Underwriting Practice and Procedure
| Jurisdiction | United Kingdom |
| Pages | 517-550 |
| Author | Raj Panasar,Philip Boeckman |
8
Underwriting Practice andProcedure
8.1 Introduction 8.01
8.1.1 What is underwriting? 8.03
8.1.2 Dierent forms of underwriting
commitment 8.04
8.2 The Underwriters 8.10
8.2.1 Role of an underwriter 8.10
8.2.2 Managing market risk 8.11
8.2.3 Managing legal risk and potential
liability 8.18
8.3 The Underwriting Agreement 8.23
8.3.1 Purpose of the underwriting
agreement 8.23
8.3.2 Parties to the underwriting
agreement 8.24
8.3.3 Key provisions of the underwriting
agreement 8.27
8.3.4 Negotiating and nalizing an
underwriting agreement 8.52
8.4 The Agreement Among Underwriters 8.59
8.4.1 Purpose of the agreement among
underwriters 8.59
8.4.2 Parties to the agreement among
underwriters 8.60
8.4.3 Key provisions of the agreement
among underwriters 8.61
8.4.4 Negotiating and nalizing the
agreement among underwriters 8.69
8.5 Specific Transaction Issues 8.71
8.5.1 Stabilization of an oering 8.71
8.5.2 Underwriting a secondary issue
of new shares 8.90
8.5.3 Underwriting a secondary sale of
existing shares 8.120
8.1 Introduction
is Chapter takes a practical look at underwriting, the contractual arrangements it involves
and associated practices and issues. It explains the purpose of underwriting and how it ts in
with the broader capital- raising process. It discusses the parties involved in an underwriting
commitment, the risks associated with underwriting arrangements, what underwriting
agreements seek to achieve, the provisions they contain, and how the relationship between
underwriters in a syndicate is governed. e Chapter then focuses on some specic trans-
action issues including stabilization of an oering, underwriting a secondary issue of new
shares, and underwriting a secondary sale of existing shares. Although many of the issues
and principles discussed in this Chapter are relevant across the capital markets spectrum,
the focus of what follows is centred on practice in the equity capital markets and primarily
with a view to practice and rules in the United Kingdom1.
Although national dierences in underwriting practice and procedure across Europe exist,
broadly speaking, consistency prevails. is similarity is driven by a combination of the har-
monization in securities oering and prospectus disclosure regimes in Europe deriving from
the European Commission’s Financial Services Action Plan and the resulting legislation,
1 As at the time of publication, the United Kingdom ceasing to be a member of the European Union pursuant to
the EU- UK Withdrawal Agreement is not expected to have any signicant impact on the underwriting practices
and issues discussed in this Chapter.
8.01
8.02
518
such as the Prospectus Directive (Directive 2003/ 71/ EC as amended by Directive 2010/
73/ EU) and the Prospectus Regulation (Commission Regulation 809/ 2004, as amended),
which, as of 21 July 2019, was repealed and replaced in all respects by the new EU Prospectus
Regulation (Regulation (EU) 2017/ 1129), including the ability to ‘passport’ prospectuses
approved by one national regulator into other jurisdictions of the EEA, and also the in-
uence of a select number of international investment banks and advisers who set market
practice in terms of documenting underwriting arrangements. Where practice does dier
across jurisdictions this tends to be as a result of specic, local regulatory, or corporate
law requirements. ese dierences include, inter alia, rules requiring that a minimum
percentage of an oering be reserved for domestic retail investors where there is a public
oering alongside an institutional oering; the length of time an oering period must re-
main open to dierent types of investors; the length of time national regulators require to
approve a prospectus; and the imposition of regulatory responsibilities and obligations on
investment banks advising companies conducting oerings (see paragraph 8.20). One area
where, historically, European legislation has not been harmonized across member states is
in relation to the liability regime for prospectuses. e publication in 2013 of a report by the
European Securities and Markets Authority (‘ESMA’) on prospectus liability regimes2 served
as a reminder that although there is a well- established pan- European prospectus regime,
governing the circumstances in which a prospectus is required or, indeed, when an exemp-
tion from the requirement to prepare a prospectus is available, and the detailed content re-
quirements for a variety of dierent types of prospectus, there remain signicant dierences
across member states when it comes to assessing the risk and extent of liability under that
regime (see paragraph 8.19). e way in which practice varies in the types of examples noted
above has an inuence on the way in which underwriting arrangements are conducted. e
new EU Prospectus Regulation introduces certain minimum sanctions and other measures,
including monetary nes, aimed at developing a more consistent approach to addressing in-
fringements of the prospectus regime.3
8.1.1 What is underwriting?
At its most basic, underwriting is a contractual commitment given by one party, the under-
writer (generally, an investment bank), to another party, the issuer or seller of securities,
2 On 10 June 2013, ESMA, following a request from the European Commission, published a report comparing
the liability regimes applied by EEA member states in relation to the Prospectus Directive (Directive 2003/ 71/
EC as amended by Directive 2010/ 73/ EU). Among other things, the report covers the national sanctioning re-
gimes (administrative and criminal) for infringements of national legislation and rules transposing the Prospectus
Directive (and Commission Regulation 809/ 2004 implementing the Prospectus Directive) (the ‘Prospectus
Regulation’).
3 In an attempt to harmonize the sanctions regime across the EEA, Chapter VIII of the new EU Prospectus
Regulation requires that, among other things, member states, in addition to their right to impose criminal sanc-
tions, provide for national competent authorities to have the power to impose administrative sanctions and other
measures for breaches of the Prospectus Regulation and failure to cooperate or comply with investigations. Article
38(2) sets out a range of sanctions, including:public disclosure of breaches; nes of twice the amount of prots
gained or losses avoided as a result of the breach; in the case of legal persons, nes of €5,000,000 or 3% of annual
turnover and in the case of natural persons, nes of €700,000. In addition, member states may provide for add-
itional sanctions or measures and for higher nancial penalties than those provided for under the Prospectus
Regulation. Other articles in Chapter VIII prescribe the factors that national competent authorities should take
into account when determining the type and level of sanction, how sanctions are reported across the EEA and to
ESMA, and what criteria are relevant in connection with publicly disclosing breaches by responsible persons and
the penalties imposed.
8.03
519
under which the underwriter agrees to acquire the securities if the persons they have been
oered to do not agree, or fail, to acquire them. Acommitment to underwrite provides an
issuer or seller of securities with certainty that it will, in return for a fee paid to the under-
writer, receive the proceeds from an oering of securities regardless of whether or not in-
vestors in the broader market can be found to acquire the securities oered or, if found, the
investors default in such acquisition.
8.1.2 Dierent forms ofunderwritingcommitment
An underwriting commitment can take a number of different forms, but broadly there
are two main types of underwriting— ‘hard’ underwriting and ‘soft’ underwriting. Hard
underwriting provides an issuer or seller of securities with certainty that, whether or
not buyers can be found for the securities, the underwriter will acquire them and the
issuer or seller will receive the proceeds. Soft underwriting, on the other hand, provides
an issuer or seller of securities with the comfort that, provided buyers are found for the
securities, the underwriter will acquire them if the buyers fail to pay for them at the
relevant time.
Athird variant, generally associated with so underwriting, is known as ‘best eorts’ under-
writing. is is sometimes misleading as there is not always an underwriting commitment
involved in best eorts underwriting. It is called ‘best eorts’ because the investment bank
will use its best eorts (or, more commonly in practice, and documented as such, its ‘reason-
able eorts’) to procure investors to acquire the securities, but if it fails to do so, it is either
under no commitment to underwrite (hence it is misleading to call it underwriting) or it is
under a commitment to underwrite only to the extent that the buyers it has procured fail to
pay. Consequently, best eorts underwriting is a term oen used synonymously with so
underwriting.
In the case of hard underwriting, the underwriters are said to be taking ‘market risk’ (i.e.,
the risk that investors in the market do not want to buy the securities) and in the case of so
or best eorts underwriting, underwriters are said to be taking ‘settlement risk’ (i.e., the risk
that investors fail to pay for the securities when payment becomes due).
e type of commitment an underwriter is prepared to accept will depend on a variety of
factors, including the nature of the oering, the bargaining power of the parties involved, the
size of fee that the issuer or seller is prepared to pay, and the level of risk that the underwriter
is prepared to take on. For example, in the context of an initial public oering (‘IPO’), w here
an unlisted company is coming to the public markets for the rst time and seeking to sell its
business story to investors, it would be unacceptable, as a matter of market practice, if the
only way the company could raise the equity capital it was seeking was through an under-
writer acquiring all the shares in the oering. Consequently, it would be standard practice
for the underwriters to nd buyers who had agreed to acquire the shares being oered in the
IPO before committing to underwrite the oering (i.e., so underwriting). Hence, the risk
the underwriter takes on is the much more limited settlement risk of those buyers failing to
pay for the shares.
In the case of a listed company raising further equity capital for a specic purpose (for ex-
ample, to fund an acquisition or for its general working capital needs), it would be normal, in
the United Kingdom at least, to ensure that the oering is underwritten at the outset before
8.04
8.05
8.06
8.07
8.08
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