With their headline-grabbing activity, not to mention eye-watering legal fees, take privates are firmly placed at the racier end of corporate activity. At the opposite end of the spectrum is the more pedestrian task of taking companies public, which entails the comparatively dull exercise of ploughing through several hefty volumes of listing rules to make sure companies adhere to them pre-float.
While a flotation will never produce the same adrenalin rush as taking a FTSE100 company private with complex debt financing, the UK’s markets have become distinctly more cosmopolitan in the past decade, with an ever-increasing number of foreign companies seeking to raise capital in London.
For lawyers this adds some colour to the arguably mundane job of bringing a company to market. But what do lawyers actually do to earn their fees in the run-up to a float?As Peter Bradley, corporate finance partner at Stephenson Harwood, points out, the work varies depending on whether the company is seeking to list on AIM or the London Stock Exchange’s (LSE) main market.
“On the main board there are a number of prescriptions, such as having to have a track record, a number of years of accounts and profit records, in addition to size criteria,” he says. “AIM rules are far less prescriptive.”
To list on AIM companies must adhere to rules set out by the LSE, while on the main market the rules are laid down by the UK Listing Authority, part of the Financial Services Authority (FSA).
AIM rules are well known for being significantly less onerous than those of the FTSE All-Share, as well as equivalent indices in the likes of Canada and the US. That said, with an ever-growing number of foreign companies seeking to list on the UK’s junior market from as far-flung locations as China, the Ukraine, Kazakhstan and Malaysia, huge amounts of work have to be done with management teams to ensure companies make the, albeit lower, grade for AIM.
Tim Sheddick, a partner at Baker & McKenzie, points out that foreign companies seeking a primary listing in the UK must report according to international financial reporting standards, something an emerging market company might not do as standard.
“Normally one of the main issues, particularly in foreign listings, is about the financials – what state they’re in and how the company has reported historically,” he says.
Bradley says: “There’s a lot that has to be done on the corporate governance side, particularly with overseas companies. A lot of those aren’t used to corporate governance. One of the jobs on an IPO is educating management on that.” Another major issue for lawyers dealing with listings is the FSA itself. Although the City watchdog does not actually control AIM, the laws it lays down in relation to the main market are used as a model for those that govern the junior index.
A notoriously difficult master to please, the FSA ensures listing on the main board is a long-drawn-out process, because it repeatedly vets documentation before the actual listing takes place. Added to this is the fact that it regularly updates what its requirements actually are.
For example, in compliance with Europe-wide guidelines, last year the FSA implemented the EU Prospectus Directive, which now constitutes the key set of rules when it comes to listing. Under this a company is required to draw up a prospectus that includes information such as a description of its business, an outline of any risk factors and details of financials – hardly the most riveting task a lawyer will ever oversee.
Although this seems straightforward, particularly as the information should be easily accessible for companies seeking a main market listing, the demands of the regulator dictate that the process be far more lengthy than would seem necessary.
Sheddick says: “Listing on the main board creates a lot of work because there’s a pre-vetting process with the FSA. Companies have to have their prospectus approved before listing and normally we go through two or three rounds of comments with the FSA before doing the final document.
“Generally it takes about one and a half months from when you first put it in to the FSA to when you have a final document ready to go.”
And in one and a half months a lawyer can clock up a significant fee for effectively redrafting a piece of work over and over. But then, companies can hardly complain about their hefty legal bills when they often do not make the task any easier for their lawyers.
Bradley says: “For companies, production of information can be difficult. It depends on how organised the company is. A lot of information is required and a lot of firms underestimate the amount of time and resource they need to put into that. That slows the process down a lot, and failure to produce information of any sort creates a bottleneck.”
Listing on AIM is attractive for a number of reasons, particularly as the amount of information required is less than for the main market. However, the paperwork part of getting to market is largely the same because the admission document the LSE requires before allowing a listing is based on the FSA’s prospectus, the main difference being that it does not have to be vetted by the regulator, with the nominated adviser taking responsibility for assuring a company’s suitability.
With the likes of Ukrainian tractor manufacturers and Malaysian property companies turning to AIM, however, the chargeable hours add up by just getting to know the client.
From the FSA’s perspective the UK listing regime allows for flexibility and transparency in the UK’s capital-raising markets. According to Hector Sants, managing director of the regulator’s wholesale business unit, the rules ensure UK standards are high, meaning shareholders are protected and can have confidence that the markets are well run and regulated.
The FSA may believe the systems it has in place are appropriate, and with market cleanliness a key concern it is right to err on the side of caution when it comes to assessing a company’s suitability for listing.
However, does the regulator’s repeated vetting of documentation – which, remember, has been compiled by lawyers well versed in the laws of listing – really add anything to the process, or indeed result in potential threats to the market being identified and eliminated? Could it be that, by requiring draft after draft of a company’s prospectus, the regulator is just drawing out the process to the extent that the only beneficiary is the lawyers’ chargeable hours tally?As a recent AIM survey by The Lawyer (4 June) examined, legal fees for AIM floats can be anywhere between £100,000 and £300,000, depending on the nature of the company, its country of origin and the amount of due diligence that needs to be done. On the main market the sums are understandably higher as the companies are bigger. Average figures come in at anywhere between £200,000 and £400,000, but really large companies from the likes of China or Brazil could be looking at anything up to £1m.
Is advising on a float as high-octane as acting on the leveraged buyout of a major public company? Almost certainly not. But with dozens of City firms earning millions in fees from listings, don’t turn your nose up just yet.