Underwriting arrangementsTypes of arrangement
What types of underwriting arrangements are commonly used?
The type of underwriting arrangement used will depend on the type of transaction. For example, most investment-grade debt issues use a fixed-price approach, where the pricing terms are all set out at the outset. Other debt issuances (for example, issues by first-time issuers or asset-backed securities) are often unpriced until after a book-building process, where potential investors notify the book-builder of their interest in the issuance. The underwriters will subsequently be able to commit to underwriting with a better idea of the level of demand for the securities.Typical provisions
What does the underwriting agreement typically provide with respect to indemnity, force majeure clauses, success fees and overallotment options?
Depending on the type of deal as well as the negotiating positions of the parties, the underwriting agreement may include an indemnity given by the issuer to the underwriter over all claims or losses arising out of the breach of the representations and warranties and any untrue statements or omissions in the prospectus. The issuer may also agree not to make any claims against the underwriter in respect of any losses the issuer sustains arising from the services provided by the underwriter (absent a specified level of negligence, wilful default, or breach of regulatory duties). The ultimate type of indemnity and the level of negotiations on an indemnity is generally driven by the type of transaction and the appetite of the parties for an approach that departs from what is perceived as ‘standard’.
Section 678 of the Companies Act 2006 (which prohibits a public company from giving financial assistance to a person acquiring or proposing to acquire shares in the company) could be triggered if the underwriter is indemnified against losses incurred as a result of the underwriter having to purchase surplus securities. Therefore the indemnity should be specific and may exclude losses sustained through being obliged to purchase surplus securities.
Force majeure clauses are common, providing for the suspension or sometimes termination of contractual obligations where a party is prevented from performing its obligations under the contract by a factor outside its control. Typical events provided for include the suspension or limitation of trading on a certain market; changes in taxation; outbreak of hostilities; or the occurrence of a relevant material adverse change.
Underwriting fees are typically expressed as a percentage of the principal raised. The underwriting fee must be disclosed in the offering document.
Overallotment options are often included in equity issues as a way of facilitating price stabilisation - see question 18.Other regulations
What additional regulations apply to underwriting arrangements?
Underwriting arrangements are regulated within the FSMA framework. According to the FCA, underwriting activities will be covered by the regulated activities of dealing in investments as principal, dealing in investments as agent, and arranging deals in investments, meaning that an underwriter will likely need to be authorised under FSMA in order to provide underwriting services. Authorised underwriters are subject to a number of organisational, conduct of business and other regulatory requirements.
Additionally, sections 552 and 553 of the Companies Act 2006 require that payment of the underwriting commission be authorised by the issuer’s articles of association, and that the consideration paid or agreed in respect of the underwriting must not exceed the lower of (i) 10 per cent of the price at which the shares are issued, and (ii) the amount or rate authorised by the articles. The underwriting commission must generally be disclosed in any prospectus.