1Best practice recommendations Published by Deutsche Börse AGfor emerging markets IPOs in collaboration with Deutsche Börse Listing Partners
2 Preamble Preamble The following recommendations and suggestions are designed to help issuers as well as participating banks and advisors to address the special characteristics of an emerging markets company’s initial public offering (IPO) and thus to contribute to a successful IPO. They do not constitute mandatory procedures for conduct- ing an emerging markets IPO. The specific features of each issuer should always be taken into account. Therefore, the following recommendations should not be treated as a comprehensive list of the issues to be considered in emerging markets IPOs. For the purpose of these recommendations, emerging markets IPOs are IPOs of companies whose management, ownership structure and operations are predominantly located in an emerging markets country. Additional information Details on financing options and access to the capi- tal market through Deutsche Börse can be found at www.xetra.com/listing_e. The Listing Center also offers an index of expert capi- tal market specialists: Deutsche Börse Listing Partners. These independent service providers can also be searched by area of business and region: www.xetra.com > Listing > Listing Partners Your contact at Deutsche Börse Listing & Issuer Services Phone +49-(0) 69-2 11-1 88 88 E-mail email@example.com Finance your future. Made in Germany
Contents 3ContentsRecommendations for intermediaries supporting an IPO and their 4working proceduresRecommendations for preparing an IPO 7Recommendations regarding issuer’s boards and committees and 9for its IPO teamRecommendations for the issuer’s post-IPO infrastructure 10
4 Intermediaries supporting an IPO and their working procedures Recommendations for intermediaries supporting an IPO and their working procedures 1. General requirements final consolidated financial statements (potentially The advisory team involved in an IPO should hold including completion of all forms and notes) via inter- capital market expertise in the German market as office opinion to the auditor signing the report, thus well as expertise in transactions involving the country placing the issuer’s auditor in the position of assum- where the issuer operates. This can either be provided ing responsibility. by advisors with an international focus, who combine teams in Germany with teams on site, or by the involve- Depending on the issuer’s financial history, different ment of competent local advisors. set-ups and procedures might be used here. Issuers should continue to be supported by profes- Far-reaching checks for possible irregularities (fraud) sional advisors after the IPO (especially auditors, should be an integral part of audit activities. Among legal advisors, IR advisors and Designated Sponsors). other sources, irregularities may arise from different views on corporate governance and general lack of 2. Auditors well-developed internal controls. The audit approach The auditor should be able to conduct auditing activ- must take these factors into account as a whole and be ities within the company or group, or through coopera- focused on the special features of the relevant country. tion partners in both the country where the group This includes the following aspects for example: holding company is headquartered and in the relevant country. Both a local team with local expertise and Fictitious assets: verification that assets exist through the auditor who signs the auditor’s report should be site visits by the auditor who signs the report. involved. This auditor should also inspect the com- Fictitious or missing written bank confirmations: pany on site. The collaboration between the local audi- confirmations from third parties, especially banks, tor and the auditor who signs the auditor’s report should be presented to the auditor directly (in per- should be designed such that both parties hold res- son) by well-informed bank staff. Consideration ponsibility for the consolidated financial statements should be given as to whether to obtain confirma- within the scope of their contractual relationship. An tion directly from the third party’s headquarters example would be the local auditor approving the (rather than from a local branch). Fictitious sales revenue and receivables: the exist- ence of receivables and sales revenues – alongside the usual confirmation of balances – should also be verified through direct conversations with busi- ness partners. Incomplete information: the local auditor, in particu- lar, should check and guarantee that the issuer’s relationships to related parties are completely dis- closed. This is often a particular challenge in emerg- ing markets due to the often complex ownership structures and interrelationships between busi- nesses. Legal advisors should be consulted in this context with respect to the necessary content of prospectuses and the results of legal due diligence.
Intermediaries supporting an IPO and their working procedures 53. Legal advisors/due diligence and prospectus 4. Investment banks/consortium leaderspreparation The consortium leader should have sufficient localIt is advisable for all IPOs, and especially those in expertise to carry out due diligence on site, oremerging markets, to involve legal advisors with should appoint external advisors (e. . to carry out gcapital market experience, both on the side of the a separate financial due diligence and commercialissuer and the bank. Together with the issuer and due diligence) who have sufficient local expertise.the other parties involved in the transaction, legal the event that external advisors are involved, Inadvisors design and make comments on the pro- the consortium leader should have the expertisespectus, and implement the corporate legal structure required to examine and evaluate the documentsfor the IPO. Legal opinions and disclosure letters in prepared by these advisors. The use of externalaccordance with German law are submitted by the third parties is not a substitute for checks by thelegal advisors at certain stages of the transaction, as consortium leader.well as their counterparts in accordance with local Furthermore, for identified critical questions thelaw by the local legal advisors. Based on the auditing supervising consortium leader should conduct itsactivities carried out (particularly legal due diligence own supplementary due diligence on site (company,and participation in prospectus meetings), the disclo- finances and market) or, where appropriate, consultsure letter contains a negative declaration with regard local experts with demonstrable expertise relatedto errors in a prospectus. Close cooperation with local to the market, company and/or system as well asforeign lawyers is essential here. The submission of technical know-how. The use of external third par-the legal opinions and disclosure letters has the pur- ties is not a substitute for plausibility checks by thepose of giving information and uncovering risks, and consortium leader. In addition to their expertise inalso serves to defend the consortium banks. the sector and industry, the advisors involved in this due diligence should also have experience in theThe primary basis for the prospectus and thus for the preparation of due diligence reports in the countrylegal opinions and disclosure letters submitted by where the issuer’s operating activities are mainlythe legal advisors is a legal due diligence. It should be located. Data collection for due diligence purposesconducted by experienced teams of local and German should take place primarily in the country wherelawyers. The German team has an important monitor- the issuer’s operating activities take place. It ising function in this context. Legal due diligence nor- recommended that spot checks be carried out onmally also includes site visits and interviews with the important data sent by the company and that theseissuer’s management staff. be conducted by independent third parties or in- house specialists (e. . experienced analysts). g is further recommended to arrange for the exec- It utive board and supervisory body of the issuer to implement binding improvement measures in the company’s organisation with a “milestones plan” in order to remedy potential shortcomings in risk management and reporting systems identified by the audit. Local circumstances, legal requirements and the shareholders’ right to information are to be taken into account when determining the propor- tionality of such risk management and reporting systems.
6 Intermediaries supporting an IPO and their working procedures Recommendations for preparing an IPO 5. Investor relations advisors/PR advisors An IPO leads the emerging market issuer into a new To simplify coordination, it is advisable to appoint an legal environment and an unfamiliar market. It thus agency to be responsible for all communications. This requires particularly extensive preparation. It is particu- agency should ideally cover the entire spectrum of larly important that the issuer is aware before, during corporate, financial and crisis-related communication. and after the IPO of the information and transparency This also includes expertise in designing and launch- requirements of the advisors, intermediaries and inves- ing websites, as well as in financial reporting for the tors involved. The issuer must implement suitable mea- period after the IPO. sures for fulfilling these requirements. In this respect we recommend the following: The agency should also have experience in coaching managers from emerging markets companies. Help- 1. Due diligence/preparation of prospectus ing to prepare the management for presentations as It is mandatory to produce a securities prospectus as well as press and analyst conferences is an important a liability document for an IPO. It is essential that element of a successful IPO. this is accurate and complete, not only for liability reasons but also to protect investors. Here it is par- ticularly important that the bank accompanying the IPO carries out due diligence in conformity with mar- ket practice. To ensure that this aspect of the IPO is conducted efficiently, we recommend the following: it cannot always be assumed that emerging mar- As kets issuers are familiar with German or European law, the management should be given extensive
Preparing the IPO 7 information about liability and the significance of 2. IPO readiness analysis the securities prospectus. An IPO readiness analysis should be carried out by The issuer’s management should be informed in the issuer. This should cover the following aspects, detail by the bank and the lawyers involved about among other things: the procedure and requirements with regard to due diligence. Effective and efficient processes for financial reporting: The management should be advised explicitly that Capital market-ready IFRS accounting including it is absolutely essential to provide comprehensive informative and transparent segment reporting information about all aspects of the issuer and Ability to substantiate the equity story with verifi- to make all necessary documentation available in able and reliable data (financial and non-financial its entirety. KPIs) The management should be informed explicitly Timely production of financial statements (annual, that, in addition to the documents requested for group and quarterly reports) and investor and ana- due diligence, access must also be provided to lyst communications documents and information that were submitted Documentation of planning and budgetary processes to authorities or registers in the period relevant for (minimum three-year planning) the prospectus. Enforcement of compliance with the standards set must be ensured that the main results of due dili- It by Deutsche Prüfstelle für Rechnungslegung (DPR, gence are provided in the prospectus. A smooth German Financial Reporting Enforcement Panel flow of information must be ensured here for all par- FREP) in documentation of relevant matters; estab- ticipants. Due to the complexity of emerging markets lishment of processes to answer FREP enquiries IPOs, this should be taken particularly into account when setting up the timeframe. Adequate risk management and internal control The issuer should be advised that the individuals system (with relevant documentation) involved in due diligence must be closely involved Early risk identification system in preparing the prospectus. Reporting to supervisory board, e. . in accordance g The drafting sessions for the prospectus should with section 107 of the Aktiengesetz (AktG, German take place at the location of the issuer’s operating Stock Corporation Act) companies and should involve the expertise of the Systematic identification, analysis and reporting issuer’s specialist departments. Heads of manage- of risks ment must be intensively involved in preparing the prospectus. Corporate governance and compliance/investor the event of language barriers, important sections In relations of the prospectus should be translated into the local Objective should be the corporate governance language so that they can be verified by the man- and investor relations organisation as described agement and approved by the specialist depart- in “Recommendations for the issuer’s post-IPO ments. infrastructure”. Taxes Checking optimal tax structure Checking tax strategy and tax planning Internal control system (including excise duties)
8 Preparing the IPO 3. IPO tutoring The information provided to the investor relations On the basis of the IPO readiness analysis it can be agency is often inadequate for producing the com- helpful to conduct IPO tutoring tailored to the specific munication tools required for the IPO. Sources of issuer’s needs. As part of this IPO tutoring, the weak- information such as the securities prospectus – as nesses of the issuer identified in the IPO readiness the central basis of information – should be com- analysis should be addressed and remedied, or a bind- plemented by original information from the issuer ing plan should be produced to remedy these weak- based on the prospectus (e. product descriptions, g nesses (see the information on the “milestones plan” marketing documents, pictures, analyses of markets on page 6). The issues of corporate governance and and competition etc.) compliance should also be addressed in this context, Creating the IR website should also be planned at as should the construction of a risk management sys- any early stage. It is the first point of call for invest- tem which is in line with capital market requirements ors and represents the company externally. Content and focused on the company’s specific requirements. should be easy to update using a generally accepted content management system. IPO tutoring also involves management training on Good capital market communications means that topics relevant to the IPO and issuer and management the issuer must be actively involved in creating the follow-up obligations after the IPO. content of an investor relations website and writing corporate news. This includes structured feedback Establishment of adequate reporting should also be on drafts submitted to the issuer for review. emphasised during the IPO tutoring. The better the information provided to the agency, the higher the quality of the communications that The objective should be to have established an ade- accompany the IPO and contribute to active market- quate risk management and internal control system, ing. The essential aim when producing communi- as well as adequate reporting, by the time of the IPO cation tools is to achieve conformity with the con- at the latest. At the very least, a binding plan should tents of the securities prospectus while also attrac- be agreed for setting up the relevant processes in tively marketing the shares being issued. good time. Pre-IPO communication serves to prepare for the com- 4. Pre-IPO communication munication which is to be provided by the issuer the run-up to the IPO, the issuer should clearly In after the IPO and is therefore of upmost importance. set out the capital requirement and financing struc- ture and provide a detailed explanation of how the funds will be used. This leads to greater require- ments for communication and clarification, particu- larly during the post-IPO phase. Training on capital market requirements and IR/PR measures should be obligatory. The particular target group is the management and investor relations manager.
Issuer’s boards and committees and its IPO team 9Recommendations regarding theissuer’s boards and committees andfor its IPO team1. Executive board and supervisory board With the beginning of the preparation of the IPO, anThe issuer should have at least one executive board investor relations manager ideally based in Germanymember who has capital market experience and should be involved in the issuer’s project coordinationspeaks English (CEO or CFO) and who can represent as a fixed member of the issue team. He/she shouldthe company externally on the capital market. This be able to demonstrate appropriate knowledge ofexecutive board member should be tied to the com- the requirements relevant to the capital market or bepany for at least one year after the IPO by contract trained accordingly. He / she should also be able to(and by incentives where appropriate). negotiate in English – and should ideally also be able to handle enquiries in German. The investor relationsThe executive board member should also have suffi- manager should act in the period after the IPO as thecient knowledge of the issuer. In this respect, a length main contact for:of service in the company’s executive board of at leastone year prior to the IPO has proven beneficial. investors analystsAn executive board member should be given explicit advisorsresponsibility for compliance with the subsequent the media.admission requirements. He / she acts as an interface between capital marketThe supervisory board should have expertise in capi- participants, advisors involved and the executivetal market law, accounting and the industrial sector. board member responsible for capital market commu-All members of the supervisory board should at least nication (e. . CFO). gbe able to communicate in English. The majority of thesupervisory board members should be independent(i. . they should not be related and should not have ebusiness relationships with the company or its princi-pal shareholder).2. Project coordinationThe management should be advised that the CEO and/or other executive board members with extensiveknowledge of the company (“IPO key individual(s)”)are to be fully available to the bank, auditors, lawyersand other advisors throughout the entire process.One of the IPO key individuals or a third party withgood access to the IPO key individuals should act asproject coordinator. This project coordinator shouldspeak English and has to ensure that the advisors aregiven sufficient support from the company to fulfil theinformation requirements.
10 Issuer’s post-IPO infrastructure Recommendations for the issuer’s post-IPO infrastructure The day of the IPO is not the end of the process for 2. Investor relations and capital market compliance the issuer’s adjustment to capital market requirements. To ensure capital market compliance, processes should IR activities and compliance with subsequent admis- be established for identifying insiders, maintaining sion requirements play a decisive role. The emerging insider lists as well as for ad hoc announcements. market issuer therefore has a particular need for a suit- able post-IPO infrastructure, which ideally should have The communications agency chosen for the IPO should already been created by the time of the IPO. Sufficient continue to be appointed after the IPO for corporate financial and available personnel resources are to be and financial communication by the emerging market made available to this end after the IPO as well. In company. It is important here that the executive board this respect we recommend the following: member responsible for communication has a continu- ous dialogue with the agency – e. . through regular g 1. Corporate governance phone conferences – and that both parties keep each Supervisory board to be comprised of qualified other up to date. The agency is to be informed in a and largely independent members timely manner on current operational and financial Rules of procedure for executive and supervisory issues. The agency reports on enquiries from analysts, boards (including their committees) investors and journalists. Use of the recommendations of the German Corpo- rate Governance Committee and checking the basis The agency must be able to support the issuer in ful- for submitting the Declaration of Conformity filling all ongoing obligations associated with the IPO. Checking other compliance systems and regula- This includes – where necessary – writing and trans- tory requirements lating ad hoc announcements and notices on voting
Issuer’s post-IPO infrastructure 11rights, press releases, quarterly reports, and producing 3. Post-IPO support by service providersthe annual report. The agency also helps to prepare The consortium leader should require the issuer tothe AGM and updates the IR section of the website. provide it with continual information (at least once per year) on the current rights and obligations of theFurthermore, the agency organises ongoing commu- supervisory and executive boards (in accordancenication. To this end, an annual plan is set up which with the Stock Corporation Act), transparency andincludes all mandatory appointments and all voluntary follow-up obligations imposed by law and the stockappointments with the financial community. exchange, especially obligations on the timely pre- paration of financial reports and the subsequentTo conduct personal appointments with analysts, in- requirements concerning reporting, risk manage-vestors and journalists, the company’s executive board ment and internal control systems.member responsible for communication should visit Issuers should continue to be supported by profes-Germany and other European countries regularly and sional advisors after the IPO (especially auditors,take part in appropriate capital market conferences. legal advisors, IR advisors and Designated Spon-The agency should answer enquiries about informa- sors).tion that is already publicly available on behalf of the Issuers should also commission equity researchcompany. There should be a continual flow of infor- and create a sufficient infrastructure for efficientmation between the issuer and the agency for this IR activity.purpose. 4. Ensuring efficient cooperation betweenThe investor relations manager, in consultation with supervisory body and executive board membersthe CFO, should be able to answer complex investor Minimum requirements should be set for ongoingrelations enquiries from institutional investors on cur- reporting by the company management to the super-rent business developments within a maximum of visory body, such as the presentation of key com-24 hours. pany results, conclusion of important contracts, financial figures (actual vs target). maintain the continual flow of information, reg- To ular “off the board” discussions should take place between the CEO and the chair of the supervisory body, at least every two months. It is reasonable to involve the chair of the supervisory body at an early stage in order to make meetings of the supervisory body as efficient as possible. This par- ticularly applies to the budget meeting and the meet- ings on the accounts.
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