UK: Deal Or No Deal? How Can Unquoted Companies Provide A Dealing Facility In Their Shares?

Summary and implications

It can be difficult for shareholders of private, established companies to sell shares without the company being quoted on an exchange, especially if they would like to sell a minority stake. Admission to a public market is expensive, time-consuming and often not a route to guaranteed liquidity. In addition, it can indeed be a distraction and more of a hindrance than a benefit to the company. Accordingly, in order to provide existing investors with a source of liquidity – whilst raising the profile of the company and avoiding the downsides associated with a public quotation – unquoted companies may want to consider alternative ways to provide secondary market liquidity to investors.

Employee share scheme

The options for unquoted companies in terms of providing a secondary trading facility for their shareholders without the involvement of a firm authorised by the Financial Conduct Authority (FCA) are limited. This is because the activity of arranging for investors to buy and sell shares is usually a "regulated activity" under the Financial Services and Markets Act 2000 (FSMA), and so companies carrying it on are required to be authorised by the FCA. Having said that, companies are permitted under an exclusion from the FSMA- regulated activity of "arranging deals in investments" where they carry on this activity in the context of operating an employee share scheme. This allows a company (or another company in the same corporate group) to operate a secondary dealing facility in its shares where this is to enable or facilitate transactions in its shares, or the holding of its shares, by or for the benefit of its employees or former employees (or those of another group company). This exclusion is not quite as limiting as it first appears as it also extends to the spouses, civil partners, widows, widowers and children and step-children under the age of 18 of such employees and former employees.

However, where (as is often the case) the shareholder register includes a broad range of people – including founders, management, employees, commercial partners, angel and private equity investors and friends and family – the employee share scheme exclusion referred to above does not offer a complete solution. In these circumstances companies wishing to give their shareholders access to a secondary trading facility will have to enlist the help of an FCA-authorised firm. 

Ad hoc matched bargain arrangements

In its most basic form, this might involve the company informing shareholders to contact its authorised corporate finance advisor if they are interested in buying or selling shares in the company. The corporate finance advisor will then match buyers and sellers on an ad hoc basis. However, this approach has a number of obvious limitations:

• It is inherently passive and therefore reduces the likelihood of buyers and sellers being matched.
• It is likely to be restricted to existing shareholders and not accessible to a wider audience of unconnected third party investors who are unaware of the possibility of investing in an unquoted company.
• There is no real transparency in terms of price discovery and publication of successful trades.

Overall, these factors significantly limit the possibility of creating a genuinely liquid secondary market in the shares of unquoted companies.

Electronic trading platforms

An alternative approach, which avoids the costs and onerous disclosure requirements of obtaining a public listing on a regulated market, but is likely to result in more liquidity than the approach just considered, would be for the unquoted company to enlist the services of an FCA-authorised firm permitted to operate a trading platform for unquoted shares. Electronic trading platforms, such as Asset Match or Britdaq, provide a cost-efficient and transparent central marketplace for transactions in unquoted company shares. These platforms are accessible to a much wider audience than would be the case where transactions are arranged privately and on an ad hoc basis. The combination of transparent price discovery and a broader potential investor base serves to facilitate genuine secondary market liquidity in unquoted shares.

Conclusion

There is a longstanding perception that companies that are not admitted to trading on a public market are unable to provide a dealing facility in their shares. However, it is not necessary to incur the significant expense and administrative burden associated with an IPO in order to create a secondary market in a company's shares. Indeed, whilst there are valid reasons for a company to IPO, it could be argued that doing so with the primary goal of creating a secondary market represents poor value for money. 

As many private companies end up with a larger number of shareholders than originally envisaged – perhaps through multiple funding rounds, employee share ownership schemes and dispersal amongst family – it is perhaps becoming increasingly necessary for companies to put in place arrangements for a secondary market using the services provided by companies like Asset Match.

This briefing has outlined the three non-public market options available to companies seeking to provide a secondary market:

Naturally, there is no one-size-fits-all solution to a company's requirements and a considered exploration of the options is key to success.

So, when a private company is faced with the "deal or no deal" conundrum, there might be more reason to say "deal" than previously thought.

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.