160 5 Equity and Shareholders’ Capital
In addition, securities may not be admitted to trading on a regulated market in
the EU unless particular listing conditions have been satisfied.^130 One of the key
requirements is the consent of the competent authorities.^131
Reasons for going public. The benefits and drawbacks of going public depend
on the perspective. Controlling shareholders, managers, and the firm may have
conflicting interests.
Controlling shareholders benefit, for example, from: obtaining a market valua-
tion for their shares; an increased share price because of increased liquidity; the
chance to use those higher-priced shares as a means of payment in takeover fi-
nance and otherwise; access to minority shareholders as a source of funding; eas-
ier exit; and a chance to diversify their holdings better.
However, a stock exchange listing would also increase disclosure duties and the
duties of the board to protect the interests of the company and its minority share-
holders. If those duties are effective (in many countries they are not), they can act
as a constraint on how controlling shareholders can exercise control.
Managers would benefit from the duties of the board to protect the interests of
the company and its minority shareholders and generally from the adoption of ac-
ceptable corporate governance practices. In principle, legal rules and market prac-
tices could help to shield the management from large shareholders. In addition, a
company with dispersed ownership is typically controlled by its managers; this
tends to be combined with higher pay and the existence of stock option pro-
grammes.^132
On the other hand, the board and managers of a listed company must comply
with a large body of legal rules and corporate governance practices designed to
make them more effective. Increased disclosure and the market for control may
act as a constraint.
Going public can bring many benefits to the firm: (a) A stock exchange listing
gives the company’s shares a market and a market valuation. (b) A market
valuation of shares and easier exit for their holders can make it easier for the
company to ask for a better price for the shares that it issues. (c) A market will
generally help the company to broaden its shareholder base. In addition, some
institutional investors, such as pension funds, have internal rules that prevent them
from investing in securities that are not liquid. A stock exchange listing will
increase both the number of institutional investors that might be interested in
buying the shares and the share price. (d) A market valuation makes it easier for
the company to use its shares as a means of payment. For example, shares can be
used as a means of payment in takeovers, and tradeable shares make it easier for
the company to introduce share option programmes. (e) A stock exchange listing
makes it easier for the founders and existing owners of the company to exit the
company. (f) In other words, a listing can give the firm easier access to capital for
growth. (g) A stock exchange listing can also make the company better known,
(^130) Article 5 of Directive 2001/34/EC (Listing Directive).
(^131) Article 11(1) of Directive 2001/34/EC (Listing Directive).
(^132) Bebchuk LA, Fried JM, Walker DI, Managerial Power and Rent Extraction in the De-
sign of Executive Compensation, U Chic L R 69 (2002) pp 751–846.