224 5 Equity and Shareholders’ Capital
In addition, the Second Directive prohibits the issuing of shares “at a price lower
than their nominal value, or, where there is no nominal value, their accountable
par”.^445 There is an exemption making it easier to use intermediaries: Member
States may allow those who undertake to place shares in the exercise of their pro-
fession to pay less than the total price of the shares for which they subscribe in the
course of this transaction.^446
When determining the issue price, the firm will have to take into account the
legal capital regime. The Second Directive does not require share premiums to be
treated in the same way as fixed share capital. Depending on the preferences of the
Member State and the articles of association of the company, they can more easily
be distributed to shareholders.^447 Sums representing share premiums represent a
valuable source of funding.
Securities markets law. Offers of shares to the public and issues by companies
whose securities have been admitted to trading are constrained by rules based on
EU securities markets law (see section 5.9).
The process in practice: general remarks. In company law, it is assumed that a
company markets its shares to potential investors and that investors directly
subscribe for new shares. Such a simple process would be sufficient in a private
placement by an SME.
However, a listed company, or a company that wants its securities to be
admitted to trading on a regulated market in an IPO, would use one or more
investment banks as intermediaries. The company expects them to: (a) possess
know-how about the capital market, investors, and the pricing of securities; and
(b) ensure that all formalities will be taken care of; and (c) work as a risk
mitigation mechanism.
The process can be complicated. In the following, the key steps of the process
will therefore be illustrated by the 2006 IPO of Ahlstrom Corporation, a Finnish
manufacturer of specialty papers. The Ahlstrom IPO can be regarded as a
mainstream European IPO which involved the use of the most common legal
techniques and practices.
5.10.2 Management of Risk
In an IPO, the firm typically employs a mix of methods to obtain a higher price for
its shares and to manage risk.
Choice of an investment bank or banks. A usual IPO starts with a “beauty
contest” and the choice of an investment bank.
A letter of engagement will describe: the transaction; the services that the
investment bank will provide (possibly as lead bank in a consortium); the role of
(^445) Article 8(1) of Directive 77/91/EEC (Second Company Law Directive).
(^446) Article 8(2) of Directive 77/91/EEC (Second Company Law Directive).
(^447) Article 15(1)(a) of Directive 77/91/EEC (Second Company Law Directive): “... lower
than the amount of the subscribed capital plus those reserves which may not be distrib-
uted under the law or the statutes.” See, for example, Ferran E, Principles of Corporate
Finance Law. OUP, Oxford (2008) pp 116–123.