What does it mean?
Floating a company - also known as “going
public” – is the legal process by which a company goes from being
privately to publicly held. The floating process culminates with a
percentage of the company (in the form of shares) being made
available for purchase by the general investing public on a public
investment exchange (such as a stock exchange). This sale of stock
which was previously privately held is called the Initial Public
Offering (IPO).
In the UK there are three principal markets
on which a company can choose to float:
- The Official List at the London Stock
Exchange
- The Alternative Investment Market (AIM)
- OFEX
Going public is viewed by many as the epitome
of financial success and reward. However the decision to float a
company must be carefully considered from both a business and legal
perspective. Flotation is a complicated and costly process which, if
it is to be successful, will require the appointment of independent
legal and financial council and a dedicated IPO team.
Why go public?
To raise capital
Flotation provides broader access to the
raising of capital for several reasons:
- The IPO itself generates a large amount
of capital for the company. This is often a way of generating a
return for those (owners, venture capitalist, etc.) who provided
the initial capital. Becoming “liquid” is a big reason for going
public – investors need to get paid back.
- For private companies with debt, selling
shares is a cheap source of capital because money is raised
without incurring interest payments (as with loans etc.)
- Going public makes alternative sources of
capital available. For instance, the public debt markets are
more accessible to public companies than to companies without a
listing.
- Going public generally improves a
company’s debt to equity ratio and may enable it to borrow from
more conventional sources (ie: banks) on better terms in the
future.
Other Advantages
- The use of incentives such as stock
options and stock bonuses to attract and retain employees and
management became very popular in the 1990s. Equity based
incentives have proven to be particularly good for attracting
sought-after candidates to higher tier managerial positions.
- Press coverage of public companies is
typically greater for public than for private companies. This
leads to increased public visibility. There is also significant
prestige attached to being publicly listed company, and a
widespread conception that these companies are stronger and more
substantial which often helps to secure long-term customer and
investor relationships.
The problems of going public
- High initial cost (potentially 15-25% of
money raised by IPO) and recurring costs such as annual audit
fees, increased PR fees and higher salaries for financial
personnel.
- Length of process – typically 3-6 months
but often over a year – which is likely to consume the attention
of the management for long periods, potentially distracting the,
from other areas of business development.
- High levels of disclosure leading to
information about any financial losses, criminal actions,
lawsuits etc. being in the public domain.
- Pressure of the market – management will
be under intense pressure to deliver results which may lead to
focus on short-term rather than long term development.
- Liability – through lack of due diligence
leading up to the IPO.
- Loss of control – outsiders are in a
position to take control of corporate management, the company
could be victim to a hostile takeover.
In Order to float:
-
A company must comply with the legal and
regulatory standards required of a public limited company. It
needs to have the right legal structure – sole traders and
partnerships can’t float, only companies. Public limited
companies must have a minimum share
capital of £50,000, a quarter of which (£12,500) must be paid
up.
-
The company’s annual accounts and reports
must comply with the generally accepted accounting principles of
the London Stock Exchange (these are accepted as the standard
regardless of which market the company is joining).
-
The company must comply with the independent
rules and regulations of the market which it joins. These are
largely concerned with the conditions and processes for the
trading of shares and are set down in each market’s rule book.
Each market also has its own disciplinary body and set
disciplinary procedures to be followed in the event of a breach
of conduct by a member company.
Due diligence
One of the most important requirements of the
flotation process is due diligence. A broad definition of due
diligence is an investigation into the commercial activities and
internal operations of a company which must happen before that
company is involved in either an IPO or any kind of merger or
acquisition, so that potential investors know exactly what they are
buying into. Due diligence investigations are generally executed
voluntarily by the company going public, but are a legal requirement
to the extent that that company will be liable for failure to
disclose any information deemed relevant once public.
Important due diligence steps include:
- Industry comparisons – analysis of data
from similar public companies, industry trends etc. to assess
growth rates and long terms outlooks.
- Disclosure of officer and director
information including pay, share options and employment history.
- Having in place all legal documentation
including articles of incorporation, charters, contracts,
licenses, trademarks etc.
- Financial reports – annual reports, tax
returns etc. must be assessed as must internal accounting
practice. Due diligence must take into account the accounting
systems capacity to meet regular public disclosure and present
audited financial statements in accordance with regulatory and
industry practices.
- Other business related
documents including business plans, financial forecasts,
agreements with key customers/partners/distributors and any
insurance related documents must be reviewed
