CORPORATE LAW

BBB 3233

LECTURE 6: COMPANY FLOATATION

 TOPIC OUTLINE

• Official System for listing securities on an

investment exchange

• Offers of unlisted securities

• Procedures for issuing shares

• Underwriting / Brokerage
 INTRODUCTION
• Floating a company – also known as “going public”
• Legal process by which a company goes from being privately to publicly
held
• Called the Initial Public Offering (IPO)
• The first sale of stock by a private company to the public
• Are often issued by smaller, younger companies seeking capital to expand
• Can also be done by large privately-owned companies looking to become
publicly traded
• The term "float" refers to the regular shares that a company has issued to
the public
• Represents the portion of shares of a corporation that are in the hands of
public investors
• Obtain financing from outside the company

• To raise large amount of investment finance

• To create a wider market for company shares

• To increase ability to make acquisition

• To raise company profile

• To encourage employee commitment

• Increase the value of the company

• IPO market is considered as Primary Market but once listed, it is traded in the Secondary

Market

• Due to IPO normally offered to shareholders, corporations before it goes public through

the stock market

• The issuer obtains the assistance of an underwriting firm

• Which helps it determine what type of security to issue (common or preferred), best

offering price and time to bring it to market

OFFICIAL SYSTEM FOR LISTING SECURITIES
ON AN INVESTMENT EXCHANGE

• Choosing whether to float a company is one of the most important

business decisions that the Directors and Owners of a company will

make

• Flotation is a complicated and costly process which, if it is to be

successful, will require the appointment of independent legal and

financial council and a dedicated IPO team

• Different stock markets, each with their own characteristics

• Design to meet the needs of different types of companies

• All companies seeking listing on Bursa Malaysia will require SC’s
approval, under Section 212 of the Capital Market and Services
Act 2007
• Under Bursa Malaysia, depending on the size and turnover of
the company, owners can choose between listing in the Main
Market or the ACE Market
• The Main Market in Bursa Malaysia are the most common share
trading market for establish company such as Malaysian
Airlines, Air Asia, Petronas
• ACE Market is intended for companies with good growth
potential and the emerging markets
• Bursa Malaysia was known as Kuala Lumpur Stock
Exchange (KLSE)
• Provide a profit figure and uninterrupted profit after tax or of
3 to 5 full financial years
• Minimum of RM20 million in the latest full financial year
• Fulfil the Market Capitalisation Test ( value of a company that
is traded on the stock market, calculated by multiplying the
total number of shares by the present share price)
• Must be able to offer a minimum of RM500 million totals in
market capitalization once it goes public and incorporated
• Generated operating revenue of 1 full financial year
before submission for listing
• Issue a minimum of 25% of the company’s share
capital to the public or at least 1,000 public
shareholders
• Bumiputera Equity of 50% of the public spread to
investors who are of Bumiputera status
• Companies with predominant foreign-based
operations are also exempted from this requirement
• The ACE Market which stands for ‘Access, Certainty, Efficiency’ is
actually the new name for the formerly known MESDAQ (Malaysian
Exchange of Securities Dealing and Automated Quotation) market
• For ACE Market listing application, SC’s approval under Section 212
is not require, however subjected to SC review
• Regulations for listing in ACE market are less stringent and the
company need not provide the track records like how it is required
in the Main Market
• Regulatory framework of the ACE Market is to offer companies and
entrepreneurs with better transparency and hence makes it easier
to list
• Encourage more innovative products and companies to
push for development and growth
• No minimum operating track record or profit
requirements needed
• Minimum of 25% of the company’s share capital to the
public or at least 200 public shareholders with at least
100 shares
• No Bumiputera Equity requirement for ACE Market
companies upon initial listing
 OFFERS OF UNLISTED
SECURITIES
• Market for buying and selling shares which were not listed on the Main
Market
• Issued by smaller or new firms who cannot or do not wish to comply with
the listing requirements of an official exchange
• Through the over-the-counter (OTC) as an alternative investment market
• Bank Negara's Bond Info Hub website
• http://bondinfo.bnm.gov.my/portal/server.pt
• The bonds are not quoted or traded on the Exchange
• Gives investors an great opportunity to invest in stocks of small and/or
overlooked companies that have plenty of growth potential
• Very risky since they are the stocks that are not considered large
or stable enough to trade on a major exchange
• Not required to report to the SEC, many stocks offered by companies with
bad credit records
• Not all as many companies simply don't want to participate in the
expensive reporting process
• Traded through a dealer network rather than through a centralized, formal
exchange
• Usually traded by private securities dealers who negotiate directly with
buyers and sellers
• The players/participating members on this platform would be the
stockbrokers, corporate finance advisors, legal firms, audit firms, valuers
etc
• Interested investor must open an account with a registered brokerage firm
 PROCEDURES FOR ISSUING
SHARES
• Company's power to issue shares is subject to the Companies Act
1965 / CA 2016
• Contents of the company's constitution
• Company's board of directors may issue shares, at any time, to any
person and in any number, as the board chooses
• Issuing shares is therefore entirely at the board of directors' discretion
• Shares must be issued after a company is first registered
• Notice of share issue must be lodged with the Registrar of Companies
• Shareholder approval can overcome restrictions in the constitution
• Existing shareholders have pre-emptive rights over new shares
• When company has been registered, the following
procedure is adopted by the company to collect money
from the public by issuing of shares
• Issue of prospectus: When a Public company intends to
raise capital by issuing its shares to the public, it invites
the public to make an offer to buy its shares through a
document called ‘Prospectus’
• Contains the brief information about the company, its
past record and of the project for which company is
issuing share
• Includes the opening date and the closing date of the issue, amount payable

with application, at the time of allotment and on calls, name of the bank in

which the application money will be deposited, minimum number of shares

for which application will be accepted, etc

• After reading the prospectus if the public is satisfied then they can apply to

the company for purchase of its shares on a printed prescribed form

• Application money must be deposited by the public in a schedule bank and

get a receipt for the same

• Company cannot withdraw this money from the bank till the procedure of

allotment has been completed

• Allotments of shares means acceptance by the company for applicants to

take up the shares applied for

• Information of allotment is given to the shareholders by a letter known as
‘Allotment Letter’
• Informing the amount to be called at the time of allotment and the date fixed
for payment of such money
• Decision to allot the share is taken by the Board of Directors in consultation
with the stock exchange
• After the closure of the subscription list, the bank sends all applications to the
company
• Receipt of applications carefully inspected such as whether application form
is properly filled up and signed and the money is deposited with the bank
• The remaining amount left after application and allotment money due from
shareholders may be demanded in one or more parts
• Termed as ‘First Call’ and ‘Second Call’ and so on
• A word ‘Final’ word is added to the last call
 UNDERWRITTING / BROKERAGE
• Underwriting is an agreement used in the sale of new issues of corporate

securities
• An underwriter is a person (or a finance house) which on a public issues of shares

• Helps companies introduce their new securities to the market

• When a company wants to issue stock, bonds, or other publicly traded securities, it

hires an underwriter to manage what is often a long and complex process

• Underwriting services are provided by some large specialist financial institutions, such

as banks, insurance or investment houses

• By underwriting securities, investment bankers raise investment capital from

investors on behalf of corporations and governments that are issuing securities

• Agrees to purchase those shares which are not taken by public

• Underwriter may be paid a commission not exceeding 10% of the issue price
• Once company prospectus in hand, the underwriter then proceeds
to market the securities
• Determining the final offering price is one of the underwriter's most
important responsibilities
• Once the underwriter is sure it will sell all of the shares in the offering, it
closes the offering
• Underwriters usually maintain a secondary market in the securities they
issue
• An underwriting contract is a contract between an underwriter and an
issuer of securities
Broker:
• Investment brokers are individuals who bring together
buyers and sellers of investments
• Usually are required to be licensed to act on behalf of
buyers and sellers of stock
• Charge a commission on trades that they execute on such
instructions from buyers and sellers
• May offer advice to clients regarding investment decisions
• Charge various service fees and collect interest on amounts
borrowed by investors against a brokerage account
 EXERCISES
1. Describe the role of underwriting
2. Discuss the differences between ACE Market
and Bursa Malaysia
3. Elaborate the procedures of issuing shares
4. Discuss the purpose company goes for
floating
5. Determine and elaborate where a company
can offer their shares which were
not listed on the market