Initial Public Offerings Flashcards

Question

What are the Advantages of the Listing Rules Regime over the Statutory Regime?

Answer 1

* **Shorter** **minimum offering period**, i.e. **ten business days** for the **date** on which the offer is **first open for acceptance**. * Enables the **sale of fractional shares** for the **firm's benefit**. * Enables the **notification of overseas shareholders as the firm sees fit**. * **Allows use of Open Offers** in lieu of Rights Issues. Ferran and Ho -- P. 121-125. FCA Listing Rules -- 9.3.11-9.3.12, 9.5.1-9.511.

Answer 2

The Holders of: * **Warrants**; * **Convertible debt securities**; or * **Non-voting** (participating) preference **shares**. Ferran and Ho -- P. 117. According to the authors, this is because otherwise would not be compatible with the Second Company Law Directive: *European Commission v Spain* [2008] ECR I-10139.

Answer 3

**Context-dependent**. Shareholders **may not possess the necessary finances** to maintain their proportion, and **if** the company is **private**, the **necessary liquidity** to facilitate the trade of shares **may be absent**.

Answer 4

A letter which permits the **transference of preemption rights** from a willing shareholder to a third-party, typically because the **former cannot afford to exercise said rights** while the latter can. ## Footnote CA 2006 -- §561(2). "The Companies Act does not require offers to be made in the form of renounceable letters of allotment. In this respect, therefore, statutory protection is less than comprehensive." Ferran and Ho -- P. 116.

Answer 5

**Not under the Companies Act**, but under the **FCA Listing Rules**, in the case of a **Rights Issue**, shareholders must be made a Preemption Offer in such a form. ## Footnote Ferran and Ho -- P. 116. A Rights Issue is, "an offer of new shares or other securities made to existing shareholders in proportion to their shareholdings." Thomson Reuters, Rights Issue.

Answer 6

**Shareholders**, using their Renounceable Letters of Allotment (or other (or other negotiable document, e.g. Provisional Allotment Letter) **can sell their right purchase the shares in the market *nil paid***. Thomson Reuters, Nil Paid Rights.

Answer 7

The **firm**, and any **officer** who **knowingly authorized or permitted** the contravention, will be **held jointly and severally liable to compensate entitled parties** for any resultant loss, damage, costs, or expenses. ## Footnote CA 2006 -- §563. An entitled party is whomever was owed a Preemption Offer but was never made one. A two-year cut-off applies to claims under §563.

Answer 8

**No**. However, the **Court can exercise its §125 power**, "to rectify the Register of Members by **removing the names of persons to whom shares have been wrongly allotted**."\* ## Footnote Ferran and Ho -- P. 116; \**Re Thundercrest* [1995] BCLC 117. Critically, *Thundercrest* concerned a small private company and a wrongful allotment of shares by the Board to itself. Wrongfulness was a result of an illegaly short minimum offering period and actual knowledge of the Board that the entitled party did not receive the offer letter. The Court believed that not using §125 would have enabled the Directors to profit from their own wrongdoing.

Answer 9

**No**. Passive and **non-responsive shareholders increase the risk of wealth erosion and dilution** for active shareholders. ## Footnote Ferran and Ho -- P. 117. Henceforth, this shall be termed the Lazy Shareholder Problem.

Answer 10

Shares that would have otherwise gone to Lazy Shareholders **must be offered publicly**, and **any premium obtained** thereupon (expenses netted) **must be returned** to their would-be Holders. ## Footnote FCA Listing Rules -- 9.5.4. That is, unless the proceeds do not exceed £5, in which case they may be ratined by the firm.

Answer 11

* **Dilution** of value and voting power. * **Soundness of the firm's reasoning** for doing so. * **Firm's** **size**, **sector**, and stage of **development**. * **Firm's** **stewardship**, **governance**, and **performance**. * **Availability of alternative** means of **finance**, and the necessity of disapplication in their light. * **Contingency plans**. * ***Ex ante* management of shareholder relations**. Preemption Group -- Disapplying Preemption Rights, a Statement of Principles (2015) [7].

Answer 12

* **Broader investors pool from which to raise equity**, thereby decreasing the cost of equity capital. * **Circumvention** of **financial limitations** or **disinclinations** of **existing shareholders**. * **Exit route for existing shareholders**. * **Decreased dependence on debt** **and retained earnings**. * **Increase share liquidity and value**, given the transferability requisites that come with listing.\* * **Use** the firm's **shares as consideration**, e.g. share-for-share transactions. * **Benchmark metric for share value** **and** **company performance**, thereby facilitating pay-for-performance or other metric-based tools. * **Corporate governance improvements**, whether due to market pressures or the onboarding of new key managers. * **Higher prestige**, whether through the 'Plc.' mantle or greater publicity. * **Decreased cost of debt capital** (for the all reasons above). Textbook -- P. 487-492; \*FCA Listing Rules -- 2.2.4.

Answer 13

* **Very resource-intensive**, i.e. time-consuming, costly, complex. * **Increased and ongoing regulatory and disclosure obligations**, which themselves **incur further costs**. * **Exposure to financial markets' disciplining**. * **DDs become more onerous**. * **Dilution of corporate governance controls** (for Founders). Textbook -- P. 492-493.

Answer 14

* **Regulatory regime**. * **Available means of flotation**. * **Target investor demographic**. * **Favorability** of **market conditions**. * **Available stock exchanges** (including tiers). * **Frim's size**, **sector**, and **stage of development**. Textbook -- P. 493.

Answer 15

**Becoming a public company**,\* given that **private companies cannot issue shares to the public**\*\* or have their securities admitted to an Official Listing.\*\*\* ## Footnote Textbook -- P. 494; \*CA 2006 -- §90-§96; \*\*§755; \*\*\* FSMA 2000 (Official Listing of Securities) Regulations 2001, SI 2001/2956, Reg. 3. This entails the cost of additional statutory rules which come with benig a public company, e.g. minimum capital requirements or the differential treatment of legal capital rules. Cumulatively, the effect is a higher cost of administration.

Answer 16

* **Placement**, more appropriate for smaller Issuances. * **Offer for Sale or Subscription** (usually coupled with **listing on a stock exchange**), more appropriate for larger Issuances. Textbook -- P. 494. In legal actuality, the 'offer' an invitation to treat. Listing on a stock exchange is not stricly necessary to complete an Offer of Sale.

Answer 17

The **former** entails the **purchase of existing or alloted shares**, whereas the **latter** entails the **purchase of entirely new shares**, i.e. have not been issued or alloted. ## Footnote Ferran and Ho -- 371. For my purposes, when distinguishing between Offers and Placements, I will use the two interchangeably.

Answer 18

An Offer of Sale is **extremely time-consuming and expensive**, and therefore may be **uneconomical** if the **capital** being sought is **insufficiently large**. ## Footnote Textbook -- P. 495.

Answer 19

Through a **Prospectus**, a **heavily-regulated document** that is meant to provide **potential investors** with the **data they need to make an informed decision** on subscription. ## Footnote Textbook -- P. 495.

Answer 20

Through **underwriting**, which, for a fee, entails an investment bank either: * **Subscribing for the whole Issuance** and thereafter **itself making an offer of sale** to the Public; or * **Subscribing for any leftover securities** which the Public has not purchased. Textbook -- P. 495. There may also be sub-underwriting, where the Lead Bank other financial institutions to share in the risk.

Answer 21

On a **fixed basis**, typically **determined as late as possible** and with an **aim to ensure a modest over-subscription**. ## Footnote Textbook -- P. 495. Rarely, applicants may be invited to tender at or above a minimum price, with the highest bidders getting to subscribe and all others being eliminated.

Answer 22

An **agreement between** a **firm** and an **investment bank** to **distribute** the former's **shares to institutional investors** **who have agreed to purcahse them**. ## Footnote Textbook -- P. 496. There is therefore no offer to the public, however, Placements are usually coupled with a listing on a stock exchange.

Answer 23

* **Increases share liquidity** by providing a **secondary market** for trading; and as a result * **Facilitates investment by initial subscribers** because it gives them a **greater chance to thereafter realize a gain**. Textbook -- P. 497. Generally, this step will only be skipped if the firm does not wish for its shares to widely traded or to comply with with additional regulation.

Answer 24

To gain exposure to: * **New markets**; * **Greater liquidity**; * **More advanced technology**; * **Higher accounting standards**; * **Better shareholders' rights protection**; * **More reputable and attractive markets**; or * **More skilled analysts and institutional investors**; Textbook -- P. 499.

Answer 25

Bookbuilding **markets securities prior to pricing them**, guaging the **demand** therefor and **other factors to determine an appropriate figure** in lieu of simply fixing the price. ## Footnote Ferran and Ho -- P. 372. Otherwise, there are no differences.

Answer 26

It **more accurately matches price with demand**, but comes at a **higher cost** and **potentiates conflicts of interest** for the Bookbuilder. ## Footnote Ferran and Ho -- P. 372. Bookbuilders, like Underwriters, tend to be Investment Banks. It will be context-dependent whether the benefits outweigh the costs.

Answer 27

"When a person acquires the **unconditional right to be included in the company’s Register of Members**... in respect of the shares." ## Footnote CA 2006 -- §558. More generally, also §549-§559.

Answer 28

A vehicle that **IPOs and raises capital** with the **sole purpose of merging with a private company**, **thereby** **taking it public** without the otherwise necessary rigmarole, **within two years of floating**. ## Footnote Klausner et al., *A Sober Look at SPACs*, [3]. There are therefore two key transactions in place, namely an IPO and a Merger.

Answer 29

**_Pre-Acquisition:_** 1. The Sponsor and Investors infuse the SPAC with capital. 2. The SPAC proposes a Merger within two years. 3. SPAC shareholders either redeem their shares or sell them. 4. Contemporaneous with the Merger, the Sponsor (and others) infuse further equity capital into the SPAC (PIPEs). 5. The SPAC executes the Merger. **_Post-Acquisition:_** 1. Remaining SPAC shareholders own a small equity stake in the acquired company. 2. The Sponsor (and others) own similarly small equity stakes in the acquired company. Klausner et al., A Sober Look at SPACs, [13-14]. 'Others' is a reference to third-party investors. Given the small equity stakes resultant, typically a median of 35%, it cannot truly be said that the SPAC 'acquired' the target company. Realistically, it is more a merger which renders. a private company public.

Answer 30

The **Sponsor**, who is typically an **Institutional Investor** of some sort. ## Footnote Klausner et al., *A Sober Look at SPACs*, [3]. The Sponsor is typically either a Hedge Fund, Private Equity House, Investment Bank, or an enterprise which specializes in the creation and administration of SPACs.

Answer 31

**None**. If a merger is realized, they **may either participate or redeem the cash value of their shares with interest**. If no merger is realized, the latter option is still available. ## Footnote Klausner et al., *A Sober Look at SPACs*, [3]. Share redemption nevertheless entitles shareholders to retain their warrants and the rights associated with their shares (somewhat uncommon), therefore serving as additional compensation for the opportunity cost incurred.

Answer 32

**Placement**. ## Footnote Klausner et al., *A Sober Look at SPACs*, [6].

Answer 33

* **High** **and** **opaque imbedded costs**. * **Poor alignment** **of** **Agent/Shareholder interests**. Klausner et al., *A Sober Look at SPACs*, [6].

Answer 34

Prior to the IPO, it acquires a **sum of SPAC shares** at a **nominal price** that will be **adjusted to 25% of IPO proceeds or**, equally, **20% of post-IPO equity**. This is known as the Sponsor's Promote. ## Footnote Klausner et al., *A Sober Look at SPACs*, [11]. Sometimes, "the Sponsor’s interest increases automatically if additional equity is invested at the time of... [the] merger."

Answer 35

In addition to the Promote, the **Sponsor will purchase warrants**, **shares**, **or both**, at prices which it estimates reflect fair market value; the **proceeds thereof are used to fuel the SPAC**. ## Footnote Klausner et al., *A Sober Look at SPACs*, [11].

Answer 36

They are **placed into a trust** and **invested in Treasury Bonds**. Under the Deed, the trust assets can only be abet a(n): * **Acquisition** of a company; * **Capital contribution** to an acquired company; * **Distribution to shareholders** in case of **liquidation**; or * **Redemption of shares**. Klausner et al., *A Sober Look at SPACs*, [11].

Answer 37

**No**. ## Footnote Klausner et al., *A Sober Look at SPACs*, [11].

Answer 38

A **marketing campaign of proposed mergers** to potential investors. Its purpose is to: * **Garner attention in the public markets**, thereby giving intial investors an **exit route which leaves cash within the SPAC**. * **Attract private investment**, namely through the form of **equity infusions into the proposed merger**. Klausner et al., *A Sober Look at SPACs*, [13]. The latter purpose is otherwise referred to as a Private Investment in Public Equity (PIPE).

Answer 39

**Very**. Given that the majority (92%-97%) of initial investors will seek to dispose of their holdings prior to Merger, it is **critical to ensuring the SPAC is adequately capitalized to actually acquire the target**. ## Footnote Klausner et al., *A Sober Look at SPACs*, [16-17]. 'Disposal' describes either redeeming the shares or reselling them. The Roadshow is effectively a second IPO. In Klausner's Cohort, 77% received PIPEs, 61% received equity from the Sponsor, and 44% received both. The mean equity infusion was 40%. Klausner et al., *A Sober Look at SPACs*, [21].

Answer 40

**To take the SPAC public**, thereby allowing new shareholders to invest and facilitate the eventual Merger, a transaction which the original investors effectively play no role in. ## Footnote Klausner et al., *A Sober Look at SPACs*, [22].

Answer 41

They constitute, "**value extracted by parties other than the principals** **to the SPAC’s ultimate investment transaction**," thereby reducing, "the amount of net cash per share," the SPAC contributes to the Merger. ## Footnote Klausner et al., *A Sober Look at SPACs*, [22]. The Principals are the SPAC's shareholders and the Target and its shareholders.

Answer 42

* The **Sponsor's Promote** (20%). * IPO investors' **warrants and rights**. * **Fees**, e.g. underwriting, accounting, and legal and financial advice. * **Share redemptions**. Klausner et al., *A Sober Look at SPACs*, [22]. More warrants and rights, higher fees, higher redemptions, and lower PIPEs all equate to lower cash per share.

Answer 43

They **reduce the net cash per share contributed to the Merger by a mean of $4.10**, **down from $10.00**, a representation of the amount extracted in compensation paid to the various parties involved. ## Footnote Klausner et al., *A Sober Look at SPACs*, [22]. $10.00 is the standard price tag of a SPAC share.

Answer 44

**Non-redeeming shareholders** (NRSs), directly in proportion to the **discrepencies** between **pre-merger net cash and post-merger share price**, and the **Merger's price tag**. ## Footnote Klausner et al., *A Sober Look at SPACs*, [33]. The ill-returns of NRSs are especially woesome in the months after, suggesting, "a continuous downward adjustment in the market’s valuation of post-merger SPACs."

Answer 45

**No**. "**Sponsors’ returns are very high**, **even when** post-merger price **performance is poor**." ## Footnote Klausner et al., *A Sober Look at SPACs*, [38]. Returns compute to a mean and median of 549% and 257%, respectively.

Answer 46

**Yes**, but only to the extent that **NRSs**, "**extract some surplus from the deal**." ## Footnote Klausner et al., *A Sober Look at SPACs*, [22].

Answer 47

* **Targets do not pay the orthodox costs of going public**. * **Sponsors' incentives diverge from shareholders' interests**. * **Mispricing and misallocation of resources** could result. * Circumvention of the traditional vetting process results in **decreased transparency**. * If the **Sponsor does not add post-merger value equal to the value it extracts**, **additional social costs** will be incurred. Klausner et al., *A Sober Look at SPACs*, [47].

Answer 48

**No**. Measuring cost as a **% of cash delivered**, **SPACs** (62%) **cost 34% more than IPOs** (28%). ## Footnote Klausner et al., *A Sober Look at SPACs*, [50].

Answer 49

**Projections made are given,**"**safe harbor** from liability in private actions." This **decreases information asymmetries** by enabling the dissolution of more data without fear of suit. **Aggressive over-projection is also a risk**, though. ## Footnote Klausner et al., *A Sober Look at SPACs*, [53]. The First Point is particularly important for pre-revenue or low-revenue companies, who may have little else other than projections to persaude investors and win over their capital.

Answer 50

The practice of **providing investors** with, "**confidential information** on which to make an **investment decision**," thus **decreasing information asymmetries** and **increasing the accuracy of price discovery**. ## Footnote Klausner et al., *A Sober Look at SPACs*, [54]. This is also a feature of IPOs, but significantly rarer relative to SPACs. It is especially relevant to companies with sensetive information that is pertinent to investment decisions, but which cannot be made public.

Answer 51

Any **PIPEs** resultantly **validate** the **project's value**. ## Footnote Klausner et al., *A Sober Look at SPACs*, [54].

Answer 52

**It can**. Prophylactically, the **PIPE Investor will require** that the **information it received be made public** in the SPAC’s filings **once the deal is announced**. ## Footnote Klausner et al., *A Sober Look at SPACs*, [55].

Answer 53

Earnouts are **provisions** that **entitle the Target to compensation** should it **meet certain financial thresholds**. It **defers pricing** the Merger **until** the **Target has performed and the market has reacted** accordingly, thereby increasing the accuracy of price discovery. ## Footnote Klausner et al., *A Sober Look at SPACs*, [55].

Answer 54

**Only Slightly**: * The **price is determined just a few weeks out** (if that) from Merger, and is subject to ongoing negotiations throughout; * "The the **total amount of net cash** a Target receives," i.e. the Merger's price tag, is **unknown until the Merger is concluded**. Klausner et al., *A Sober Look at SPACs*, [58].

Answer 55

**Not at all**. To the extent that net cash is sufficient to satisfy the Target, that is **not a structural feature of the SPAC**, but a **show of proper execution**. ## Footnote Klausner et al., *A Sober Look at SPACs*, [58]. Deal certainty is a measure of price risk, i.e. the risk that a Merger or IPO will be unacceptably priced.

Answer 56

**Not meaningfully**. To the extent that they are, this is **only because firms that IPO begin their preparations earlier**, rather than because SPACs require less time to complete. ## Footnote Klausner et al., *A Sober Look at SPACs*, [59].

Answer 57

* **No warrants or subsisting rights** given to IPO investors. * **Lower Sponsor compensation**, adjusted for, "redemptions and aligned with post-merger share value." * **Underwriters billed**, "on the **basis of nonredeemed shares**." * **Larger PIPEs** from the Sponsor (and others). Klausner et al., *A Sober Look at SPACs*, [61].

Answer 58

* **Sponsors may be incorporated** to identify firms ready to float, support them thereafter, and liaise with Underwriters (Placement). * **Earnouts**, in the form of **OTM Call Options** with strike prices calibrated accorindgly, **may be given** to management and investors **to incentivize performance**. * Klausner et al., *A Sober Look at SPACs*, [64].

Answer 59

**Directors must act within their powers**, in accordance with the company's Constitution,\* and exercise their powers **for the purposes conferred thereby** (the Proper Purpose doctrine).\*\* ## Footnote CA 2006 -- \*§171(a); \*\*§171(b). Determining whether a Director has the power to act is merely a matter of construction; determining when has improperly exercised that power is the challenge.

Answer 60

* **Was the Director acting within the limits of his Powers**, as so defined by the Constiution and any contracts with the company * **Was the Director acting in Good Faith?** * What were the Director's motivations, and how can it be demonstrated **which motivations most drove him?** Sealy and Worthington -- P. 343.

Answer 61

Share Issuance is a power that must be exercised, "**for the benefit of the company**," e.g. when it becomes necessary or desirable for the company to raise capital. ## Footnote Sealy and Worthington -- P. 343; *Punt v Symons & Co.* [1903] 2 Ch 506.

Answer 62

* **Good Faith alone does not preclude liability** under §171. * **Majority rule is unimpeachable** (unless oppressive), **and acting against it**, even if done earnestly, **warrants liability** under §171. * **Share Issuance is a fiduciary power**. * Shareholders are **entitled to ratify a proposedly defective Issuance** should they see fit. Sealy and Worthington -- P. 344; *Hogg v Cramphorn* [1967] Ch 254.

Answer 63

* The Court must assess the **substantial purpose** underlying a power's exercise, and **whether said purpose was improper**. * **Adherence** to the Doctrine **cannot be solely characterized by** **either Good Faith or a desire to raise capital** for the firm. * **Self-interest's involvment disqualifies Good Faith**. * **Absence of self-interest does not preclude liability**. * It is **wrong and unconstitutional** to **issue** chiefly to create **voting power**. * **Shares may be issued for reasons other than financing**, e.g. maintaining the company's financial stability. * It is **impossible to define the exact limits which Directors must not pass**. * **Demarcation followed by examination of impropriety** is the correct way to investigate claims under §171. Sealy and Worthington -- P. 345; *Howard Smith v Ampol Petroleum* [1974] AC 821 (Privy Council).

Answer 64

* Directors **must react to matters which affect shareholders' rights** *inter se*. * Where there exists two classes, and a decision **would benefit one and harm the other**, the principal question is, "**what is fair as between [them]**," rather than one of the company's interests. * **A Director's status as a shareholder does not de facto invalidate his decisions.** * **Directors are not Trustees**, and cannot be held to their standard. * **Ultra Vires** and **Motive** are the **core considerations** under §171. Sealy and Worthington -- P. 347; *Mills v Mills* (1938) 60 CLR 150 (High Court of Australia).

Answer 65

"Where the question is one of **abuse of powers**, the **state of mind** of those who acted, **and** the **motive** on which they acted**, are all important**." ## Footnote Sealy and Worthington -- P. 350; Hindle v John Cotton (1919) 56 Sc LR 625, applied in Eclairs Group v JKX Oil & Gas [2015] UKSC 71. This effectively emphasizes the subjective nature of the test.

Answer 66

* Save influence by **dishonesty** or **self-interest**, **mixed-motive decisions** will **only** be **set aside** **if**, "the **primary** or **dominant** [**motive**]... **was improper**." * **Primacy or dominance is determined by examining causality**, with **reference** whether to **harm or injustice** has been **suffered by shareholders**. * An outright 'but for' test was suggested, but not wholesale adopted. * "The [Doctrine] is a **principle by which equity controls the exercise of a fiduciary’s powers** in respects which are not, or not necessarily, determined by the instrument [i.e. contract term]." Sealy and Worthington -- P. 350; *Eclairs Group v JKX Oil & Gas* [2015] UKSC 71. The Third Lesson verily states that impropriety is both a subjective and objective assessment, in that it is necessary to understand Directors' subjective intentions and to objectively assess whether those intentions drove them to enact something improper.

Initial Public Offerings Flashcards

(90 cards)