The underwriting agreement is the agreement between the banks, the company, the directors and any selling shareholders, under which the banks, acting as principals, agree to find purchasers for shares and to acquire any shares not taken up by investors. It therefore effectively guarantees to the company, subject to certain conditions, the number of shares to be issued and the amount of money raised.
Where the principal underwriting bank is also the sponsor to the issue, the underwriting agreement may contain the terms of appointment of the sponsors including the extent of the sponsor’s responsibility for the prospectus, the sponsor’s advisory fee and the sponsor’s indemnity from the company.
The underwriting agreement is prepared by banks’ counsel. The typical process would usually involve written comments being received from the company and its counsel (and selling shareholders, if any), followed by a process of negotiation and the production of additional drafts.
The typical provisions of an underwriting agreement include:
- commitment from the banks to procure purchasers for the shares or, failing that, to purchase the shares;
- representations, warranties and undertakings from the company, selling shareholders and directors of the company to the banks, including in relation to the operation of the company and the accuracy of information provided to investors;
- lock-up commitments from selling shareholders and directors concerning future sales of shares;
- conditions to closing of the IPO, providing that the obligation of the banks are subject to certain conditions which, if not satisfied or waived, can lead to the banks pulling out of the offering;
- an indemnity in which the company is required to indemnify the banks for losses arising out of or in connection with the IPO; and
- allocation of commissions to be paid to the banks and other costs and expenses, which typically include legal and certain other fees.
These provisions may not, of course, be included in all underwriting agreements, and will need to be tailored to suit the particular structure and type of offering. Also, certain provisions may be removed or altered during the negotiation process.