The Companies (Amendment) Act, 1999, which was enacted recently, allows for the first time price stabilisation of new issues and offers of shares (and other securities, such as bonds) on the Irish Stock Exchange.
Price stabilisation is effectively a legitimate form of share price support which may be operated for a limited period following a share offering and which has been recognised by the major stock exchanges as desirable because, in the weeks following the offering, it protects investors from sharp falls in the price of shares. It is usually conducted by one of the investment banks making the share offer which acts as the stabilising manager.
Price stabilisation is conventionally a feature of international share offerings and is already allowed, for example, on the London and New York Stock Exchanges. Before the introduction of the new legislation, offerings of shares by Irish companies were capable of being stabilised on these foreign exchanges. The new legislation, however, brings the law applicable to offerings of shares to be listed on the Irish Stock Exchange into line with the practice in the UK and the US.
Priority was given to the enactment of the legislation to allow the Government the option to incorporate a stabilisation mechanism into the arrangements for the Telecom Eireann IPO, so as to enable stabilising activity to take place on the Irish Stock Exchange.
As part of the stabilisation arrangements, the stabilising manager is typically granted an option, by the company or shareholder which is making the offer of shares, to buy additional shares at the original offering price (the "over-allotment" option, commonly called the "green shoe" option). The green shoe option allows the stabilising manager the freedom to establish a short position in those shares through over-allotment - that is, the freedom to sell more shares to investors than the company or shareholder making the offer is offering.
Having a short position both eases price pressure on the shares when they are first traded (caused by institutional investors, who have been unable to buy all of the shares they require in order to obtain the correct weighting in the shares, trying to buy more shares) and assists the stabilising manager in the stabilisation exercise. Broadly speaking, if the price of the shares rises in the period following flotation, the stabilising manager may cover its short position by exercising the over-allotment option and buying the necessary number of shares from the company or shareholder making the offer at the original offering price, rather than buying those shares in the market at the higher price.
If the price of the shares falls as investors sell their holdings, the stabilising manager may cover its short position by buying those shares in the market, thereby supporting and stabilising the price of the shares.
The Irish inside-dealing legislation had constituted a legal impediment to the carrying on of stabilisation activities in Ireland, although the EU Insider Dealing Directive, which the Irish legislation transposes, specifically envisages that stabilisation may be exempted from the application of a member state's insider dealing regime. The new legislation exempts stabilisation from the prohibition on insider dealing, provided it is carried out in accordance with the rules set out in the legislation.
The legislation sets out detailed rules for stabilising activity. There are four key controls on the action which may be taken:
(1) stabilisation may only take place during the "stabilising period" (the period generally commencing on the day that the price of the shares in question is announced and ending 30 days after the first receipt of the proceeds by the company or shareholder making the offer);
(2) all documentation issued in connection with the offering must make it clear that stabilisation of the shares may take place;
(3) limits are placed on the maximum price at which stabilisation dealings are permitted and the rules are drafted so as effectively to prevent the stabilising manager from leading the market; and
(4) details of all stabilising transactions must be recorded and provided to the Irish Stock Exchange.
The Act brings market practice into line with international practice and should assist in ensuring the success of future public offerings on the Irish Stock Exchange.
Barry Devereux and David Byers are members of the corporate finance department of McCann FitzGerald, solicitors, which is advising AIB Capital Markets plc and Merrill Lynch International, the global co-ordinators of the Telecom Eireann IPO.
An Irish Times reporter adds: The strong price of the Telecom shares has meant that the stabilisation procedure has not needed to be used in the case of this float and it is likely to be formally withdrawn shortly. It will remain in place, however, for further major flotations.
