226 5 Equity and Shareholders’ Capital
One of the purposes of the bookbuilding method is to signal to investors that
the offer price is reasonable. As said above, this is done by interviewing
institutional investors about the price during the pre-marketing phase.
The share price can be stabilised by means of an over-allotment option (the
greenshoe method), a share buy-back programme, and lock-ups.
An over-allotment option (the greenshoe method) can mitigate the risk of price
rises caused by too large demand. The terms of the over-allotment option are
constrained by the Directive on market abuse. In practice, they must comply with
the detailed provisions of the legal instruments implementing the Directive.^450
There is a Commission Regulation implementing the Market Abuse Directive as
regards exemptions for buy-back programmes and stabilisation of financial
instruments.^451
In the Ahlstrom IPO, Ahlstrom disclosed^452 that SEB Enskilda, a Swedish bank, was
granted an option,^453 exercisable for 30 days^454 from the date of pre-listing of the shares on
the Helsinki Stock exchange, to subscribe for up to 1,150,000^455 additional new shares (in
addition to the offering of 8,000,000 new ordinary shares to the public) at the offer price,^456
solely to cover over-allotments.^457
A share buy-back programme can help the firm to stabilise the price and mitigate
the risk of decreasing share price caused by too much selling.
In addition, large institutional investors will accept a lock-up clause that will
prohibit insiders from making short-term profits and causing the share price to fall
soon after trading has begun.
The combination of those methods helps the firm to signal a more stable
development of the share price, avoid very short-term investors, attract investors
whose investment period is longer, and obtain a better price for its shares.
Stabilisation and market abuse. From a legal perspective, stabilisation
nevertheless raises questions of market abuse (for share buy-backs and
stabilisation, see also section 10.2.4).
(^450) Article 8 of Directive 2003/6/EC (Directive on market abuse).
(^451) Regulation 2273/2003 implementing Directive 2003/6/EC as regards exemptions for
buy-back programmes and stabilisation of financial instruments.
(^452) Article 9(1) of Regulation 2273/2003.
(^453) Article 2 of Regulation 2273/2003: “For the purposes of this Regulation, the following
definitions shall apply in addition to those laid down in Directive 2003/6/EC: ... 14.
‘greenshoe option’ means an option granted by the offeror in favour of the investment
firm(s) or credit institution(s) involved in the offer for the purpose of covering overal-
lotments, under the terms of which such firm(s) or institution(s) may purchase up to a
certain amount of relevant securities at the offer price for a certain period of time after
the offer of the relevant securities ...”
(^454) See Article 8(2) of Regulation 2273/2003.
(^455) Article 11(d) of Regulation 2273/2003.
(^456) Article 11(a) of Regulation 2273/2003, see also Article 10(1).
(^457) Article 11(c) of Regulation 2273/2003.