person or a tech or pharma expert, often has a significant lead time.

Finally, to avoid frustration as the IPO Phase proceeds, there are housekeeping issues to address such as, quite simply, can all the company's financial records and material contracts be located at short notice? Avoid entering into contractual terms - such as certain "change of control" clauses - which would be triggered by an IPO and, where appropriate, ensure that title opinions for significant assets are up-to-date.

The IPO Phase

The formal listing process typically takes between three and six months, depending upon the size, complexity and international reach of the business concerned, with few IPOs completed in reality in less than four months. This phase is both intense and time-consuming and will distract the management team from their day-to-day tasks in running the business, so proper planning is again critical and the company should make sure it devotes adequate internal resource to getting the job done.

This phase often begins with the appointment of the advisors - to the extent not already in place - who will guide the company through the IPO Phase, including the sponsor/nominated advisor, broker, accountant and solicitor. The advisory team selected should be experienced in capital markets transactions, professional and hard-working, and easy to deal with, given the amount of time the company will be spending with its advisors in the coming months. Above all, the management team will want to make sure the advisors share the management's passion and enthusiasm for the business and for completing the transaction as successfully as possible.

Following the initial "kick-off" meeting or call with the advisory team, the focus will turn to due diligence. Investigations will be carried out, and reports written, to ensure that all material details about the company, its management and its business are discovered and brought to the attention of the transaction team. Again, this process can reveal areas where remedial steps have to be taken. As well as commercial and legal due diligence, the accounting team will normally prepare both a long-form financial due diligence report as well as a report on the working capital requirements of the business. Natural resources businesses will need a competent person's report and a company heavily reliant upon a particular piece of technology or patented process may also need a suitable expert's report.

Work on the formal public documentation will usually also start around the time due diligence commences. There will be many drafts before the final version is ready and, typically, many time-consuming meetings and calls. The main document will be a prospectus (for companies listing on the UK Official List) or admission document (for AIM). There are some differences in prescribed content, but effectively each seeks to describe the company, its business and its prospects, as well as certain risks, in a significant level of detail. Where applicable, such as with oil & gas or mining companies, the relevant expert's report will form part of the document. Finalisation of a prospectus can take longer because it is necessary to have the document reviewed by the UK Listing Authority (part of the Financial Conduct Authority in Canary Wharf), whereas an AIM admission document is signed off by the company's own AIM nominated advisor.

To manage liability, a process known as verification will be undertaken with a view to ensuring the accuracy of statements of fact and opinion in the public documentation; this is crucial, but time-consuming and needs adequate resource made available within the company to support it. The directors will also be briefed by the advisors on their responsibilities and liabilities in connection with both the IPO process and life as a listed company. Generally, the company and its management must be careful what they say and do around the time of the company's IPO and should seek advice before making any public statements.

The fundraising process will be co-ordinated by the company's broker, who will typically first issue a research note sharing its views about the company. A marketing presentation will then be prepared and verified, drawn from the information in the prospectus or admission document, which will be used in formal investor presentations arranged by the broker with potential investors at which the management sells the company's story. The placing agreement, confirming the legal basis upon which the sponsor/nominated advisor and broker are facilitating the listing and fundraising, will be negotiated between the company and the relevant stockbroking house(s) and their respective solicitors.

The valuation put on the company's shares is obviously fundamental. This will normally have been discussed from early on in the process, and almost certainly have been considered by both the company and the broker as part of the decision to commence the IPO Phase and accept the mandate to act for the company on its IPO. Critically, the existing shareholders will have to decide how much of the company to give up in return for the money to be raised, and at what price, thereby also putting a value on their own retained shareholding(s). Whilst a matter for commercial consideration, there is usually something to be said for not trying to be too aggressive, and allowing for the share price to tick up a little following listing of the company's shares.

The impact meeting will take place when all the various documents and agreements are in final form. These are then signed and the formal process occurs of issuing the final form prospectus or admission document, confirming the investors' commitments to subscribe new shares and applying for admission to the stock market. That process usually completes a few days later, with the funds flowing to the company shortly afterwards, net of commissions and expenses deducted by the broker.

The Listed Company Phase

On the first day of dealings in the shares on the stock exchange, it is tempting to pop a cork and reflect on a job well done. But to quote Sir Winston Churchill after El Alamein:

The company will have completed its transition from "private" to "public", yes, but this marks but another step on the great corporate journey. Attention must now be turned to once again driving the business forward and to making good on the promises made to investors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.