In a nutshell
The world's capital markets are trading floors (either real or virtual) on which cash-hungry businesses obtain funding by selling a share of their business (equity) or receiving a loan (debt) from lenders. Capital markets lawyers advise companies ('issuers') and investment banks ('underwriters') on these complex transactions. Here are some of the terms you'll encounter.
Equity capital markets: where a private company raises capital by making its shares available to the public by listing itself on a stock exchange and executing an initial public offering (IPO), as a result of which it becomes a public company (or plc). The London Stock Exchange (LSE) and New York Stock Exchange (NYSE) are the most prestigious exchanges, but companies may list on many other exchanges worldwide. Once listed, a company's shares can be bought and sold by investors at a price determined by the market.
Debt capital markets: where borrowers raise capital by selling tradable bonds to investors, who expect the full amount lent to be paid back to them with interest. Structured finance: this area can get gloriously complicated, but its aims are simple – to increase liquidity and limit or trade on risk, which in turn offers up extra funding for borrowers.
Derivatives: financial instruments used by banks and businesses to hedge risks to which they are exposed due to factors outside of their control. The value of a derivative at any given time is derived from the value of an underlying asset, security, index or interest rate.
What lawyers do
- Carry out due diligence on issuers and draft prospectuses which provide information about the company and its finances, as well as past financial statements. Under current rules, a prospectus must comply with the requirements of the EU's prospectus and transparency directives.
- Negotiate approval of a listing on the stock exchange. This involves the submission of documentation, certifications and letters that prove the client satisfies the listing requirements. As soon as a company undergoes an IPO, it will be subject to all the rules and requirements of a public company, so the necessary organisational structure must be in place before then.
- Work with underwriters and issuers to draw up the structure of a security and help the parties negotiate the terms of the structure. The underwriter's lawyers draft most documents related to a bond issue. An issuer's lawyers will comment on them and negotiate changes.
- With derivatives, lawyers communicate back and forth with the client discussing legal issues and risks related to various possible structures for the product, as well as suggesting ways to resolve or mitigate those problems and issues.
- Issuer's and underwriter's counsel work together with a team of bankers, accountants, insurers and an issuer's management to get securities issued.
Realities of the job
- Capital markets lawyers are mostly based in the City of London. The biggest firms have specialist departments focused on capital markets or one of its sub-groups, while mid-size firms may lump capital markets work in with corporate.
- Clients can be very demanding and lawyers work very long hours. On the plus side, large law firms usually have strong and close relationships with investment bank clients and financial institutions, meaning that trainees and NQs can get frequent client contact.
- Lawyers have to gauge the needs and personality of the company they're working with and require an aptitude for responding to and resolving issues as they arise.
- Capital markets lawyers feel all the highs and lows of market forces – if you're trying to get a deal done market conditions often matter more than the willingness of the parties involved. Even if a deal has been organised, unpredictable market conditions can mean it falls through.
- There has been a resurgence of activity in the UK IPO market in 2021, on the back of fallow years caused by uncertainty around Brexit and then the Covid-19 pandemic.
- As of 28 June 2021, 45 companies had listed on the AIM and LSE. This compares to eight companies listed in London in the first half of 2020, five on the LSE, and three on AIM. The 20 IPOs in the first quarter of 2021 on the LSE is the most listings since 2007.
- Listings in the technology sector have dominated the scene with high-profile examples including: Deliveroo, Moonpig, Trustpilot, and Darktrace. Other notable IPOs include iconic shoe-maker Dr Martens and Made.com.
- Deliveroo’s debut on the London Stock Exchange back in March was described as the ‘worst in London’s history’ by many commentators. The company had hoped for an £8.8 billion market cap but was valued at just £5.2 billion by the end of the day. Many cite the ruling by the Supreme Court that Uber must classify its drivers as ‘workers’ as a key reason for the poor performance.
- In November 2020, the government published its UK Listings Review, a report designed to strengthen the UK’s position as a leading economic hub. The review included proposals to increase the competitiveness of London as a listing market. The changes are expected to result in an uptick of SPAC listings which, up until recently, have only been prominent in the US.
- The increasing awareness and subsequent behavioural change around climate change saw a surge in the renewable energy sector towards the end of 2020. As climate fears increase, that trend is likely to continue. According to Latham & Watkins’ vice chair of its capital markets practice, Keith Halverstam: “Clients, boards, and stakeholders all want to know about ESG (environmental, social, and governance).
- Looking to the future, Halverstam also predicts that government-backed cryptocurrencies are likely, and says that this is space to be watched.
- The intersection between a host of new regulatory measures and the innovation and growth of the industry is likely to keep law firms that specialise in capital markets busy. Reports by capital market commentators described AI, tech, automation and data mining as integral to the future of capital markets but noted that security concerns have prompted regulations requiring stricter standards of data use including GDPR.