Deal or no deal? How can unquoted companies provide a dealing facility in their shares?

By Adrian Brown

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 — while 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.

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…

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