Underwriting is the process which the large financial service providers like banks, insurers and investment houses utilizes to get the eligibility of the customer to achieve products like capital, equity, insurance, credit or mortgage. After striking the underwriting agreement, the underwriter bears the risk of selling the underlying securities. He also bears the cost of holding them on its books until the time in future when they are considerably sold. The company and the sponsor have the probability of conflicting interests concerning underwriting. The underwriters take all the shares left after the IPO in which the float is undersubscribed in return for negotiated fee which is usually 3 to 4% of the written amount. If the IPO describes that there are no other shares left, the underwriter has no liability to access any shares. This arrangement is recorded in the underwriting agreement (The College of law of England and Wales, 2000).
The Initial Public Offer (IPO) or flotation is the process by which a company becomes listed after undergoing the parallel admission procedure to contain it shares. Since IPO is a complex transaction, it requires good corporate advisers for successful float. Thus a year before the IPO, the company must consider carefully on the personnel to appoint as advisers, usually its lawyers and accountants. Any company seeking to float needs professional advice in association with the broad range of issues. The lawyers advising on the formal aspects of IPO form part of the considerable bigger team of advisers and each take responsibility for different aspects of float (The College of law of England and Wales, 2000). The lawyers advising on IPO cannot work in isolation and thus they need excellent project and communication management skills. They also require for excellent understanding responsibilities and roles of the other team.
The underwriter normally allocates some or the entire risks of the offer being undersubscribed to sub underwriters by a sub underwriting agreement in which the company is not the party to any sub-underwriting agreement. Normally the sponsor adopts the duty of underwriter. Occasionally, if the broker is different from the sponsor, he becomes the underwriter. Often the sub-underwriters are the other brokers, banks and the big institutional investors. There are normally two types of lawyers, from various firms which are involved in flotation and are specialists in corporate finance. One team deals with advising the company while the other advises the sponsor. Both the teams work closely to offer the seamless service. The need of the two teams mirrors the fact that there are issues on which the company and the sponsor conflict, although both have the common aim for successful IPO (The College of law of England and Wales, 2000).
The sponsor owes some responsibilities to FSA which the company does not owe. The sponsor is highly sensitive concerning the risks of being engaging with unsuccessful IPO, or that which generates awful publicity and the effect this it has on its capability to get its future work. Thus it wishes to exercise for more cautious approach than that of the company in particular areas (The College of law of England and Wales, 2000). The sponsor and the company are also more probable to conflict on the interests concerning underwriting. In addition to the company and sponsor lawyers, there can also be other lawyers who represent any selling shareholders when there is the conflict of interest amidst the company and those shareholders. If there exists no conflict, the company lawyers may also act for the selling shareholders.
The lawyers of the company draft the entire documentation concerning the IPO. This involves the prospectus and also the ancillary documents, alongside any preparatory documentation needed to restructure the company like changing of articles of association, re-registering of the company as public company and drafting the new service contracts for directors. The lawyers of the company are also accountable for verification process. The sponsor lawyers work together with the company lawyers to negotiate the agreements amidst the sponsor, the company and the shareholder, for instance the underwriting agreement. The company lawyers have the basic responsibility of processing IPO documentation while the sponsor’s lawyers contribute towards the drafting (The college of law of England and Wales, 2000). This assists to keep a close eye on the company’s lawyer’s advancement concerning the legal documentation and verification exercise on which to advise the sponsor appropriately.
The main marketing document of the float is the prospectus and this ought to have substantial amount of information concerning the company. The directors have the primary accountability for accuracy of that information. This requires them to enlist assistance of the company secretary and the main managers to locate and offer to advisers the prospectus and the precise information concerning the company. The company requires the sponsor as well as he owes duties to FSA and the firm takes up appointments once the sponsor is contented with the company suitability for listing. The sponsor guides the company and its management during the flotation process and advises the company on the Listing Rules interpretation. It liaises with FSA and to smaller extent; the Stock Exchange on behalf of that company relays any comments back to the company. The sponsor likewise coordinates the advisers’ team and advises them on the IPO timetable. The lawyers have the day to day contact with the sponsor during the flotation progresses. As usual the investment bank, accountancy firm or the stockbroker shall adopt the duty of the sponsor though it has to be approved by FSA.
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