Initial public offers (IPOs) can be one of the pinnacles of business achievement for entrepreneurs.
IPOs are as complex as they are exciting and business owners must get to grip with a myriad of legal issues that come to the fore when Initial Public Offers (IPOs) are being contemplated. Furthermore, as with any major strategic business decision there are advantages and disadvantages that come with this complexity.
Advantages of IPOs
There are several advantages to becoming a publically listed company with shares traded on the open market. The company will have better access to capital, a market for company’s shares and there is the potential for tax benefits for investors.
An IPO will also raise the companies’ international profile which can create a path for future mergers and acquisitions. It has been suggested that IPOs bring a certain amount of prestige to the business.
The Downside to IPOs
Not all businesses are suited to going down the IPO route as it can throw up a number of legal issues which current management is unprepared for. Public listed companies are expected to act in a transparent manner. This can lead to a lack of privacy, with competitors and the public at large able to access sensitive information that was previously unavailable. Vital information on the business’ sales and strategies would be made public initially and periodically after that.
Business owners and managers should also consider that there is the possibility of loss of control of the business if a sufficiently large percentage of shares are sold to the public.
The success of the management of the company will be shared with shareholders following an IPO. This can lead to greater investor pressure and this may encourage short-term profitability at the expense of long-term ambitions.
It should be noted that IPOs are costly with large legal, advisory and printing expenses and if the IPO is not successful, out-of-pocket expenses will not be recovered.
Eligibility for an IPO
Even if managers are not put off by stringent regulatory requirements and high investment banking fees, another very important legal question is that of eligibility. Business owners should seek professional advice to see if their company is eligible for an IPO before expending significant resources on an IPO strategy.
For example, on the London Stock Exchange if a company seeks a premium listing of equity on the main market it must be shown that the company is offering a minimum of 25% of the shares to public hands, has at least a 3 year trading record and has a sponsor or nominated advisor.
It must be emphasised that many of these legal obligations are on-going. Compliance with the UK Corporate Governance Code and requirements to publish price sensitive information are strictly enforced if the company has a premium listing of equity on the main market.
It should also be noted that there are different markets available for different sized companies and that legal requirements can vary substantially depending on each market.
For more information please contact James Crichton via e-mail jcrichton@rollingsons.co.uk or by telephone on 0207 611 4848.
