IPOs, secondary offerings and corporate transactions: equity capital market “Transaction Guidelines” from the IMA

Written on 12 Nov 2014

The Investment Management Association has this week updated its guidance on aspects of equity capital market transactions. These “Transaction Guidelines” set out the views of IMA members, as institutional investors, on: 

  • IPOs; 
  • Secondary offerings; and 
  • Corporate governance during corporate transactions.

The Transaction Guidelines – which build on the ABI’s “Encouraging Equity Investment Report” and “Improving Corporate Governance and Shareholder Engagement” report, both of July 2013 – are necessary reading for equity capital market participants. Below, we pick out some of the more interesting points from the Guidelines. 

IPOs 

  • Limiting syndicate size: “The IMA believes that as a rule of thumb, no more than three book-runners should be appointed for large transactions (i.e. above £250m excluding any over-allotment option). Below this issue size, there should generally be no more than two book-runners. Issuers should ensure that any additional members of the syndicate are included based on their sector expertise or distributional reach.” 
  • Syndicate membership and on-going relationships: “We discourage the inclusion of syndicate members who are present solely on the basis of past or future services to the issuer or vendors. Nonetheless, we acknowledge that vendors and/or companies may occasionally need to appoint more banks to the syndicate due to on-going relationships. In these instances, companies should clearly specify the roles and responsibilities of each syndicate member, including those with entirely passive roles in relation to the transaction.” 
  • Disclosure and disaggregation of fees: “There should be, as a matter of good practice, greater disclosure in the prospectus of all the fees paid for an IPO, including the maximum incentive fee, if any. This should include a breakdown of fees as a percentage of the size of the offering, and those fees that are independent of size, such as, but not limited to, independent advisers’, lawyers’ and accountants’ fees. Syndicate members’ individual fees should also be disclosed.” 
  • Obscurantism in prospectuses: “Market views on prospectuses include that they are too detailed to be understood by retail investors; contain too many generic or boiler plate risk factors that obscure the most important risks and opportunities; and are too time consuming to go through, given the short time between the Pathfinder prospectus being issued and investors’ meetings with management as part of the roadshow, resulting in some investors feeling ill-prepared for the company meeting. We are strongly supportive of the UKLA’s aim to reduce the amount of generic information in the prospectus.”


Secondary offerings 

  • Rights issue deep discounts and sub-underwriting: “Companies should use deep discounts in rights issues in order to reduce the level of underwriting fees paid to both primary underwriters and sub-underwriters. They are also encouraged to reduce primary underwriting fees where possible, by getting firm undertakings from sub-underwriters before announcing the transaction.”
  • Unbundling of fees: “The gross spread for rights issues and open offers should be unbundled, so that the amounts for advice, including document preparation, primary underwriting and sub-underwriting are shown separately. These unbundled fees should be fully disclosed in the offering documents, along with disclosure of other rights issue-related fees including, but not limited to, lawyers, accountants and independent advisers. Investors would like to see disaggregated disclosure as a matter of best practice, despite there being no legal requirement for the disclosure of disaggregated fees.”


Corporate governance during corporate transactions 

  • Importance of non-executive directors: “The IMA believes that non-executive directors are crucial to good governance; we are recommending structural measures to ensure that non-executives can maintain and assert independence during corporate transactions.”

    Non-executive directors to be inside the loop: “Non-executive directors should be given sufficient time and information to give proper consideration to the merits of the transaction in question, as well as the opportunity to provide their views to shareholders when they are first made insiders…The non-executive directors should be provided with a narrative description of discussions between the company and the transaction counterparty and this narrative should be disclosed in summary form in the circular to shareholders.” 

  • Non-executive access to advisers: “Non-executive directors should be given direct access to financial and legal advisers to the company on a transaction in order to ensure that information can be rapidly obtained and understood.” 

The IMA has merged with ABI Investment Affairs and from 1 January 2015 will be called “The Investment Association”. 

See also: Updated institutional investor guidance on share capital management and ECM and M&A transaction execution