How to prepare for a London IPO in 2010

January 3, 2010

This article was written for and first featured in International Resource Journal

Although IPOs on the London markets have been few and far between in 2009, there have been an increasing number of secondary fundraisings in recent months, and other indica­tions that capital markets are starting to reopen.
 
The cautious optimism returning to the London markets was perhaps illustrated best by the November IPO on AIM (the junior market of the London Stock Exchange) by the aptly named London Mining plc and £71 million fundraising. Lest anyone think the streets of London are literally “paved with gold”, London Mining’s asset base consists of rights to extract iron ore in such varied jurisdictions as Sierra Leone, Saudi Ara­bia, China and Greenland.
 
London’s ability to attract internationally-focused re­sources companies was also in evidence when the The Sunday Times recently reported that at least five oil & gas companies are preparing to come to market in 2010 to take advantage of rising prices for their commodities. The expected new entrants to the London Stock Exchange’s Main Market are said to include North Sea oil explorers Fairfield En­ergy and Caithness Petroleum, Kazakhstan-based Canamens, Siberian oil explorer Exillon Energy, and Kuwait Energy Corporation, whose operations are located in Ukraine, Pakistan and Egypt.
 
Given the lead time involved in getting prepared for a stock market listing, aspiring resource com­panies should address key preliminary consider­ations now to put themselves in a better position to achieve a successful stock market listing in 2010.
 
Know why you want to IPO
 
It is paramount to have acceptable reasons for wanting to list in London and raise public funds—otherwise known as an “initial public offering” (IPO) or in U.K. parlance, a “flotation”. Typically, these reasons include access to additional devel­opment or working capital to execute on a value-delivering strategy. New investors are not however generally amenable to letting existing investors exit completely in cash and will often expect debt holders to convert to shares. The preparation of a proper business plan will be a crucial first step in setting out your vision for investors.
 
Appoint the right advisers
 
You will require, at a minimum, a financial adviser (known as a “sponsor” on the Main Market and a “nominated adviser” on AIM), broker, solicitors, reporting accountants and not least a geologist (known as the “competent person”) to prepare an up-to-date detailed geological report on your natural resources rights and assets.
 
It is crucial to choose advisers who not only are sufficiently experienced but with whom you feel you will get on well and share your passion for the business. These relationships are very important—you will be spending a lot of time together so personalities and fit will be key.
 
Don’t underestimate the extent of due diligence and documentation
 
Accept that a flotation will take a minimum of four months from when advisers are appointed, but that, more likely, it could be six months or more. Getting together all of the key documentation relevant to the company’s business and assets—from licences and permits, to key contracts and directors’ CVs—is an invaluable first step when­ever a company is considering a potential IPO.
 
No company is perfectly organised, so be as open as possible about any due diligence problems or gaps in documentation as they will undoubtedly come out eventually—you can save time and ex­pense at the outset by explaining the position.
 
Up to date legal opinions on title to mining or oil & gas assets and key contracts from which mineral rights are derived will be required. Co-ordinating these with local lawyers in far flung jurisdictions can be a time-consuming exercise and, therefore, should be put in motion at the earliest opportunity.
 
In order to minimise disruption to your busi­ness, appoint a point person to coordinate all requests for documentation and ensure that key iterations of documentation are read by the directors on an ongoing basis, rather than cram­ming hundreds of pages in the night before the completion meeting!
 
Allow time for reorganisation and restructuring
 

Recognise that some form of reorganisation of restructuring is generally required in advance of floating you business. For a start, U.K. private companies will need to be re-registered as a public company (or “plc”), which for a pre-production or early production business with historical losses may not be possible without putting a new holding structure in place. Similarly, depending on the ju­risdiction where the parent company in the existing group is incorporated, institutional investors may insist that a new holding company be established in a jurisdiction with familiar shareholder rights and protections, whether the U.K. or offshore juris­dictions such as the Isle of Man, Channel Islands, Bermuda or the British Virgin Islands.  
 
Investors will expect a simple capital structure with only one class of share, so you will need to rectify any more complex structures in advance. A further rule of thumb is that investors will generally not be happy with convertible securities, such as options and warrants representing more than 10 per cent of your enlarged share capital on flotation. You may want to allow time to get a tax-efficient share option scheme in place, which for a U.K. company will require advance consent from Her Majesty’s Revenue & Customs.
 
Ensure appropriate management is in place well in advance
 
At a minimum, your board will need to consist of a Chief Executive Officer, a Finance Director (or Chief Financial Officer, who in the U.K. will be expected to be on the board, contrary to North American practice) and at least two suitably quali­fied non-executive directors.  
 
Getting good non-executives on board can take time though your advisers can usually provide good recommendations. The non-executives will typically have relevant quoted company experience (prefera­bly having gone through the IPO process previously) and/or relevant industry sector experience.
 
The earlier the non-executives join the board the better, so they have time to get familiar with the company and its business and implement suitable corporate governance policies well ahead of IPO, so the board can hit the ground running on listing. This preliminary period will also be a good opportunity to see whether the various individuals can work together to ensure the board operates effectively, as investors take a dim view of sudden changes to the board in the short term post-listing.
 
Understand the accounting and financial reporting requirements
 
The Finance Director’s role will be crucial to the IPO process, controlling the preparation of the financial due diligence, financial model for work­ing capital purposes and implementing financial reporting procedures. The IPO timetable is of­ten driven by the requirement for audited ac­counts no more than nine months out of date, or interim accounts will be necessary which can increase time cost. You will also need to con­sider issues of IFRS restatement/reconciliation of historical financial information, particularly for any foreign subsidiaries.
 
Get off to a good start as a publicly listed company
 
It may be counter-intuitive, but care should be taken not to be too aggressive with valuation expectations. It is important to leave something on the table for investors as you will need their support down the road. Achieving the first set of market expectations is crucial to maintaining confidence in your share price, so it is infinitely better to under-promise and over-deliver than the reverse!
 
A company that is well-organised and has given consideration to these matters prior to embarking on the IPO process will make a much better impression with advisers and the invest­ment community, thus enhancing the prospects of a successful IPO.
 
Richie Clark is a partner and Head of Capital Markets at Fox Williams LLP, where he leads a team focused on pre-IPO finance, admissions and placings on the London Stock Exchange’s Main Market and AIM, secondary fundraisings, M&A and takeover activity, and increasingly on activist shareholder and corporate governance issues, acting for both companies and finan­cial advisers. He specialises in the energy and natural resources sectors and the issues facing international companies accessing the London capital markets. Fox Williams is an independent business law firm based in the City of London. The firm has a strong reputation for both con­tentious and non-contentious work in its core practice areas of corporate, partnership, em­ployment & immigration, real estate, and com­merce and technology, and has a sector focus on energy and natural resources.


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