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  • 1. A guide to listing on the London Stock ExchangePublished by White Page Ltd in association with the London Stock Exchange, with contributions from:
  • 2. QUOTEDPublishing editor: Nigel Page A guide to listing on the A guide to listing on the London Stock Exchange London Stock ExchangePublisher: Tim Dempsey is published by: © 2010 London Stock Exchange plc and White Page LtdDesign: London Stock Exchange plc White Page Ltd, 17 Bolton Street London W1J 8BH Copyright in individual chapters rests with thePrinting and binding: Argent Litho Ltd United Kingdom authors. No photocopying: copyright licences Whatever your company’s size or sector, we can put you at the heart Phone: + 44 20 7408 0268 do not apply. Fax: + 44 20 7408 0168 of one of the world’s most sophisticated financial communities. Email: This guide is written as a general guide only. It Web: should not be relied upon as a substitute for The Main Market is home to approximately 1,400 companies from specific legal or financial advice. Professional advice should always be sought before taking over 60 countries, including some of the world’s most successful and white page any action based on the information provided. dynamic organisations. So far this year £20.8 billion has been raised Every effort has been made to ensure that the on the London Stock Exchange, of which £17.9 billion has been First published: November 2010 information in this guide is correct at the time of raised on the Main Market. ISBN: 978-0-9565842-1-2 publication. The views expressed in the articles contained in this guide are those of the authors. Here at the London Stock Exchange we help companies to access the London Stock Exchange, AIM and the coat of deepest pool of international capital. Premium Listed companies on the arms device are registered trademarks of Main Market meet the highest listing standards helping to raise their London Stock Exchange plc. The publishers and authors stress that this publication does corporate profile and increase their exposure to investors. not purport to provide investment advice, nor do they bear the responsibility for any errors or Learn more about the Main Market and why leading omissions contained herein. companies choose to list on the London Stock Exchange – Copyright November 2010 London Stock Exchange plc London Stock Exchange, the coat of arms device and AIM are registered trademarks of the London Stock Exchange plc. London Stock Exchange statistics as at end September 2010
  • 3. A guide to listing on theLondon Stock ExchangeContents3 Foreword London Stock Exchange5 The Main Market – the standard for excellence London Stock Exchange13 The role of the UKLA The United Kingdom Listing Authority19 Preparing for an IPO UBS Investment Bank31 The legal framework for an IPO Freshfields Bruckhaus Deringer LLP43 Accounting requirements and advice through the IPO process Ernst & Young LLP57 Generating and capturing investor demand during an IPO UBS Investment Bank69 Managing the company’s profile Fishburn Hedges81 The role of the registrar in an IPO Capita Registrars87 London: a unique investment opportunity FTSE Group91 Preparing to list depositary receipts Cleary Gottlieb Steen & Hamilton LLP105 Establishing a depositary receipt programme J.P. Morgan116 Useful contacts
  • 4. A guide to listing on the London Stock Exchange Foreword By Tracey Pierce, Director of Equity Primary Markets, London Stock Exchange With roots stretching back to the coffee houses of 17th century London, the London Stock Exchange is built on a long history of integrity, expertise and market knowledge. It has become one of the world’s largest and most international stock exchanges, playing a pivotal role in the development of global capital markets. We offer the widest choice of routes to market, which are available to both UK and international companies, and today we have close to 3,000 companies from over 70 countries listed and trading on our markets. In challenging market conditions, the London markets have proved their value by providing companies with access to capital when other funding channels have not been available. At the Exchange, we strive to build on this success by working with market regulators and the wider financial community to ensure that our markets are well-regulated, transparent, liquid and neutral. This success is underpinned by the dedicated community of advisers and investors that continues to support the companies on our markets. We understand that joining a public market is one of the most significant decisions a business will ever take; the sheer range of topics that need to be considered building up to IPO can seem like a daunting task. With this in mind, this guide has been developed with input from some of the key advisers experienced in bringing companies to our Main Market and our Professional Securities Market, providing you with a practical outline of the listing process, as well as an insight into life as a public company. I hope you find this publication useful and wish you every success, both in bringing your company to market and as a publicly-traded company.A guide to listing on the London Stock Exchange Page 3
  • 5. The Main Market –the standard for excellence London Stock Exchange
  • 6. QUOTEDWhatever your company’s size or sector, we can put you at the heartof one of the world’s most sophisticated financial communities.The Main Market is home to approximately 1,400 companies fromover 60 countries, including some of the world’s most successful anddynamic organisations. So far this year £20.8 billion has been raisedon the London Stock Exchange, of which £17.9 billion has beenraised on the Main Market.Here at the London Stock Exchange we help companies to access thedeepest pool of international capital. Premium Listed companies on theMain Market meet the highest listing standards helping to raise theircorporate profile and increase their exposure to investors.Learn more about the Main Market and why leadingcompanies choose to list on the London Stock Exchange – November 2010 London Stock Exchange plcLondon Stock Exchange, the coat of arms device and AIM are registered trademarks of the London Stock Exchange plc.London Stock Exchange statistics as at end September 2010
  • 7. The Main Market – thestandard for excellenceEstablished in 1698, the London Stock Exchange’s Why join a public market…?(the ‘Exchange’) Main Market has long been home Joining a public market – the Main Market or AIMto some of the UK’s, and indeed the world’s, (our market for smaller, growing companies) – is alargest and best-known companies. There are over way to grow and enhance your business. When1,400 companies on the Main Market with a considering the available financing options, thecombined market capitalisation of £3.7 trillion. following factors are frequently cited as the keyCompanies of all types, nationalities and sizes benefits of admission to a public market:together represent some 40 sectors. l providing access to capital for growth,As well as sectoral and geographical diversity, the enabling companies to raise finance forMain Market accommodates the admission to further development, both at the time oftrading of companies with a Premium Listing or a admission and through further capitalStandard Listing. The FSA’s listing categories are raisingsdescribed in detail in the chapter ‘The role of the l creating a market for the company’s shares,UK Listing Authority’ on page 13. broadening the shareholder base l placing an objective market value on theA listing on the Main Market demonstrates a company’s businesscommitment to high standards and provides l encouraging employees’ commitment andcompanies with the means to access capital from incentivising their long-term motivation andthe widest set of investors. Over the last 10 years, performance, by making share schemes£366 billion has been raised through new and more attractivefurther issues by Main Market companies – capital l increasing the company’s ability to makethat has seen companies through the good times acquisitions, using quoted shares asand the bad. currencyJoining the Main Market Responsibility for the approval of prospectuses and admission of companies to the Official List lies with the UK Listing Authority (UKLA). The Exchange is responsible for the admission to trading of companies to the Main Market. Joining the Main Market consequently involves two applications: one to the UKLA and one to the Exchange. UKLA admits securities to London Stock Exchange the Official List admits securities to trading on the Main Market Official List notice issued Admission to trading notice to the market issued to the marketThe Main Market – the standard for excellence Page 7
  • 8. l creating a heightened public profile – A respected and balanced regulatory stemming from increased press coverage and environment analysts’ reports – helping to maintain The UKLA’s listing framework underpins London’s liquidity in the company’s shares reputation for balanced and globally-respectedl enhancing the company’s status with standards of regulation and corporate governance. customers and suppliers. Regulatory requirements in London are principles- based and provide an appropriate balance ofCompanies that choose to seek admission to a investor protection, practitioner certainty andpublic market in London have a range of options flexibility. The Exchange aims to be involved in alldepending on their size, stage of development and relevant processes where amendments orcapital-raising requirements. The options open to additions to the regulatory framework arecompanies should be discussed in detail with their considered. This is to ensure that London’steam of advisers. competitive advantage remains undiminished; that listings and subsequent capital raisings are cost-Companies which are successful on AIM and reach effective and efficient for our companies; and thata certain size and stage of development, may seek investors have the appropriate amount ofto transfer their securities from AIM to the Main information to make informed investmentMarket, provided that they meet the eligibility decisions.criteria. While a move to the Main Market maysubject the company to increased regulatory Choicerequirements, it can bring benefits in terms of a Companies with either a Premium or a Standardheightened profile and attracting different Listing can choose to admit to trading on the Maininvestors. Market.…and why the Main Market? A Premium Listing means that a company must meet standards that are over and above (oftenThe success of the Main Market is built on a wide described as ‘super-equivalent’) those set forth inrange of factors: the EU legislation, including the UK’s corporate governance code. Investors trust the super-l a respected and balanced regulatory equivalent standards as they provide them with environment additional protections. By virtue of these higherl choice standards, companies may have access to al access to capital from a broad and broader range of investors and may enjoy a lower knowledgeable investor base cost of capital owing to heightened shareholderl expert advisory community confidence. A Premium Listing is only available tol enhanced profile and status. equity shares issued by commercial trading companies.The Main Market has attracted companies of allsizes and from all sectors over many years. With a Standard Listing, a company has to meetIrrespective of their sector, origin or strategic the requirements laid down by EU legislation. Thisdirection, they have all sought to take advantage means that their overall compliance burden will beof the range of benefits a listing on the Main lighter, both in terms of preparing for listing andMarket affords. Those benefits include: on an ongoing basis. Standard Listings cover the issuance of shares and Depositary ReceiptsPage 8 The Main Market – the standard for excellence
  • 9. (‘DRs’) as well as a range of other securities, Underpinning the Main Market is a network ofincluding fixed-income. Large companies from experienced advisers who will guide you on theemerging markets may wish to list their DRs, thus journey to an initial public offering (‘IPO’) andattracting investment from the significant provide ongoing advice once your company isinternational pool of capital available in London. listed.(A table showing the key differences between aPremium Listing and a Standard Listing can be Selecting the right advisers for you and yourfound in the chapter ‘The role of the UK Listing company is vital. Getting it right early on will helpAuthority’ on page 18). ensure that disruptions to the process are minimised and you are able to get on with the taskIn this guide, the chapters ‘Preparing to list at hand. Factors to consider when appointingdepositary receipts’ and ‘Establishing a depositary advisers include the firm’s relevant and recentreceipt programme’ are dedicated to the listing experience in relation to your business and theand admission to trading of DRs on both the Main sector you operate in, as well as the personalMarket and the Professional Securities Market rapport you develop with the individuals with whom(‘PSM’). The PSM provides an alternative route to you will be working.a listing on the Exchange for issuers of DRs. The diagram on page 10 below shows the differentAccess to capital advisers typically involved in a flotation on theWe provide access to the largest pool of Main Market and briefly highlights their varyinginternational equity assets in the world. This roles and responsibilities.culture is embedded in London’s investmentmanagement community, which understands Profilecompanies from home and abroad and wants to Floating a company on the Main Market raisesinvest in the global economy. your company’s profile and helps you to meet your strategic objectives. You will have the opportunityOnce they are listed and admitted to trading on to project your company onto a global stage withthe Main Market, companies should not increased media coverage, investor interest andunderestimate the value of being able to return to broad analyst coverage.the market to raise funds through further issues.Even during the recent difficult market conditions, With a Premium Listing comes the potential forthe Exchange successfully facilitated significant inclusion in the FTSE UK series of indices whichlevels of capital raising. Further issues by Main includes the FTSE 100, FTSE 250 and FTSEMarket companies provided capital injections that Small Cap indices. Access to these indices iswere used to pay off debt, rebuild balance sheets often seen as one of the key benefits of achievingand fund further growth. a Premium Listing since so many investment mandates – particularly in respect of the vastExpert advisory community amount of capital represented by tracker funds –The decision to join the Main Market is a pivotal are driven by FTSE indexation. For moreone. To achieve a successful listing and admission information see chapter ‘London: a uniqueto trading, companies must deliberate over many investment opportunity’ on page 87.considerations. Our commitment to the primary markets There is a continuous stream of proposed regulatoryThe Main Market – the standard for excellence Page 9
  • 10. Advisers’ roles and responsibilities Sponsor Bookrunner • Overall co-ordination and project • Prepare company for roadshow management of IPO process • Facilitate research • Co-ordination of due diligence and prospectus • Build the book pre-float • Ensure compliance with applicable rules • Marketing and distribution • Develop investment case, valuation and • Pricing and allocation offer structure • Manage communication with LSE and UKLA • Act as adviser to the company’s board • Ongoing support/advice after flotation Lawyers • Legal due diligence Other advisers • Registrars THE COMPANY • Draft and verification of prospectus • Corporate restructuring • Financial printers • Provide legal opinions • Remuneration consultants Financial PR Reporting accountant • Develop communication strategy • Review financials – assess company’s to support pre-IPO process readiness for IPO • Enhance market perceptions to • Tax structuring develop liquidity and support • Financial due diligence - long form, share price short form and working capital reports • Pre- and post-IPO press releaseschanges affecting companies on our markets, with Once you are listed on the market, we arelegislation stemming from changes here in the UK committed to helping you raise your profile andand in Brussels. With companies’ best interests keeping you abreast of market developments. Wefront of mind, we continue to lobby on their behalf help to do this through the provision of brand marksto ensure our markets are fit for purpose. It is (see page 11); a dedicated page on our websitecrucial that through our lobbying we continue to specific to your company (including latest news andpromote a regulatory regime based on principles, pricing information on the trading of yourseeking to limit disproportionate legislation securities); educational initiatives, such as seminarsapplicable to issuers that are admitted to trading on and practical guides; and investor-focused eventsour markets, while ensuring sufficient investor such as capital markets days that bring companiesprotection. and investors together.Page 10 The Main Market – the standard for excellence
  • 11. Main Market brand marks LISTED LISTED LISTED STANDARD PREMIUM STANDARD SHARES DEPOSITARY RECEIPTS These brand marks are provided exclusively to companies listed on the Main Market. Companies may use the brand mark across corporate and investor relations materials to showcase their association with the London Stock Exchange and provide information as to their listing status. More information is available on the Exchange’s website: finally…Listing and admission to trading on the MainMarket is an efficient way for companies to accesscapital to fund their growth, while simultaneouslybenefiting from enhanced profile and liquiditywithin a well-governed and regulated marketstructure.As an ambitious company with plans to take yourbusiness to the next level, joining the Main Marketis an ideal way to assist you in realising your globalaspirations.The Main Market – the standard for excellence Page 11
  • 12. The role of the UK Listing Authority UKLA
  • 13. The role of the UK Listing AuthorityThe UK Listing Authority (‘UKLA’) is the name As a consequence, when a company wishes toused by the Financial Services Authority (‘FSA’) make an initial public offering (‘IPO’) of itswhen it acts as competent authority for listing, as securities onto a regulated market such as thecompetent authority for the purposes of the Main Market of the London Stock Exchange, theEuropean Prospectus and Transparency Directives, UKLA has two principal roles to perform: to reviewand as competent authority for certain aspects of and approve the issuer’s prospectus, and to admitthe Market Abuse Directive. These roles have a those securities to listing once it is happy that thestatutory basis in Part VI of the Financial Services issuer complies with all relevant eligibility criteria.and Markets Act 2000 (‘FSMA’). Threesourcebooks in the FSA Handbook implement the Listing categoriesrelevant rules. These are: The term ‘listed’ is used in a number of different contexts, but in the UK this technically meansl Listing Rules – these rules include the admitted to the Official List of the UKLA. The eligibility requirements for admission to the UKLA has created a number of different listing Official List (or ‘listing’) and the continuing categories which determine the eligibility criteria obligations that apply thereafter. They come and continuing obligations that apply to the issuer partly from the European Consolidated and its securities. Admissions and Reporting Directive, but also include a significant body of rules that are The UKLA introduced the listing categories to help ‘super-equivalent’ or additional to the clarify that listing refers to admission to the European minimum requirements. These Official List of the UKLA, and does not relate to additional requirements include substantive the market to which a security is admitted to eligibility requirements such as the need for a trading. Listing categories are also intended to three-year track record, the class test and clarify the regulatory standards that apply to related party regimes, and the requirement different types of listing. A Standard Listing for a sponsor in relation to a Premium Listing. requires compliance only with EU minimuml Prospectus Rules – these rules stem standards, whilst a Premium Listing also requires primarily from the enactment of the European compliance with the more stringent super- Prospectus Directive and detail the equivalent standards. Note that only equity shares circumstances when a prospectus is required may be admitted to a Premium Listing; issuers of and the disclosures a prospectus should other securities may only seek a Standard Listing include. for their securities. A table showing the keyl Disclosure and Transparency Rules (‘DTRs’) differences between Premium and Standard – these rules govern the periodic and ad hoc Listings can be found on page 18. disclosure of information by listed companies. Periodic information includes interim and Eligibility annual accounts, and ad hoc disclosures, An issuer will generally select its preferred market including major shareholding notifications and and listing category in consultation with its details of significant developments that might advisers prior to engagement with the UKLA. For affect the price of the securities. These rules issuers requesting a Premium Listing of their originate from the Transparency Directive and equity shares, contact with the UKLA will be part of the Market Abuse Directive, and also undertaken by the issuer’s appointed sponsor firm. from the 4th/7th Company Law Directives. The role of a sponsor is to guide the issuer on the application of the Listing Rules and the ProspectusPage 14 The role of the UKLA
  • 14. Listing segment Premium Standard Listing Equity Equity Equity Shares GDRs Debt & Securitised Misc. category shares shares shares debt-like derivatives securities Debt Commercial Closed- Open- Equity Options Examples of companies ended ended shares* securities types of investment investment Asset-backed Subscription funds companies Non-equity securities warrants companies/ shares Convertible securities securities - Preference shares (specialist securities) Listing Rule LR6 LR15 LR16 LR14 LR18 LR17 LR19 LR20 chapter* an investment entity will only be able to benefit from this Standard Listing category for a further class of equity shares if italready has (and only for so long as it maintains) a Premium Listing of a class of its equity sharesRules. This includes liaison with the UKLA on requirements. The UKLA suggests that suchbehalf of the issuer, and to provide certain letters are sent in as early as possible in the IPOdeclarations to the UKLA that provide comfort process and that they are as detailed as possible,that the relevant rules have been complied with including relevant background information on theand the issuer has established appropriate nature of the issuer’s business. This is becauseprocedures. unnecessary delay can be caused to the timetable where significant eligibility concerns arise late inThe UKLA maintains a list of approved sponsors the IPO process.and conducts supervisory activities in order toensure that the list of sponsors contains only those Issuers seeking a Premium Listing of equity sharesfirms that meet the eligibility criteria for a sponsor. will be required to comply with the moreFor issuers that are seeking a Standard Listing, the substantive eligibility requirements that areUKLA has no preference as to whom the main imposed by the super-equivalent parts of thepoint of contact should be, although it should be Listing Rules, in addition to those requirements insomeone that is reasonably knowledgeable about the Listing Rules based entirely on EU law. Forthe UKLA and its processes. commercial companies, these additional requirements include the requirement for a cleanTo start the eligibility process, the UKLA generally three-year track record of operations, and theexpects that a letter is submitted detailing the requirement for a clean working capital statementissuer’s compliance with the applicable eligibility for at least the next 12 months. For investmentThe role of the UKLA Page 15
  • 15. entities, these requirements include an additional The prospectus can be published once it has beendegree of regulation in relation to the corporate formally approved by the UKLA. The actual timinggovernance of the issuer. Overseas issuers wishing of that approval will depend on the issuer’s choiceto comply only with the minimum standards applied of issuance method – for example, if the issuanceby the EU Directives can apply for a Standard involves a retail offering then approval andListing of either equity shares or GDRs. The UKLA publication must occur sufficiently in advance ofhas recently also extended the Standard Listing the beginning of the offer. A prospectus relatingcategory to UK issuers of equity shares which only to an introduction where no offer to the publiccould previously only have had a Premium is made may be approved as little as 48 hours prior(formerly ‘Primary’) Listing. to admission to listing.Prospectus review and approval Listing ParticularsAn admission of securities onto the Official List Although no prospectus is required for theand the Main Market of the London Stock admission of securities to unregulated marketsExchange requires the production of an approved such as the Professional Securities Market (theprospectus. As the UKLA is the UK’s competent ‘PSM’), the UKLA does require Listing Particularsauthority for the purposes of the Prospectus for the admission of those securities to listing onDirective, it typically approves prospectuses the Official List. In these cases, the process forproduced during an IPO. reviewing the document, and the content requirements, are very similar to the requirementsAlthough final confirmation of an issuer’s eligibility for a prospectus. The principal difference is thatcan only be given once its prospectus has been the financial information in a prospectus must beapproved, the UKLA will generally try to resolve prepared in accordance with IFRS or anany major eligibility issues prior to starting its equivalent GAAP. In the case of Listingreview of an issuer’s prospectus. This review Particulars where securities are to be admitted toinvolves an iterative process of reviewing and the PSM, the financial information can becommenting on drafts of the prospectus until the prepared in accordance with local standards.UKLA is satisfied that all applicable rules havebeen complied with. The number of drafts Passportingnecessary to reach this point will depend on the An overseas issuer may also seek to passport ontocomplexity of the issues and the quality of the a UK-regulated market, using a prospectus thatsubmissions. By way of example, many large IPOs has been approved by another competentcan involve the review of five or more substantive authority. Although in these circumstances thedrafts for one reason or another. UKLA will rely upon the passport to satisfy the requirement for an approved prospectus, it will stillThe UKLA seeks to comply with its published separately assess the issuer against the relevantservice standards for the document review and eligibility requirements. As part of this process, theapproval process, and aims to provide comments UKLA reviews the issuer’s proposed prospectus toon an initial draft of a new applicant prospectus help in its assessment of eligibility, so again thewithin 10 working days, and comments on each UKLA recommends that an issuer makes contactsubsequent draft within five working days. On sufficiently early in the process, and certainlyaverage, the review and approval of a prospectus before the prospectus has been approved by thetakes around 6-8 weeks for an IPO. home competent authority.Page 16 The role of the UKLA
  • 16. Post-IPO interaction with the UKLA l Timetables – the UKLA staff (or ‘readers’)l DTRs – a listed issuer must comply with the allocated to a particular case will typically be DTRs on an ongoing basis, as failure to working on a large number of transactions at comply with these rules may result in the any one time. Whilst the UKLA makes every suspension of the listing of its securities. The effort to accommodate tight timetables it UKLA has a team dedicated to monitoring cannot deal with every issue immediately or issuers’ compliance with the DTRs, and to meet unrealistic timetables. Complex issues providing guidance on these rules on a real- will need time for proper consideration prior time basis. to resolution and therefore the UKLA alwaysl Prospectus requirements – if the issuer advises that such issues should be brought to seeks admission of further securities of the its attention as early as possible. same class it will be required to produce a l Helpdesks – the UKLA offers several prospectus, unless an exemption applies. different helpdesks to provide guidance on Exemptions include, among other things, the the Listing Rules, Prospectus Rules, and the issue of shares under employee share DTRs. This enables complex issues to be schemes and bonus issues. The UKLA would discussed and agreed prior to the submission typically be required to approve any future of documents, or in relation to significant prospectus. transactions (Tel: +44 (0)20 7066 8333).l Significant transactions – if the issuer has a Premium Listing of its equity shares, it will be required to consider whether any significant transaction that it undertakes will need announcement or, if it is of sufficient size, shareholder approval. Lower size thresholds are applied if the transaction is being undertaken with a related party such as a director or substantial shareholder. The Listing Rules include rules governing the disclosure requirements in circulars where shareholder approval is sought, and also clarify which circulars require UKLA approval.The role of the UKLA Page 17
  • 17. A summary of the key differences between Premium and Standard listings Premium – Standard – Standard –Key eligibility criteria Equity Shares Shares Depositary ReceiptsFree float 25% 25% 25%Audited historical financial Three years or such Three years or such Three yearsinformation shorter period shorter period75 per cent of applicant’sbusiness supported by revenue- Required n/a n/aearning record for the three-yearperiodControl over majority of the Required n/a n/aassets for the three-year periodRequirement for clean Required n/a n/aworking capital statementSponsor Required n/a n/aKey continuing obligationsFree float 25% 25% 25%Annual financial report Required Required RequiredHalf-yearly financial report Required Required n/aInterim management statements Required Required n/aEU-IFRS or equivalent Required Required RequiredUK Corporate Governance Code Comply or explain n/a n/aModel Code Applies n/a n/a As required by relevantPre-emption rights Required n/a company lawSignificant transaction Rules apply n/a n/a(‘Class tests’)Related-party transactions Rules apply n/a n/a 75 per cent No shareholder No shareholderCancellation shareholder approval approval required approval required requiredThis list is not exhaustive and should be read in conjunction with the FSA Handbook (Listing Rules, Prospectus Rules andDisclosure & Transparency Rules).Page 18 The role of the UKLA
  • 18. Preparing for an IPOJohn Woolland and David Seal UBS Investment Bank
  • 19. AdvertisementPersonalwealthmanagementAt UBS Wealth Management we Drawing on the expertise of the UBS opportunities, blending traditional asset classes with private equity, hedge funds, commodities and real estate (where suitable to the client). UBS provides brokerage services, foreign exchange execution and strategy, collateral backed lending and whole-of- market advice. Where there is a need for provides advice on structuring personalMost people who IPO a business want and corporate assets, pensions optionsto realise part of the value in cash. A and succession planning, with full back-higher proportion of their assets may up at every stage of be in stocks or shares. Early wealthmanagement advice can help the owners For more information about UBS Wealthextract and maximise the value of the Management please contact Michaelinvestments they have built up. Bishop on +44-20-7568 9587.
  • 20. Preparing for an IPOInitial public offerings (‘IPOs’) are among the most allowed to list on a market. Unsurprisingly, achallenging transactions that a business can number of the UKLA’s requirements coincide withundertake. The decision on whether to list a the attributes which investors are looking for in acompany’s shares on a public market is a company. The precise regulatory requirements aresignificant one; obtaining a public quote is a major covered in the chapter ‘The legal framework for anmilestone in any company’s life. The process of IPO’ on page 31. Areas such as a demonstrablegoing public is time-consuming, but it is an trading record and appropriately experiencedopportunity for a company to critically examine directors clearly help to satisfy both the regulatorsitself. A company, its management and its owners and the potential shareholders. Ultimately, theare likely to be in the public eye to a much greater ability to meet the market’s commercialextent than before. expectations is crucial.A company’s decision to launch an IPO must be For management and owners, an IPO may alsobased on a realistic assessment of its business, its crystallise the need to examine their tax planningmanagement resources, its stage of development and personal wealth management. This should beand its prospects. Public ownership offers addressed early to avoid distraction during thesignificant advantages, such as access to the final, and often hectic, few weeks of the IPOpublic equity and debt markets to finance growth process.and strengthen a company’s financial position, aswell as the creation of an open market for a Pre-IPO preparationcompany’s shares. However, a company will face Businesses often begin their preparations forheightened scrutiny and greater demands on its becoming public companies well before they launchmanagement. the IPO process. Typically, pre-IPO preparations take four to six months, but they can takePlanning is a key element in any IPO. In order to considerably longer. Advance preparation is a keyavoid unnecessary delays and distraction, which success factor that allows for a smooth andcould be costly, management should evaluate in efficient execution process and the ability to takedetail how it will commit adequate resources to advantage of market the pressing deadlines of an IPO process. Management teamThe run-up to a company seeking a listing on the A company’s management team will need toMain Market can be broadly divided into two explain the business, its strategy and prospects tophases – pre-IPO preparation and the IPO process investors, and demonstrate knowledge of theitself. Pre-IPO preparation includes the critical sector, as well as its challenges, in order to gainreview of a company’s business plan and growth the support and confidence of the market. Theprospects, assessing the management team, directors of a company will be accountable to itsappointing an appropriate board, tightening new and existing shareholders for the performanceinternal controls, improving operational efficiency of the business when it is a public company.and resolving issues that may adversely affect the Therefore, as a company prepares for its IPO itlisting early on. may need to ensure that its management has sufficient depth and breadth.The United Kingdom Listing Authority’s (‘UKLA’)Listing Rules set the specific regulatory Business planrequirements that a company has to meet to be For the purposes of an IPO, a company needs aPreparing for an IPO Page 21
  • 21. comprehensive business plan that sets out its existing shareholders (a primary offering)products, markets, competitive environment, l existing shareholders selling their shares tostrategy, capabilities and growth objectives. new or other existing shareholders, ie noCompanies engaging in successful IPOs tend to additional capital is raised for the business (ahave a clearly defined vision for the future secondary offering); orperformance of the business that can be l a combination of both.articulated credibly, clearly and quantifiably. If existing shareholders intend to sell in the IPO, itCompanies that are in mature or shrinking is helpful to know the likely quantum early so thatindustries, operate within small markets, or the IPO can be planned accordingly.provide a narrow range of products to a small andhighly specialised customer base may be Use of proceedsunsuitable for an IPO. If a company is raising new capital, the use of proceeds should be clearly articulated and in lineFinancial performance with its strategy. In many cases, the proceeds willA company should expect to show investors a be used to either pay down debt, fund capitalconsistent pattern of top- and bottom-line growth investment or to provide working capital forand a sound balance sheet post-IPO. For a company expansion.seeking a Premium Listing, its financial statementsneed to adhere to International Financial Reporting In determining the quantum of new capital, aStandards (‘IFRS’). Further technical requirements company needs to consider its future capitalof the financial information required to be included structure and its ability to pay dividends at anin a prospectus are covered in the chapter appropriate level.‘Accounting requirements and advice through theIPO process’ on page 43. Financial controls The market expects companies to have properGrowth prospects financial controls in place. In addition, the UKLABefore investing in a company, most investors requires the sponsor to provide writtenwant to feel confident about its future growth confirmation of the adequacy of a company’sprospects. A company should develop a financial financial controls. Companies contemplating amodel that quantifies its business plan and listing will therefore need to ensure that they haveexpected growth. The sponsor (see page 26) may systems in place to ensure a flow of accurate,work closely with management and external timely information.consultants/experts to develop this model and willconduct due diligence on the assumptions behind Boardthe model and stress-test the projections. A public company needs to satisfy corporate governance requirements. The principles are setRaising funds? out in the UK Corporate Governance Code (theThe majority of listings take place with a ’Code’) and a company is required to comply withsimultaneous share offering to investors. This can the Code, or explain why it has not, in itstake the form of: prospectus. It is typically necessary to appoint new members to the board who are independent and tol raising additional capital for the business by form new committees (eg audit and remuneration). issuing new shares in a company to new and Identifying suitable candidates can take aPage 22 Preparing for an IPO
  • 22. significant amount of time. Potential directors an IPO is an opportunity to realise or transfer partoften want to be involved in the IPO process at an of their wealth. Early planning of their personal taxearly stage. The sponsor frequently assists in the and financial affairs is advisable to avoid delay orrecruitment and assessment of potential board difficulty in the final stages of an IPO.members for a company seeking a listing. Controlling shareholdersGroup reorganisation Potential investors may be influenced, negativelyThe reorganisation steps undertaken in preparation or positively, by the presence of a controllingfor an IPO will vary, depending on the existing and shareholder. A company should assess what willintended group structure. One of the key steps is happen with such shareholders post an IPO, iedetermining the jurisdiction of incorporation of the whether they will sell down some or all of theirlisting entity. At IPO it is essential to ensure that holdings, continue to have board representation orthe group holds all assets, intellectual property and maintain veto rights on certain company decisions.contractual rights necessary to carry on its In most situations, any special rights will bebusiness operations. Part of the group unwound and, where appropriate, a relationshipreorganisation may involve their transfer where agreement may be entered into as part of the IPOthey are currently held by related parties outside process to avoid potential future conflicts ofof the group. interest.Change may be necessary to optimise a group’s Related-party transactionstax position, or to remove businesses or assets Any internal transactions, compensationthat are not part of the group to be floated. For arrangements and relationships involvingexample, company-owned horses, boats and so on management or the board that might beare unlikely to be appropriate for a quoted appropriate for a private company but improper forcompany. a public company must be eliminated. A company should therefore consider whether any outsideDetermine employee and management affiliations will be negatively perceived by thecompensation and incentive plans market.As part of the IPO process, many companiesreview the amount of equity owned by their top Investor relations (‘IR’)executives and employees. Additional equity IR is the term used to describe the ongoing activityoptions or other incentives at the IPO may be of companies communicating with the investmentgranted to increase management and employee community. While the communication that publicownership and to align incentives from the IPO companies undertake is a mix of regulatory andwith a company’s new investors. Remuneration voluntary activities, IR is essentially the part ofconsultants can advise on the structure of any public life that sees companies interacting withschemes, as well as trends in the appropriate existing shareholders, potential investors, researchindustry. The recommendations should be analysts and journalists. Larger companiesreviewed by the sponsor and bookrunner(s) to frequently create a separate IR function to meetensure that the awards are in line with market the demands for information and to assist in allexpectations. communications with the market. Please refer to the chapter ‘Managing the company’s profile’ onWealth management and financial planning page 69 for more detail on this topic.For many managers and owners of a business,Preparing for an IPO Page 23
  • 23. IPO timetable Private execution phase Week 1 2 3 4 5 6 7 Process Execution kick-off meeting ⧫ Weekly meeting/conference calls ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ Due diligence Long form report Preparation of audited numbers Valuation and capital structure Forecasts finalised ⧫ Working capital report Valuation discussion Capital structure discussions Agree offer size Documentation Draft prospectus Prospectus filed with UKLA ⧫ UKLA review prospectus Publish pathfinder prospectus Publish final prospectus Preparation of placing agreement Auditors’ comfort letters Marketing and roadshows PR process Analysts pres’n prepared and delivered Research prepared and reviewed Prepare and rehearse roadshow Announce intention to float Publish research Pre-marketing Price range set Roadshow Bookbuilding Pricing/allocation Settlement and closing Stabilisation Week 1 2 3 4 5 6 7 Active IPO executionPage 24 Preparing for an IPO
  • 24. Public execution phase8 9 10 11 12 13 14 15 16 17 ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ ⧫ +30 days8 9 10 11 12 13 14 15 16 17 Active IPO executionPreparing for an IPO Page 25
  • 25. IPO process Private phase Public phase Preparation Preliminary Analyst Investor Bookbuilding Aftermarket of the IPO valuation presentation education • Appoint all • Set initial • Preparations at • Announcement • Management • Admission advisers valuation range advanced stage of intention to roadshow float (’AITF’) • Stabilisation • Kick-off meeting/ • Existing • Due diligence • One-on-one weekly meetings shareholder views substantially • Publication of meetings • Research on price, complete research • Due diligence size, structure • Analyse demand • Investor relations • Analyst briefing • Target • Prepare key investors • Continuing prospectus and obligations other legal • Monitor market documents • Analyse feedback • Develop investment case • Refine size, valuation • Corporate housekeeping Ensure basic Decide to proceed Decide to proceed Decide to launch Price, sign placing preparedness of with analyst with pre-marketing (size, price range agreement and Life as a Plc company for the IPO presentation decision) allocate Key objectives High-quality Stable, rising Liquid trading IPO price maximised shareholder base aftermarket and quality research coverageThe IPO Process extended period. Since acting as a sponsor requiresThe IPO process involves both a private and public a high degree of commitment, the appointmentphase (see ‘IPO Process’ chart above). process is often ‘two-way’. Hence, the sponsor will also want fully to understand a company’s businessPrivate phase before agreeing to take on the listing.Select the sponsor The sponsor has responsibilities both to theA company seeking a listing is required to appoint a company and to the UKLA. For example, thesponsor. The sponsor leads a company’s team of sponsor is required to submit an eligibility letter toprofessional advisers and coordinates their roles to the UKLA setting out how the company satisfies aensure a company successfully completes the listing number of the Listing Rules. The sponsor is alsoprocess. A full list of approved sponsors and their obliged to consider whether “the admission of thecontact details is available on the Financial Services equity shares would be detrimental to investors’Authority (‘FSA’) website: interests”.Often, companies approach the appointment of Appointment of other professional advisersadvisers by holding ‘beauty parades’ with a series In addition to the sponsor, a company needs toof sponsors, asking each about their expertise, assemble a number of other advisers to guide itexperience and fees, and getting a feeling for what through the process. This includes theit would be like to work closely with them over an bookrunner(s), lawyers (one firm advising thePage 26 Preparing for an IPO
  • 26. company and another firm to advise the sessions will take place on various sections of thesponsor/bookrunner(s)), accountants, financial document. From a marketing perspective, thepublic relations advisers, remuneration prospectus outlines a company’s strengths,consultants, registrars and financial printers. strategy and market opportunity. The precise areasExperts in valuations or sector consultants may that must be covered in a prospectus, such as thealso be appointed. inclusion of risks relating to a company, are covered in the chapter ‘The legal framework for anIPO timetable IPO’ on page 31.See ‘IPO timetable’ chart on pages 24 and 25. The sponsor is responsible for submitting drafts ofAn IPO can generally be completed within 15 to 20 the prospectus to the UKLA. The UKLA is allowedweeks. The exact timetable will vary depending on 10 business days after the first submission tomarket conditions, the scope and complexity of the respond to the sponsor with a comment sheet. Thedeal and a range of other factors. company and its advisers will then revise the prospectus so that the sponsor can submit anKick-off meeting updated draft with the UKLA for a further review.A kick-off meeting is usually held in person and For the second and subsequent drafts, the UKLAinvolves discussions to make sure that the working responds via its comment sheet within five businessgroup fully understands the structure of the days. As every transaction is unique, it is impossibletransaction, the process, timetable and all other to predict exactly how long this process will take.relevant issues. The sponsor will usually provide a However, as a rule, the timeframe is approximatelydetailed organisation book that goes through all six to eight weeks from initial submission of thethese issues in detail. prospectus to the UKLA (approximately three to four submissions) to preliminary approval ahead ofWeekly meetings launching the transaction, often with a PathfinderIn order to ensure that the process remains on prospectus (see page 29).track, the sponsor is likely to organise weeklymeetings/conference calls. These meetings give Due diligencean opportunity for all parties to be kept fully up to The overall purpose of due diligence is to ensuredate on the process and for any key issues to be the accuracy, truthfulness and completeness of araised. company’s prospectus, and to understand any issues associated with the company. While eachProspectus – UKLA process professional adviser performs a different role inBefore a company can be listed, the sponsor must this process, the sponsor/bookrunner(s) will focusget a company’s prospectus approved by the on the diligence of a company’s operations,UKLA. Although the prospectus is a legal management, financial prospects, historicaldocument, it is also a marketing tool to help to sell performance, competitive position and businessshares to potential investors. A company’s lawyers strategy. The advisers will also look closely atusually take the primary responsibility for drafting factors such as a company’s suppliers, customers,the prospectus although the creditors and anything else that might have asponsor/bookrunner(s) assist a company in bearing on the offering or viability of a company ascrafting the appropriate marketing story. The a public company and on the accuracy anddrafting of the prospectus takes several weeks and completeness of the prospectus.will involve all advisers. A number of draftingPreparing for an IPO Page 27
  • 27. Due diligence comprises many interrelated l litigationprocesses. Business due diligence is conducted l compliance with laws and regulationsmainly by the sponsor and bookrunner(s) and is l title to principal assetsdesigned to verify a company’s business strategy l corporate structureand potential for future growth. As part of the l debt covenantsinformation and fact-gathering process, the l environmental issuessponsor/bookrunner(s) may conduct onsite l intellectual property.inspections, particularly for manufacturing andproperty-intensive businesses. They may also Legal restructuring, documentation andinterview company officials, suppliers and agreementscustomers to understand fully every aspect of a During this stage, a company’s management,company’s business and its financial statements. sponsor and lawyers work together to draft theThe knowledge obtained will later help the necessary legal documentation and implement anysponsor/bookrunner(s) and management to craft a required corporate restructuring. The collectivestrong, consistent message that can be used purpose of these documents is to assure investorsduring the marketing process. and regulators that the IPO has been objectively vetted for gaps, irregularities, misleadingFinancial due diligence is geared toward confirming statements and other potential problems. Thea company’s historical financial results and documents include:understanding its operational and financialprospects. Key areas of focus include: l the placing agreement (if funds are being raised)l audited and interim financial statements l comfort lettersl capital structure l legal opinionsl breakdown of historical financials by business l lock-up agreements.l detailed review of budgetsl meetings with auditors Continue to prepare a company to become al budget versus actual financial statements public companyl accounting policies and auditor management The sponsor/bookrunner(s) will assist a company letters on a number of matters critical to itsl use of proceeds transformation into a public entity. These include:l financial control systemsl working capital requirements l discussion of valuationl debt covenants. l development of investment case l the composition of the board and itsThe financial due diligence workstreams are committeescovered in more detail in the chapter: ‘Accounting l internal controlsrequirements and advice through the IPO process’ l prevailing market conditions.on page 43. Marketing strategyLegal due diligence is conducted by the solicitors The bookrunner(s) and sponsor will set up aand is the process of verifying a company’s legal comprehensive marketing plan to target specificrecords, material contracts and litigation. Key investors.areas of focus include:Page 28 Preparing for an IPO
  • 28. Analyst presentationIt is common practice for senior management to Considerations for overseas companiesmeet with the research analysts employed by the For inclusion in the FTSE UK Index Series, it isbookrunner(s) before the IPO and for such important for overseas companies to note that:analysts to publish pre-deal research on acompany before the start of the roadshow. To l a company not incorporated in the UK will beprepare fully for the presentation, several required to publicly acknowledge adherencemeetings and rehearsals with senior management to the principles of the UK Corporateare usually required. Material information must be Governance Code, pre-emption rights and theincluded in the prospectus, but considerable UK Takeover Code, as far as is practical; andadditional information will be provided to the l a company not incorporated in the UK mustanalysts to ensure a full understanding of a have a free float of not less than 50 per’s business and sector. Details in relation to the FTSE UK Index SeriesPublic phase are covered in the chapter: ’London: a uniqueThe main components of the marketing process investment opportunity’ on page 87.are outlined below and explained at greater lengthin the chapter: ‘Generating and capturing investor investors using the research they have written.demand during an IPO’ on page 57. This takes place on larger IPOs and is in advance of the management roadshow.Announcement of Intention to Float (‘AITF’)The first time that a company provides specific Management roadshow presentationconfirmation of its IPO plans is in a public The management roadshow is a series ofannouncement known as the AITF. At this stage meetings with potential investors. It typicallythe marketing process begins in earnest, often includes a formal presentation by the CEO andwith publication of research by analysts connected CFO outlining the company’s businessto the bookrunner(s). Larger companies are likely operations, financial results, performance,to have a carefully developed media PR campaign markets, products and services. As with theto promote knowledge of the business and analyst presentation, the role of themanagement to the media. sponsor/bookrunner(s) in this workstream includes assisting a company in the preparationPathfinder prospectus of the presentation and organising rehearsals.At this stage in the process, a draft prospectus(also referred to as a Pathfinder prospectus) is Completion and pricing meetingoften made available to prospective investors. This Following the management roadshow and thedocument is an almost final version of the pricing of the IPO, a completion meeting takesprospectus. Apart from details of the precise size place where all relevant documents and paperworkof the IPO and the subscription price of the new are reviewed in their final form by both theshares to be offered (which are unlikely to be directors and their advisers. The exchange of newfinalised at this stage), it should include all other shares for funds typically occurs three businessrelevant details. days after pricing. During this three-day period, the shares may trade on a ‘when issued’ basis,Investor education meaning that the bargains are not settled until theInvestor education is the process whereby the listing becomes effective.analyst(s) referred to above market the story toPreparing for an IPO Page 29
  • 29. Impact Day companies and certain financial companies. InThis is typically the day after the completion some cases, expert reports will be required (eg tomeeting and is the day on which the availability of report on oil and gas reserves).the prospectus is advertised and the listing isofficially announced to the market. Occasionally, companies may be able to IPO when they do not meet the three-year rule onUKLA final approval financial statements, such as when they areThe prospectus must be submitted in final form, seeking a Standard Listing. The requirements forwhich will include the relevant pricing and size listing should be discussed in advance with bothinformation, to the UKLA for final approval. the sponsor and the London Stock Exchange or the UKLA.The UKLA also requires any supportingdocuments, including directors’ service contracts, Summaryaudited accounts and all reports referred to in the When contemplating an IPO, a company’sprospectus, to be delivered on the date of management and its owners should notapproval. The UKLA only approves the prospectus underestimate the significant time, resources andon the day it is dated and published. planning required in listing a company on the Main Market.Applications for listing and tradingAt least 48 hours before admission, the formal There are two distinct stages: pre-IPO preparationapplication for a listing is submitted to the UKLA. and the IPO process itself. It is imperative for theAt the same time, a formal application for success of an IPO that a company undertakesadmission to trading is submitted to the Exchange. sufficient pre-IPO preparation to ensure it is suitable to become a public company.AdmissionThis is the point at which a company’s shares are To assist in the planning process, a sponsor, which‘admitted’ to listing and the shares are traded is usually an investment bank, should bepublicly on the Main Market. The listing is officially appointed. A sponsor is able to advise a companygranted by the UKLA in conjunction with through its pre-IPO preparation and will, duringadmission to trading being granted by the London the IPO process, lead a company’s team ofStock Exchange. professional advisers and coordinate their roles to ensure a smooth listing process.Specialist companiesSpecific rules apply to a variety of businessesincluding investment companies and resourcePage 30 Preparing for an IPO
  • 30. The legal framework for antitle Section IPO Simon Witty and David Cotton Freshfields Bruckhaus Deringer LLP
  • 31. An IPO is just the beginning.In 2009, we helped our clients complete 14 initial public offerings(IPOs) globally, raising in excess of $15bn. We also completed58 further issues, raising in excess of $62bn.We’re proud of those statistics, but they’re only a part of the story.We cover every kind of mandate and, because we workhard to maintain long-standing client relationships, we get towork with clients through the good times and the challenging.Freshfields Bruckhaus Deringer currently acts for over a third of theFTSE 100 and those clients know that, when the going gets reallytough, we are the law firm they can turn to for business-focusedadvice on the most complex challenges.With over 2,500 lawyers in 27 offices, we are able to offer our clientsthe best legal advice for their business – wherever they need it,whatever the jurisdiction and through every stage of development.If you would like more information please contact any, Freshfields Bruckhaus Deringer LLP is proud to be the official legal services provider to the London 2012 Olympic and Paralympic Games.
  • 32. The legal framework for an IPOThis chapter provides an insight into the following (the ‘Official List’), and then for the Exchange toareas: admit those shares to trading on the Main Market.l regulations governing the Main Market and In order to obtain admission to the Official List, a an overview of the relevant rulebooks company must meet the requirements of thel eligibility criteria for companies seeking Listing Rules and have published, or passported Premium and Standard Listings into the UK, an approved prospectus. Thel contents requirements for the prospectus requirements of the Listing Rules will varyl considerations for companies located outside according to the type of listing being sought – a the UK Premium Listing or a Standard Listing. In order tol continuing obligations. be admitted to trading on the Main Market, in addition to obtaining admission to the Official List,The legal and regulatory basis of a company must comply with the Exchange’s ownthe Main Market regulations as laid out in its Admission andThe Main Market of the London Stock Exchange Disclosure Standards (‘A&DS’).(the ‘Exchange’) is governed by EU law, UK Actsof Parliament, regulations drawn up by the Eligibility for joining theFinancial Services Authority (‘FSA’) and the Official List/Main MarketExchange’s rules. For shares to be admitted to the Official List and to trading on the Main Market, a company and theEU law, through various directives and regulations, shares it issues must satisfy the relevant Officialprovides the minimum standards (applicable EU- List and the Exchange’s eligibility requirements. Awide) that apply to the Main Market. The UK has, company also needs to bear in mind, and ensurewhere necessary, implemented these directives that it is able to comply with, the continuingand regulations through the Financial Services and obligations to which it will be subject followingMarkets Act 2000 (‘FSMA’) and through the listing and admission. These are described onListing Rules, the Prospectus Rules and the page 39 and following.Disclosure and Transparency Rules. Among otherthings, FSMA gives statutory powers in relation to UKLA eligibility requirementslistings and listed companies to the FSA, which The UKLA eligibility requirements are found in thealso acts as the UK Listing Authority (‘UKLA’). Listing Rules. There are requirements that apply toThe UKLA is also the UK’s ‘competent authority’ all listings, as well as additional requirements thatfor the purposes of EU legislation. Also relevant to apply only to Premium Listings. One suchinterpreting and applying the relevant EU and UK requirement that applies to companies seeking alegislation are guidance published by the Premium Listing is that they must appoint aCommittee of European Securities Regulators ‘sponsor’, which will generally be an investment(‘CESR’), materials published by the FSA/UKLA bank, to advise them on the Listing Rules and(eg LIST!) and the UK Corporate Governance Prospectus Rules and to give confirmations as toCode (formerly the ‘Combined Code’), which is their compliance with those rules and certain otherpublished by the Financial Reporting Council. matters to the UKLA. Although a sponsor is required to provide advice to the company, itsAccess to the Main Market is a two-stage process: primary responsibilities and obligations are owedfirst it is necessary for the UKLA to admit a to the UKLA. The Listing Rules contain provisionscompany’s shares to the official list of the FSA as to the independence of the sponsor andThe legal framework for an IPO Page 33
  • 33. identifying and managing conflicts of interest ‘Free-float’ requirementbetween its relationship with the company and its In order to obtain a Premium or Standard Listing,role as sponsor (it is, for example, customary for a at least 25 per cent of the entire class of sharessponsor also to be a bookrunner or underwriter in must, by the time of their admission to listing, bean offering). See the chapter ‘Preparing for an held by ‘the public’ in one or more EEA states. TheIPO’ on page 19 for more detail on the role of the amount of share capital held by the public is alsosponsor and the chapter ‘Generating and capturing known as the ‘free-float’. Generally speaking,investor demand during an IPO’on page 57 for shares are deemed held by the public unless theymore information on the role of the bookrunner(s). are held by one or more of the following: (i) directors of the company or group members;Eligibility requirements that apply to both (ii) persons connected with directors of theStandard and Premium Listings company or group members; (iii) trustees of any group employee share scheme or pension fund; (iv)Chapter 2 Listing Rules requirements a person who has the right to nominate a director;Chapter 2 of the Listing Rules contains basic and/or (v) persons who individually or acting inrequirements that, subject to some modifications, concert have a 5 per cent or greater interest in theapply to listings of all types of securities. share capital.The first set of requirements relates to legal matters This rule is to ensure that there are sufficientand these require that the company is duly smaller and non company-related shareholders forincorporated, validly existing and operating in the market in the shares to operate properly – thatconformity with its constitution and that its shares is, for there to be sufficient liquidity in the shares.comply with the laws of the company’s place of Given this, the UKLA does sometimes allow aincorporation, are duly authorised and have all smaller free-float than 25 per cent – for instance,necessary statutory and other consents. The shares where there are shares held outside the EEA thatmust also be admitted to trading on a recognised would be capable of being traded, or where theinvestment exchange, such as the London Stock company’s market capitalisation is so large that aExchange (in practice, the listing and admission to smaller percentage might still allow for atrading will take place simultaneously), be freely sufficiently liquid market in the stock.transferable, fully paid and free from any liens orrestrictions on the right of transfer (save for failure This rule is of particular interest in an IPO whereto comply with a statutory notice requiring the existing owners intend to maintain ainformation about interests in shares). Neither usual substantial majority stake following the listing, asselling restrictions imposed as part of an offering it will limit the number of shares they can retainnor a contractual lock-up arrangement would be post-IPO, especially if there is also a ‘strategic’considered a bar on transferability for these investor with more than 5 per cent.purposes. In addition, all the shares of the sameclass as the listed shares must be listed and the Eligibility requirements for a Premium Listingshares must have a minimum market capitalisation The eligibility requirements for a Premium Listingof £700,000. Finally, a prospectus relating to the are found in Chapter 6 of the Listing Rules (‘LR6’).shares must be approved by the FSA (or by another As indicated above, these go beyond the basicEEA state competent authority and passported into requirements of the EU legislation.the UK) and published.Page 34 The legal framework for an IPO
  • 34. Audited historical financial information after IPO, it is customary to put in place aA company seeking a Premium Listing must relationship agreement between thosegenerally have published or filed accounts for at shareholders and the company to assist inleast the last three financial years, audited without demonstrating its operational independence.modification (which will generally mean withoutqualification), and the most recent must be for a The requirements relating to the nature andperiod ended not more than six months prior to the duration of the company’s business activities aredate of the prospectus. This requirement will often intended to enable investors to make a reasonabledrive the IPO timetable and will necessitate the assessment of the future prospects of thepreparation of interim audited accounts where the company’s business. Accordingly, an issuer mayexisting annual accounts are not sufficiently recent. not satisfy these provisions if its strategy, business or financial performance in the future is expectedIn addition to the above requirements, the auditors to be significantly different from that in its three-must be independent of the company and the year track must obtain written confirmation fromthem that they comply with the relevant Working capitalaccounting and auditing independence guidelines. A company seeking a Premium Listing is required to satisfy the FSA that it has sufficient working capital75 per cent of the business being supported by for at least the next 12 months. On a practical level,revenue-earning record, control of assets and this is generally satisfied by the working capitalindependence statement to this effect included in the prospectusAt least 75 per cent of the business of a company and the sponsor’s declaration to the FSA. Byseeking a Premium Listing must generally be contrast, an issuer seeking a Standard Listing needsupported by a revenue-earning record covering the not have sufficient working capital for the next 12period for which accounts are required under LR6 months, although if not it would need to explain in– namely, at least three years. In practical terms, its prospectus how it intends to procure suchthis means that a company that has made major capital. To support the working capital statementacquisitions (amounting to 25 per cent or more of and, where applicable, the related declaration, theits business) over the financial track record period company and its accountants will prepare a workingmust include financial information for these capital report. The sponsor will review this reportbusinesses both before and after their acquisition. and conduct other related due diligence.The form this information will take will be Warrants or options to subscribedetermined in accordance with the rules relating to The total of all issued warrants and options to‘complex financial histories’ (rules contained, subscribe for equity share capital of the companyamongst other places, in Regulation 211/2007, must not exceed 20 per cent of its issued sharewhich amended the Prospectus Regulation capital.809/2004 EC (the ‘EU PD Regulation’)). Mineral companies and scientificA company must also have controlled the majority research companiesof its assets for at least the three-year period for Mineral companies and scientific researchwhich accounts are required and be carrying on an companies are subject to additional eligibilityindependent business as its main activity. Where requirements, although they are not required to haveshareholders continue to own a substantial stake a three-year, revenue-earning, audited track record.The legal framework for an IPO Page 35
  • 35. London Stock Exchange eligibility requirements final draft of the prospectus that, in the context ofThe London Stock Exchange eligibility offers to institutional investors only, will be used asrequirements are found in the A&DS. The essential part of the book-building and marketing process ofrequirement of the company is that it complies the IPO. A few days before the day of admission towith the requirements of the securities regulators both the Official List and trading on the Mainby which it is regulated (ie the FSA and any other Market, a final, complete and UKLA-approvedhome state regulator) and any other stock prospectus will be published containing the price atexchange on which it has securities admitted to which the securities are offered for sale. If thetrading. The A&DS also impose requirements offer is also being made to non-institutionalrelating to the trading and settlement of the investors, a pathfinder prospectus is not normallyshares: the shares must be capable of being published, and instead a UKLA-approved ‘pricetraded in a fair, orderly and efficient manner and range’ prospectus is used, offering shares tothey must be eligible for electronic settlement. investors within a specified indicative offer price range. A pricing statement would subsequently beThe prospectus issued once the offer price is fixed at the end ofA prospectus must be published by a company the book-building and marketing period.before its securities can be listed and admitted totrading on the Main Market. A prospectus sets out What must the prospectus contain?detailed information about a company’s business, The prospectus must contain the informationmanagement and financial information, and there are necessary for investors to make an informeddetailed provisions in the FSA’s Prospectus Rules assessment of the assets and liabilities, financialand the EU PD Regulation regarding its content. The position, profits and losses and prospects of theprospectus and its contents also form the base for company, as well as the rights attaching to themarketing any offering to potential investors. securities being offered. This information must be presented in a way that is comprehensible andPassporting easy to analyse.The EU Prospectus Directive introduced thepossibility of using a single prospectus approved These are the overarching requirements of FSMA,within one EU jurisdiction to enable companies to but there are also more detailed contentoffer or list securities throughout the EU. The requirements contained in the Prospectus Rules,requirements to effect the passporting into the UK which along with FSMA implement the Prospectusof a prospectus approved elsewhere in the EU are Directive and the EU PD Regulation (which will beminimal: the relevant regulator must provide the shortly amended, although mainly in the context ofFSA with a copy of the prospectus and secondary offerings rather than IPOs). Additionally,confirmation of its approval and the summary certain of these detailed requirements are furthersection of the prospectus (expected to be no more described in guidelines and questions and answersthan 2,500 words) must be available in English. published by CESR, which will be taken into account by the FSA when it is determining whether‘Pathfinder’ or ‘Price Range’ prospectus the company has complied with its obligationsBy the time a company has completed its IPO it is regarding the prospectus. Further guidance on thelikely that it will have produced a ‘pathfinder’ application and interpretation of the EU PDprospectus (strictly an advertisement rather than a Regulation and Prospectus Rules can be found inprospectus) as well as the UKLA-approved the LIST! newsletters published by the UKLA fromprospectus. The pathfinder prospectus is a near- time to time.Page 36 The legal framework for an IPO
  • 36. Summary of prospectus contentsSummary This section must briefly (in no more than 2,500 words) convey in non-technical language the essential characteristics of, and the risks associated with, the company and its securities. This will usually include a summary of the company, its business, strategy and prospects along with a summary of its financial information and the risk factors.Risk factors This section must describe the principal risks of relevance to the company and an acquisition of its shares. The former should be specific to the company and its industry – often a prospectus will divide the risk factors so as to address these separately. It will generally take a considerable time to draft the risk factors. As part of the approval process, the FSA will check to ensure that the risk factors do not undermine any of the statements made in the rest of the prospectus, especially the working capital statement.Business description This section describes and discusses the company’s business and operations. It will generally start with an overview section, followed by a summary of the group’s strengths and strategies. Following this, there will be a description of the principal products or services sold by the group, together with details of where and how these are produced and sold, including information on the group’s customers and suppliers. An overview of the industry in which the group operates will also be included in this section, or included as a standalone section. The business description section will also typically include information on the group’s employees, research and development, the group’s competitors and the legal and regulatory framework in which the group operates. Operating and This section is intended to provide investors with the information necessary to enable them to financial review assess the key drivers of the group’s business, of relevance to both past and future performance, and to understand management’s perception of these matters. The operating and financial review will also include a description and explanation of the trends in the financial information included in the prospectus (including by business segment where appropriate) and a description of the group’s sources and uses of liquidity and capital resources.Financial information This section must include information about the company’s assets and liabilities, financial position and profits and losses for the three most recent financial years (or, unless a Premium Listing, such shorter period as the company has been in operation) as well as any interim results published. The financial information needs to be audited (subject to certain exceptions) and prepared in accordance with IFRS or an ‘equivalent’ GAAP (eg US GAAP). As well as the historical financial information, the prospectus must include a ‘pro forma’ table, illustrating the effect of the IPO (and any significant transactions that are not consolidated into the financial statements) on the balance sheet and income statement. If the company wishes (for marketing reasons) or is obliged (because it has previously published one that remains current) to include a profit forecast or estimate in its prospectus, that forecast or estimate must be reported on by an auditor and that report must be included in the prospectus. Working capital and The directors must make a working capital statement stating that the company has sufficient no significant change working capital for the requirements of its group for the 12 months following publication of the prospectus (or, in the case of a Standard Listing, if not, how it intends to procure sufficient working capital). In addition, the prospectus must include a statement confirming that there has been no significant change in the financial or trading position of the group since the end of the last annual or interim financial period (or, if there have been changes, include details). Other information l dividend policy about the company l material litigation l directors and senior management l related-party transactions l major shareholders, and l terms of the share offering and share capital.The legal framework for an IPO Page 37
  • 37. Who is responsible for the prospectus? state this will normally be the competent authorityThe company directors are obliged in the in its state of incorporation.prospectus to state that they accept responsibilityfor the information in it and that it is true to the best Eligibility requirementsof their knowledge, having taken reasonable care to Subject to the additional eligibility requirement inmake sure that this is the case. The issuer will also respect of non-EEA companies without a homebe responsible for the prospectus, as potentially are listing (see below), the Official List and Londoncertain others (for example, providers of any expert Stock Exchange eligibility requirements are thereports included in the prospectus). same for both UK and non-UK entities. However, non-UK companies may find it more difficult toResponsibility for the prospectus carries with it the comply with some of the Official List eligibilitypossibility of liability for the company, its directors requirements.and others. Quite apart from these considerations,the accuracy and completeness of the prospectus Absence of a home listingare of the utmost importance for commercial and Where the shares of a non-EEA company are notreputational reasons. As a consequence, also listed in that company’s country ofprocedures have developed around the preparation incorporation or the country in which the majorityof any prospectus, collectively referred to as ‘due of its shares are held, the FSA must be satisfieddiligence’, with this aim in mind. The process that the absence of a listing is not due to the needdepends on the collective efforts of management to protect investors. For instance, the companyas well as the banking, legal, accounting and other has not been delisted or refused a listing in itsadvisers. The due diligence exercise may also home country due to breaches of law or regulation.include a specific ‘verification’ exercise in whichthe steps taken to check material factual Financial informationstatements in the prospectus are recorded. A non-UK company that has not historically prepared its financial information to IFRS or anTimetable equivalent set of standards (eg US GAAP) willThe process, from the start of due diligence to the need to restate its historical financial informationfinal printing of the prospectus prior to UKLA to IFRS or an equivalent set of standards, whichapproval, is accordingly a complex one and can can be a lengthy and costly process. This wouldtake four months or more to complete (see IPO apply to a listing anywhere in the EEA.timetable on pages 24 and 25 in the chapter‘Preparing for an IPO’). Settlement To be eligible for admission, a company’s sharesConsiderations for overseas companies must be capable of being traded electronically. ForThere are a number of additional factors that a admission to the Exchange’s Main Market, thisnon-UK company needs to take into account. For means that the shares must be capable of beingexample, although non-UK companies can obtain a admitted to CREST, a system operated byPremium Listing, FTSE index inclusion (one of the Euroclear UK & Ireland Limited (‘Euroclear’) tomain motivations for a Premium Listing) will not hold and transfer uncertificated securities. Onlyalways be possible. A non-UK company also needs shares of a UK or Irish company can be admittedto consider which competent authority will be directly to CREST. For other issuers, depositaryresponsible for approving its prospectus. In the interests in respect of the underlying shares willcase of companies incorporated in another EEA need to be created and admitted to CREST.Page 38 The legal framework for an IPO
  • 38. As well as giving rise to an additional workstream facing this issue should consider the ramificationsand extra costs, Euroclear imposes certain of being subject to two sets of rules and twoeligibility requirements as to the laws of the regulators (including having a regulator other thancountry of incorporation before it will admit the FSA approve prospectuses).depositary interests in respect of shares. Not allcountries have historically been able to meet these FTSE inclusion, Takeover Code, UK Corporaterequirements (for example, Russia). A depositary Governance Code and pre-emption rightsinterest is similar to a global depositary receipt, Only securities with a Premium Listing arebut it has the advantage that the shares potentially eligible for inclusion in the FTSE UKthemselves are listed rather than receipts, which, indices series (see FTSE’s chapter, ‘London: aamong other things, can increase the range of unique investment opportunity’ on page 87, forpotential investors and permits a Premium Listing. more information on non-UK companies accessing the FTSE UK series of indices).Home member stateIn addition to the various obligations that will apply Ongoing obligationsby virtue of being admitted to trading on a UK- A non-UK company should also consider theregulated market, a company will be subject to continuing obligations to which it will be subjectcertain ongoing obligations as to periodic following listing and admission to trading. Althoughdisclosure of financial and other information, these continuing obligations do not generally differdisclosure of major shareholdings and treatment of between UK and non-UK entities, companiesshareholders under the law of its ‘home member without prior experience of being subject to suchstate’ (see ‘Continuing obligations’ below). The obligations will need to ensure that the necessarysecurities regulator in a company’s home member systems and controls are in place and that theirstate will also be the regulator responsible for employees have been adequately trained toapproval of prospectuses prepared by that issuer. comply with them following listing. In addition,The identity of a company’s home member state is some of those obligations may require changes totherefore important as it will affect both an IPO the company’s constitution to give shareholdersprocess (and any future prospectuses) and pre-emption rights and impose a regime consistentongoing obligations. with the UK Takeover Code.If a company is incorporated in the EEA, its home Continuing obligationsmember state will be its state of incorporation. If it A company will become subject to a number ofis not incorporated in the EEA, the home member continuing obligations once its shares have beenstate may be chosen from the state(s) in which the listed on the Official List and admitted to tradingissuer first makes an application to admit its on the Main Market. Certain obligations apply toshares to trading or makes an offer of those all listed companies, whether they have a Standardshares. For non-EEA entities seeking a listing in or Premium Listing, and there are additionalLondon, the home member state will generally be obligations that apply only to Premium Listedthe UK. However, it is not uncommon for non-EEA companies. The main obligations are set out below.groups to establish a non-UK EEA-incorporated Of particular note are the significant transactionholding company (for example, in Cyprus, and related-party transaction rules that apply toLuxembourg or the Netherlands), in which case the issuers with a Premium Listing. These restrict theissuer’s home member state will be the state of company’s ability to complete major transactions,incorporation of that holding company. An issuer or transactions outside the ordinary course ofThe legal framework for an IPO Page 39
  • 39. business with related parties, without first to shareholders and shareholder approval (with apublishing a detailed circular and obtaining simple majority). A Class 1 Circular needs to beshareholder approval. approved by the UKLA and will contain certain information in relation to the proposed transactionThis section assumes that the company’s home and its expected effect on the listed company.member state is the UK, which will generally be Among other things, a Class 1 Circular is alsothe case for a London-listed company. If, however, required to include a working capital statement onits home member state is another EEA state, not the basis that the transaction has gone ahead, aall of these requirements will apply or apply in full no significant change statement and, if the Class 1(for example, DTRs 3, 4 and 5). That said, similar Circular relates to an acquisition, financialrequirements may well be imposed by that other information on the target.member state as many of these rules are takenfrom EU legislation. A reverse takeover is subject to the same requirements as a Class 1 transaction and, inContinuing obligations that apply only to addition, the UKLA will generally cancel the listingPremium Listed companies of the issuer and require the combined entity to reapply for listing (which will, among other things,Significant transactions require the combined group to comply with manyA Premium Listed company is required to classify of the eligibility requirements of Chapter 6 of thecertain transactions on the basis of the ‘class Listing Rules as if it were a new applicant).tests’, which produce a ratio of the transaction sizeto certain company indicators (eg market Related-party transactionscapitalisation) set out in the Listing Rules. Not all Certain transactions entered into betweentransactions need to be classified, including Premium Listed companies and ‘related parties’, ortransactions of a revenue nature in the ordinary which benefit a ‘related party’, require publicationcourse of business and issues of securities or of a shareholder circular and shareholder approvaltransactions to raise finance that do not involve by a simple majority, with the related party notthe acquisition or disposal of assets. An eligible voting. The shareholder circular must be approvedtransaction will be classified as ‘Class 3’ (ratios all by the UKLA and include a recommendation fromless than 5 per cent), ‘Class 2’ (any ratio at least 5 an independent adviser (generally an investmentper cent, but all less than 25 per cent), ‘Class 1’ bank) that the terms of the transaction are fair and(any ratio at least 25 per cent) or as a reverse reasonable as far as shareholders are concerned.takeover (an acquisition where any ratio is at least100 per cent or that would result in a fundamental A ‘related party’ is a person who is or was withinchange in the board or voting control). Related the previous 12 months a substantial shareholdertransactions within a 12-month period are (broadly speaking, a shareholder holding at leastaggregated. 10 per cent), a director of the company or another group member, a person exercising significantEntry into a Class 3 or Class 2 transaction influence over the company, or an associate of anyrequires the notification of certain information on of these persons.the transaction to the market via a ‘RegulatoryInformation Service’ (‘RIS’) (see below). The entry Certain related transactions are exempt from theinto a Class 1 transaction is a more significant requirement to publish a circular and obtainmatter, requiring publication of a ‘Class 1 Circular’ shareholder approval. These include transactionsPage 40 The legal framework for an IPO
  • 40. of a revenue nature in the ordinary course of next annual report and accounts and, if the actualbusiness, very small transactions (below 0.25 per figures differ from them by 10 per cent or more,cent based on the class tests) and certain provide an explanation of the differences.transactions in relation to an issue of securities. Inaddition, for related-party transactions where the UK Corporate Governance (the ‘Code’)class test ratios are all below 5 per cent, a circular A Premium Listed company is required to complyand shareholder approval are not required, but an with the Code, or explain the reasons for non-independent adviser is required to confirm in compliance in its annual report. The Code iswriting to the FSA that the terms of the published by the Financial Reporting Council andtransaction are fair and reasonable as far as contains a number of rules governing theshareholders are concerned. composition and operation of the board of directors and board committees of a listedSponsor company. Among other things, the Code requiresA Premium Listed company is required to appoint a that (except for smaller companies outside thesponsor to advise it and, if applicable, to give FTSE 350) at least half the board (excluding thecertain confirmations to the FSA – for example, Chairman) is comprised of independent non-where the company is to publish a Class 1 or executive directors.related-party circular or prospectus. Pre-emption rights and further issuesModel Code A Premium Listed company is generally required to A Premium Listed company must require each of its make issues of new shares on a pre-emptive basis,‘persons discharging managerial responsibilities’ except where pre-emption rights have been(PDMRs) to comply with a securities dealing code disapplied in accordance with the UK Companiesat least as rigorous as the Model Code annexed to Act or equivalent national legislation. For non-UKthe Listing Rules. The Model Code governs when entities where pre-emption rights do not exist as aand in what circumstances a PDMR is able to deal matter of law, this requirement will need to bein the company’s securities and imposes certain addressed in the articles of association orobligations on a PDMR in respect of his or her equivalent constitutional document.connected persons. When offering new shares to investors, a PremiumIn particular, the Model Code restricts PDMRs from Listed company is, in broad terms, required totrading during ‘close periods’ (that is to say, in the ensure that the offer price is at a discount of notweeks before publication of annual, semi-annual and more than 10 per cent to the existing market pricequarterly reports) and during any other periods of those shares, unless a larger discount has beenwhen the company is in possession of inside approved by shareholders, shareholder pre-information. There are some exceptions to these emption rights have been disapplied or the offeringrestrictions, but they are very limited. A similar takes the form of a rights issue.restriction applies to the company and members ofits group dealing in the company’s securities. Repurchase of securities Various rules regarding the repurchase ofUnaudited financial information and profit forecasts securities apply to Premium Listed companies.If a Premium Listed company has published These include a prohibition on repurchasing sharesunaudited financial information or a profit forecast during a period in which PDMRs would beor estimate, it must reproduce the figures in its prohibited from dealing under the Model Code,The legal framework for an IPO Page 41
  • 41. limits on the price at which shares can be company is in turn required to notify a RIS of anyrepurchased and a requirement for a tender offer notifications made to it under these relation to purchases in excess of 15 per cent ofthe company’s share capital. Periodic reporting A company will be required to publish annual andContinuing obligations that apply to all listed semi-annual reports including consolidatedcompanies financial information for the relevant period, together with an accompanying review of theDisclosure of inside information company’s business for that period, within fourA company is required to publish any ‘inside months and two months respectively of the end ofinformation’ that directly concerns it on a RIS as the relevant financial period. The annual financialsoon as possible. ‘Inside information’ is information information must be audited. The semi-annualthat, if made public, would be likely to have a financial information need not be audited. As wellsignificant effect on the price of the shares or as a report on the company’s business for therelated financial instruments. There is limited ability period, certain other information is required,to delay disclosure of inside information – in including information on the risks and uncertaintiespractice this is normally limited to transactions facing the business. The reports are also requiredsubject to ongoing negotiation, the disclosure of to include responsibility statements from thewhich could prejudice the outcome of those relevant directors of the issuer, for example thenegotiations. Chief Financial Officer (‘CFO’).A company will also be subject to various other A company is also required to publish an interimrules on the control and management of inside management statement twice a year, between itsinformation, including a requirement to maintain lists annual and semi-annual reports. This is notof persons who have access to inside information required to include any financial information butand to provide such lists to the FSA on request. should include an update on the group’s business and financial position in the period.A RIS is a service that disseminates regulatoryinformation, such as company announcements, and Free floatmust be approved by the FSA. The Exchange An issuer is required to ensure that at least 25 peroperates the Regulatory News Service (RNS), cent of its shares are at all times in ‘public hands’which is a RIS. (see ‘Free float requirement’ on page 34 for a description of how this is calculated).Disclosure of dealings and shareholdingsPDMRs and their connected persons are required to Further issuesnotify the company of all transactions in its shares Further issues of shares of 10 per cent or more of(including instruments relating to those shares). In the company’s share capital (aggregated on a 12-addition, persons who hold voting rights (or rights to month rolling basis) will generally require thevoting rights – such as convertibles) must notify the publication of an approved if they reach, exceed or fall below 3 percent, or any 1 per cent threshold in excess of 3 percent, of the company’s total voting rights (forinstance, if a shareholder moved from a 4 per centholding to a 5 per cent holding or vice versa). ThePage 42 The legal framework for an IPO
  • 42. Accounting requirements and advice Section title through the IPO process David Wilkinson Ernst & Young LLP
  • 43. © 2010 EYGM Limited. All Rights Reserved.The IPO journey can be a rewarding yet complex one: withobligations and tax structuring as just some of the topics youwill need to get to grips with. At Ernst and Young, we arecommitted to helping you every step of the way. Ourmultidisciplinary, cross-border teams provide a comprehensivelife in the public spotlight and help you realise your fullpotential with investors post-IPO.Think IPO. Think Ernst &
  • 44. Accounting requirements and advicethrough the IPO processAlthough the initial public offering (‘IPO’) event The equity growth story for the business to attractitself generally lasts for between four and six investors must be presented, however, other keymonths, the process of transforming a business information required includes:into a public company begins at least a year or twobefore the IPO, and continues well beyond it. l operating and financial review l current trading and significant changes in theAn IPO is a key turning point in the life of a businesscompany. As such, it should be seen as a business l key investment riskstransformation process rather than simply a one- l audited financial recordoff financial transaction. The IPO is also an l unaudited interim financial information*opportunity for a business to simplify its l indebtedness, funding requirements andstructures, formalise business practices and make capital structureimprovements that will prepare it to face the l statement on the adequacy of working capitalchallenges of operating in the public spotlight. l pro forma financial information* l profit forecast.*This chapter summarises the principal financial * only required in certain circumstancesinformation requirements for a company seeking aPremium Listing and admission to trading on the While some of these requirements must have anLondon Stock Exchange’s (the ‘Exchange’) market opinion from a reporting accountant/auditor, not allfor listed securities. The prospectus requirements will lead to disclosure of financial information in theset out below apply equally to Standard and prospectus. They will, however, all need to bePremium Listings, but those eligibility requirements based upon financial information.under the Listing Rules, and the requirement toappoint a sponsor, only apply to a Premium Listing. Listing Rules These require a company (subject to certainRegulatory background industry-specific exemptions) to have accountsThe Financial Service Authority’s (‘FSA’) that have been audited without qualification and:Prospectus Rules, Listing Rules and Transparencyand Disclosure Rules (collectively, the ‘Rules’) l cover at least three yearsestablish a regulatory framework that determines l have a final balance sheet that is not morethe financial reporting requirements for a listing. In than six months before the date of theapplying the Prospectus Rules, the FSA will take prospectusaccount of guidance issued by the Committee of l show a revenue-earning record that supportsEuropean Securities Regulators (‘CESR guidance’). at least 75 per cent of the company’s business.Financial information requirementsThe most significant requirements arise from: The financial information implications of these requirements should be carefully considered and,Prospectus requirements where necessary, they should be agreed with theA company seeking to list on the Main Market FSA at an early stage in the IPO process. It ismust prepare a prospectus presenting detailed particularly important if major acquisitions haveinformation on management and the underlying occurred during the period covered, as they canbusiness. significantly impact the work required by both the company and the reporting accountants.Accounting requirements and advice Page 45
  • 45. Sponsor The sponsor will usually require the company toThe Rules require that any company seeking a commission the reporting accountant to preparePremium Listing of equity securities must appoint a reports covering both of these matters.sponsor (see chapter ‘Preparing for an IPO’ on page19). The sponsor will make an assessment of the The reporting accountant’s rolecompany’s suitability for IPO and the contents of The reporting accountant is instructed to preparethe prospectus. As part of its responsibilities, the a number of reports. These either:sponsor is required to make a declaration to theUnited Kingdom Listing Authority (‘UKLA’) which l meet specific regulatory requirements; orcovers among other things: l assist the directors and sponsor in meeting their obligations.l whether the company has established appropriate financial reporting procedures As such, much of their work is based on accepted (‘FRP’) market practice and therefore results in reportsl that the directors of the company are that are not published. satisfied at the time of the IPO that the company will be able to meet its future The directors bear legal responsibility for the reporting obligations as a listed company contents of the prospectus and the sponsor facesl the directors’ basis for the working capital considerable reputational risk should it prove to statement. This statement declares that the be deficient. The due diligence process is company will have adequate financial designed to mitigate these risks and the work resources for its present requirements, carried out by the reporting accountant is covering at least 12 months from the date of therefore extensive. the prospectus. Making this assessment will form an important aspect of the IPO preparation.Key reports prepared by the reporting accountantLong form report Working capital reportA private due diligence report on significant aspects of the This is a private report that considers the basis for the working capitalbusiness – its exact scope will be determined by the company’s statement in the prospectus. This includes the company’s approach tocircumstances (see table on pages 47 and 48). financial forecasting, its projections underpinning the working capital statement, as well as analysis of the impact of changes in the key assumptions, and the available banking facilities. FRP report A business should be able to meet its reporting obligations as a Other reports public company and therefore consideration of FRP is critical in If a company includes either a profit forecast or pro forma financial determining its listing suitability. The report assesses information in the prospectus, an Accountant’s report on the the suitability of the company’s reporting procedures, and compilation of information must be included in the prospectus. While controls, as a basis for the directors to make judgements companies rarely choose to include a profit forecast, owing to the on the company’s financial position and its prospects. additional risk, cost and time involved, pro forma financial information is commonly used to illustrate the effect of the IPO, recentAccountant’s report transactions or a reorganisation that are not reflected in the historicalThe company’s historical financial record contained in the prospectus financial information. When a profit forecast is reported on, it is usualmust be reported on. While this can be achieved by audit opinions for the reporting accountant to prepare a detailed private report thatprovided for each set of financial statements included, market practice comments on the preparation of the forecast and the risks tois for an Accountant’s report to be issued on the entire financial its achievement.track record. This forms part of the prospectus and is equivalent The reporting accountant also provides a ‘comfort letter’ to theto an audit report, but provides greater flexibility as it does not need directors and sponsor to assist with the verification of otherto be issued by the same firm that issued a previous audit opinion. financial information in the prospectus.Page 46 Accounting requirements and advice
  • 46. The following sections explain what the various The table below illustrates the typical contents of areporting entails and how disruption to the long form report and some of the issues that it maycompany’s business and cost can be minimised need to address. These will be raised with thethrough appropriate preparation. company and sponsor as the work progresses for consideration and/or timely action, as appropriate.Long form report The scope of the report is tailored to theThis is an integral component of the IPO process. It requirements of each IPO and is agreed betweenis established practice in the UK, rather than a legal the reporting accountant, the company and theor regulatory requirement, for the report to be sponsor.prepared as part of the consideration of thecompany’s suitability to be admitted to a public The report’s extensive scope requiresmarket. While the report is not made publicly management to make a significant commitment ofavailable, it will influence the contents of the time and resources in order to provide theprospectus. necessary information and explanations. This coincides with competing demands on companyThe long form report is often prepared by the same resources arising from other aspects of the IPO,firm that audits the company’s accounts, but the and some of the same information will also bework is performed by personnel who are not part required by the other IPO advisers. Cooperationof the audit team. This is owing to the specialist between the various IPO advisers is required tonature of the work and the need to provide a more reduce the pressure on the management team.objective and independent view. Long form report contents Illustrative scope of work Illustrative due diligence issuesBusiness overview • markets and competition • size of the market, growth potential • sales strategy, sales organisation and resilience to market conditions • customers, contracts and pricing • supply constraints, regulatory, • products range, description, economic or technological issues development, life-cycle, revenue and • opportunities for further expansion contribution • key customer and supplier reliance • purchasing strategy, purchasing • historical development of the organisation, principal suppliers (and business (organic vs acquisition) associated purchases) • scalability of business • manufacturing strategy, facilities, • impact of related inter-company capacity and utilisation transactions and intended relationship • distribution post-IPO • premisesOrganisational • management committees • suitability of current managementstructure, • directors and senior executives structuresmanagement and biographies • whether management appearpersonnel • organisation of personnel department qualified and/or experienced to and responsibilities manage a UK-listed business • analysis of employees (eg part/full-time, • staff shortages in key areas function, remuneration) • pensions and other employment and post-employment benefits, share incentive, share option and profit-sharing schemesAccounting requirements and advice Page 47
  • 47. Long form report contents (continued) Illustrative scope of work Illustrative due diligence issuesFinancial • historical trading performance, including • the historical results may be impactedperformance analysis by business segments and by one-offs/non-recurring items, reasons for significant fluctuations provisions, acquisitions/disposals, • analysis of and commentary on changes in accounting ‘exceptional’ items policies/applications • adjusted EBITDA • drivers of year-on-year revenue and • current trading performance earnings growth • balance sheets at each year/period end • reliance on key products/geographies of significant trends and ‘on-balance • current trading performance/monthly sheet’ exposures run-rate may not support short-term • ‘off-balance sheet’ exposures and projections financing arrangements • overstated net assets or understated • cash flow performance liabilities (eg off-balance sheet items) • seasonality in working capital which might impact valuation requirements • cash conversion rateUK and overseas • status of agreement of tax filings and • tax compliance position may betaxation payments, details of any tax audits and substantially in arrears open correspondence with the tax • tax impact of any envisaged pre-IPO authorities restructuring work • impact of the IPO on the taxation • adequacy of tax balances in audited position balance sheet to cover the business’s • compliance with corporation tax, declared taxes, including deferred employment tax and sales tax taxes, and any additional tax liabilities regulations identified by due diligence • details of the provision for tax in the accountsAccounting • consistency of accounting policies and • inconsistent accounting policiespolicies and basis procedures applied over the periodof preparation • compliance of policies with GAAP/law • aggressive accounting policies, • alignment with industry practice and ‘best not in line with listed peers practice’ • significant differences between • impact of any proposed changes local country GAAP and IFRS • inappropriate allocation bases used to derive ‘carve-out’ numbers, separation/standalone costsInformation • significant information systems • core business applications andsystems • significant application and hardware related IT infrastructure may not support • support and maintenance procedures current/future business requirements • controls over systems development and • additional unplanned IT investment data file access may be required • recovery and back-up procedures • governance procedures may not be • IT personnel sufficient for a UK-listed business • IT strategy • separation of company from parent may create certain gaps • company may require transitional IT servicesPage 48 Accounting requirements and advice
  • 48. Long form report preparation tips an initial gap analysis performed at least 12 months prior to the IPO. This will be particularly important if l start planning early and in particular: the company has made acquisitions that need to be – identify information requirements that integrated. might not be straightforward, eg GAAP conversions, complex The reporting accountant will normally prepare a transactions, and related-party and private report commenting on the FRP and give an inter-company transactions opinion as to whether it considers that the – check the quality and consistency of procedures provide the directors with a reasonable information across all subsidiaries basis on which to make judgements concerning the l assign a project manager to deal with company’s financial position and prospects. The information requests. It may be focus on prospect management has become appropriate to hire additional resource increasingly important in recent years. l establish an electronic data room. This can be particularly beneficial when The work performed would not typically extend to information is being drawn from many testing the relevant controls or procedures. sources and locations and/or different However, identifying the key performance indicators advisers require access to the same (‘KPIs’) is critical. Once these are identified, the information reporting accountant will assess whether the l start the due diligence in advance of the procedures are capable of producing information for other IPO work streams. A draft report the KPIs on a timely and reliable basis. can be prepared and then updated for current trading later in the IPO process. An example scope of work for FRP includes, but is This reduces pressure on the company’s not limited to, the following areas: resources and provides a useful basis from which to draft the prospectus. l high-level financial controls (eg ‘tone from the top’, risk identification and management, internal audit function, board and itsFRP committees)Failure to make timely disclosure of financial and l design of internal controlsprice-sensitive information can damage a l budgeting and forecasting processescompany’s reputation and result in fines for both l treasury managementthe company and its directors. Significant emphasis l accounting policies and proceduresis therefore placed on a company’s FRP during the l management reporting frameworkIPO process, culminating in the sponsor’s l financial statement consolidation anddeclaration to the FSA that the company has reporting proceduresestablished procedures that are fit for purpose. The l IT general controls and application controlslack of appropriate FRP can result in postponement for production of key financial information.and, in some cases, abandoned flotations. Historical financial informationMost companies will need to improve their FRP, as Aside from a few specific exemptions (investment,it takes time to identify changes, and to design and mineral and scientific research-based companies)implement revised procedures. The key message is a company must be able to present financialthat FRP needs to be addressed early with, ideally, information covering at least three years.Accounting requirements and advice Page 49
  • 49. FRP – a separation case study The separation of a large energy business from its parent, and subsequent IPO onto the Main Market, involved the complex detachment of legal entities, assets, people, systems and shared/centrally- provided services. As the new entity had not previously operated as a standalone business, the design and implementation of new FRP was a priority. Ernst & Young identified the FRP gaps through an early readiness assessment and the following actions were undertaken: l A comprehensive separation plan was developed, which was led by a dedicated separation manager. The key areas covered were: – management and people – the scope of central services to be provided by the parent – shared and separated IT systems – contractual agreements – confidentiality considerations l An action plan was then developed to address the implementation required for new FRP relating to corporate governance, management and statutory reporting, preparation of IFRS management accounts, budgeting and forecasting. Ernst & Young’s readiness assessment and the resulting remediation plan enabled the company to avoid delays and unnecessary cost by ensuring its FRP were appropriate in advance of the IPO. The action plan also highlighted the additional expertise that the company would need to hire in order to implement the new FRP procedures successfully, particularly with regard to International Financial Reporting Standards (‘IFRS’).However, there are some additional, potentially Age of historical financial informationonerous, requirements that are considered below. The financial information for Premium Listings must be drawn up to date no more than six monthsReporting before the prospectus date. This could mean thatThe financial information must be reported on, full, audited financial statements are required to aneither by means of an audit report or, more interim date, with comparative information,typically, an Accountant’s report. The opinion in although the latter can be unaudited.each of these reports is essentially the same, butan Accountant’s report may require additional Interim information should be prepared and auditedwork. Whichever form of report is used, it should early in the IPO planning process, as failure to do sobe unqualified. Any audits must have been can cause a delay and incur additional costs.performed in accordance with auditing standardsaccepted in an EU member state or equivalent. If a company wishes to offer shares in the US to qualified investors under Rule 144A of the US Securities Act and the latest audited financial information is more than 135 days old, the auditorsPage 50 Accounting requirements and advice
  • 50. Achieving successful financial mean that its existing financial information does reporting not reach the 75 per cent threshold. To reach this threshold, additional pre-acquisition financial The regulators do not want any surprises and information for acquired companies will have to be want to know that companies can meet their presented separately. reporting requirements in a timely fashion. Listed companies must be able to respond This inevitably adds to the work of the finance quickly and effectively to the rigorous team and the reporting accountants, particularly information demands of a listing on the Main when the financial information in question has not Market. previously been audited or was prepared using different accounting policies from those of the Companies should: company. l conduct an early gap analysis of FRP l allow time to resolve gaps in key controls Accounting policies and financial information gathering At least the last two years of the financial l embed policies and procedures into the information must be prepared using the accounting business, including the effect of IFRS policies that will be used in the first set of audited l ensure that FRP are scalable, to support accounts post-listing. For EU-registered both existing processes and future growth companies preparing consolidated accounts, this plans. will mean accounts prepared under IFRS as adopted by the EU. Non-EU registered companies have greater flexibility, as they can also use certain other approved GAAPs.may need to review more recent, unpublishedfinancial information so that they can issue the Companies that do not already prepare accountsauditor’s comfort letter, required by the under IFRS should give advance consideration tounderwriters to the offering. the conversion. This can be very time-consuming and could impact the IPO story if the trading trackFinancial track record and transactions record changes significantly when looked atA minimum of 75 per cent of the company’s through a different accounting must be supported by a revenue-earningtrack record for the three-year period. Adopting IFRS will necessitate a change in internal reporting and may require new or different internalThe implications are that, even with this track controls that will also impact the FRP workstream.record, a company may still not be eligible forlisting, if, for example, its core activity has changed Working capital statementfundamentally during the three-year period or the The prospectus will include a working capitallevel of operations has increased exponentially. In statement that considers both internal and externalsuch cases, management should discuss the matter financial resources available to the issuer in order towith the FSA to determine whether the company meet its liabilities as they fall due. This statementwill be eligible for listing at the present time. cannot be qualified, or stated to be subject to assumptions, although the Listing Rules provideIf the company has made a significant acquisition potential concessions for certain regulatedin the three years leading up to the IPO, it may companies.Accounting requirements and advice Page 51
  • 51. The directors therefore need to be satisfied that To prepare the projections, the company needs to:the company has sufficient working capital tofinance its business plan and also sufficient margin l perform an analysis of its existing businessor headroom to cover a reasonable worst-case l consider the strategy and plans of thescenario. business, the related implementation risks and resultant uncertaintiesProjections l identify assumptions that address theTo prepare a working capital statement, the uncertainties, checking against externalcompany will make unpublished financial evidenceprojections and identify the key assumptions. The l include capital expenditure and otherprojections take the form of an internally resource requirements of the businessconsistent cash flow, profit and loss and balance l identify the financing facilities available andsheet, on a monthly basis. While the statement requiredonly covers 12 months after the proposed date of l perform sensitivity analysis to identify thelisting, the projections typically extend to at impact of changes in key assumptions.least 18 months. IFRS conversion – a case study The complexities of a pre-IPO IFRS conversion were heightened for a private equity-backed consumer product business by a significant overseas acquisition made 18 months prior to the float. When asked after the successful IPO what he would have done differently, the company’s CFO stated that he would have started much earlier on the preparation of the IFRS historical financial information. His first challenge related to IFRS conversion. Issues arising included: l accounting for hedges and other financial instruments and, in particular, issues around demonstrating the effectiveness of hedge instruments for accounting purposes and valuations l fair value accounting and valuations for the intangible assets arising on the acquisitions made during the three years included in the track record l segmental reporting requirements l deferred taxation changes. The second challenge related to the overseas acquisition. The requirement in the Listing Rules for 75 per cent of the business to be supported by a historic revenue-earning record, meant that separate historic financial information had to be included for the overseas acquisition. At the IPO date, this made up more than one-third of the group’s business. The acquisition had not previously been subject to a full audit and its accounts were not prepared under IFRS. As a result, significant lead time was required by Ernst & Young to complete this process for the pre-acquisition period. In addition to preparing the historical financial information under IFRS, the team had to build the new accounting policies into the ongoing management reporting and forecasting processes. This also took significant time and effort to complete, but was essential for the company to operate on the same metrics used by market participants.Page 52 Accounting requirements and advice
  • 52. Finance facilities Working capital reportIn making a working capital statement, the company The reporting accountant will then prepare amay only include facilities to which it has secured private report* commenting on the:access at the time of making the statement. Thismeans that committed bank facilities (for the l preparation of the projectionsperiod they are committed) and the proceeds of an l assumptionsoffering (if they are either fully underwritten, or, in l accuracy of the previous forecastingthe case of a placing, firmly placed) can be taken l availability of financinginto account when making the statement. l restrictions on cash movements within the groupThe company should also consider projected l sensitivity analysiscompliance with any loan covenants (including l the directors’ basis for making the workingunder the sensitivity analysis, unless there are capital statement.mitigating actions) and the borrowing limits in its * There are additional requirements in place for mineral companies that have not been producingArticles of Association. on a commercial scale for the previous three years. Tax considerations Structure Float process l holding company location l availability of tax information and in-house l personal holding structure – 50 per cent tax tax resources rate, capital vs income l project management and coordination of tax l rollover/cash out of existing debt and equity structure, tax disclosure for long form, short structure, including share options form, working capital report, funds flows etc l tax clearances and transaction taxes (eg l likely UK GAAP to IFRS adjustments stamp duty) Tax status Post-float l ensure all tax filings and payments are up to l tax resource requirements date l post-close tax filings and payments l look to resolve any open items with the l ongoing tax compliance, planning and relevant tax authorities reporting l review the approach taken to any other areas l securing tax upsides of tax uncertainty l securing tax assets l tax assets (eg unprovided deferred tax l management of structure and optimising tax assets) profileAccounting requirements and advice Page 53
  • 53. Tax structuring – a case study Tax structuring Companies seeking admission to the Main Market Ernst & Young carried out a tax readiness review should consider their tax structure prior to listing, for a large private mining group in order to and in particular the location of key management. identify potential tax issues (and opportunities) A structure should be implemented that closely in preparation for its listing on the Main Market. aligns with the commercial and operational The determination of the tax residence of the management structure of the group to be listed, so parent company was identified as a key issue. it can be effectively managed in the future. Key management individuals were personally tax It is essential that management understands the resident in a number of jurisdictions, so the effect of the decisions taken about the IPO on structure was assessed in detail to ascertain future tax rates and the tax position of existing what was practical for the group, recognising investors. Failure to prepare early may constrain implementation issues. The most practicable the flexibility of management’s decision-making solution was a bespoke tax structure that aligned closer to the IPO event and may also create with the company’s commercial strategy. additional burdens on management’s time during the challenging later phases of preparation. If this issue had not been identified well in advance of the planned IPO, the potential and A range of potential tax implications should be significant tax consequences would have, at considered in order to determine the future optimal best, resulted in an additional tax charge; at structure. These are highlighted in the table on worst, a delay to the IPO process. page 53. In order to ensure that the structure was Overseas companies managed in a way expected of a company with Overseas companies thinking of listing in London a Premium Listing on the Exchange, new will need to be aware of the implications of procedures were needed for corporate becoming UK tax-resident and how appropriate governance, the physical location of key structuring and good governance can preserve management activities and the commercial non-resident status. structure of the entity to be listed. A UK listing does not automatically place the As the design, implementation and management business within the UK tax net if it comes through of tax residence were demanding matters, there an overseas holding company. was a risk that they would occupy significant management time. However, the process went Overseas companies with a free float of less than 50 smoothly because the issues had been per cent are not eligible for inclusion in the FTSE UK identified and acted upon early. Consequently, index series (see chapter ‘London: a unique much of the implementation of the tax investment opportunity’). Companies in this position structuring work had been completed in therefore tend to use a UK-incorporated company as advance of the IPO and management were not the listing vehicle. tied up in dealing with these matters during the key IPO execution phase. However, a successful challenge by the UK tax authorities on the parent company’s tax residence can result in profits of overseas subsidiaries beingPage 54 Accounting requirements and advice
  • 54. brought into the UK tax net under existing orfuture controlled foreign company rules. The UK Implications of an IPO on employeetax authorities increasingly look at a group’s remuneration and incentivestransfer pricing policies as a further way ofbringing additional tax income into the UK. Pay structures in public companies differ significantly to those in private companies andPersonal tax factors and employee incentives come under a great deal more scrutiny fromUK tax rates are, at the time of writing, high and non-executive directors, external regulators andcareful structuring of remuneration and investor bodies.shareholdings is crucial to protect employees’ taxposition and avoid incurring higher company costs Companies planning for an IPO should consider:(eg tax and social security). Appropriate taxstructuring though can result in a more effective l the quantum of pay, bonuses and structureand motivational reward package. of any share incentive schemes. Salary benchmarking is required to ensure theseBecoming a listed company also provides are in line with comparable listedopportunities, through shares, to incentivise a businesses and market practicemuch wider group of employees. A range of l ensure institutions are comfortable withpossible plans are available for executives and all level of dilution of pre- and post-IPO equityemployees, some with specific tax breaks incentives, usually requiring shareholderapproved by HM Revenue & Customs. approval on admission l early indication and communication toThe implications of an IPO on employee investors of any likely charge goingremuneration and incentives are summarised in the through the income statementtable opposite. l appropriate performance targets post-IPO l ensure as far as possible thatOngoing obligations post-IPO remuneration and incentives are deliveredOnce the IPO has been completed and the in the most tax-efficient manner whilstcompany has been admitted to the Main Market, a being aware of the attitudes of investors inlisted company will be subject to a number of this regardreporting obligations. These include: l ‘lock-in’ arrangements are likely to apply to management shareholders, in order to helpReport and accounts retain key management, which is key tol audited annual report and accounts must be the value of the business from an investor published within four months of the year-end perspective and include corporate governance disclosures l the remuneration committee will set payl unaudited figures must be prepared for the design and levels for executives half-year within two months of the half-year l current management shareholdings end investments and options will be impactedl interim management statements during each by any restructuring of the group of the first and second halves of the year. pre-listing and tax advice should be revisited as part of the listing process.Accounting requirements and advice Page 55
  • 55. Disclosure of price-sensitive information A shareholder circular, and approval, is alsol the company must make a prompt required for transactions with ‘related parties’ that announcement in connection with any exceed 5 per cent of any of the class tests. price-sensitive information.Transaction and document disclosure A business transformation processl many types of transactions have to be As this chapter shows, the work of the reporting disclosed to the market and some require accountant is extensive. It has to be performed at a shareholder approval. detailed level to satisfy the regulatory requirements and to provide the directors of the company and theAcquisitions and disposals post-IPO sponsor with the comfort they need. Providing allTransactions by Premium Listed companies are the information mandated by reportingsubject to ‘class tests’ that compare the size of requirements presents an onerous task tothe potential target to the listed company’s management. The burden will be particularly heavyexisting business, based on a number of financial on the finance team, who will already be subject tomeasures. A proposed transaction that exceeds competing demands from other parties involved inthe 25 per cent class test would be conditional the listing process. The reporting accountant canupon shareholder approval. Additionally, if the assist with many aspects where help is required, but100 per cent threshold is breached, the company are precluded from some for independence reasons,enlarged by the acquired entity would need to so management should consider employingreapply for listing. The class tests are based on: additional temporary resources.l gross assets The key message that should come through froml profit before tax this chapter is the need to start this process early.l gross capital The earlier that management starts to identify thel consideration: market capitalisation. gaps in their company’s IPO readiness, the sooner they can address the tasks required to fill them.These requirements could introduce an element of Those companies that start to behave like a publicuncertainty into a transaction, potentially affecting company before they list, will find their newthe company’s competitiveness in an auction environment post-IPO very much easier toprocess. Additional costs are added with these navigate. For these reasons, it is essential to viewrequirements, including the need to provide a an IPO as part of a business transformationcircular to shareholders to enable them to reach a process, rather than seeing it as a standalonedecision. The company would need to appoint a transaction.sponsor to provide declarations to the FSAconcerning the transaction and reports will also berequired from a reporting accountant.Think and operate like a listed company pre-IPO. Early preparation is everything.Page 56 Accounting requirements and advice
  • 56. Generating and capturing investor demand during an IPO Christopher Smith and Alex Bloch UBS Investment Bank
  • 57. Market-leading capabilities and the extra mile. Your IPO marks the beginning of a new chapter for your business. With UBS, you’ll have one of the most experienced, highly-regarded teams in Europe working with you every step of the way, providing detailed analysis, sound judgement and guidance to ensure that the process meets your objectives and is smooth and successful. We are chosen as trusted advisers by hundreds of companies from around the world and our market-leading equities franchise delivers exceptional access to high quality investors. You can be confident that we’ll put the full strength and depth of our resources to work for you. Start your journey with us. Visit Best Pan-European Equity House Thomson Reuters Extel 2001-2010 Contact us John Woolland +44-20-7568 2336 Christopher Smith +44-20-7568 4389© UBS 2010. All rights reserved.
  • 58. Generating and capturing investor demandduring an IPOFrom a capital markets perspective, there are three investment horizon will be less influenced bymain objectives of an initial public offering (‘IPO’): short-term trading considerations and are more likely to help the company achieve itsl to raise sufficient proceeds for the company future ambitions and/or for the selling shareholders l the ability to invest further in the after-l to optimise the price at which shares are sold market – the IPO should not be seen as the (this is important both for selling shareholders end of the investment process and certain and to minimise the dilution impact of new shareholders will look to increase their money being raised for the company) holdings in the company after the IPO. Suchl to provide the company with a strong investors lend important support to the stock shareholder base for its future development. in the after-market l the ability to act quickly and participate inThe objectives of the IPO future equity raisings and/or sell-downs –In this chapter, we explore the process used to the company may have requirements to raisemaximise investor interest and demand for an IPO additional equity at some point after the IPOon the Main Market, as this is critical in raising (eg in connection with an acquisition) or thereadequate funds for the company and the overall may be further sell-downs by existingsuccess of the transaction. There can sometimes shareholders. These transactions are likely tobe a conflict between maximising the price at be best facilitated if the company’s largestwhich the shares are offered and optimising the shareholders are able to react quickly and areshareholder base for the company’s future. Whilst likely to be supportive.the ideal result would be an IPO which is pricedhighly with a very strong, long-term investor base, The overall goal of the IPO should therefore be tothere is sometimes a degree of trade-off. To inform achieve transaction success whilst maximising thethat debate, companies should build-up an quality of the share register with which theunderstanding of the characteristics of different company begins life as a public company on thepotential shareholders as the make-up of the Main Market.register post-IPO is critical to the after-market andthe company’s ability to access the equity market Appointing a syndicate to manage the offeringin the future. Below is a list of some of the key In addition to the sponsor, who is responsible forinvestor qualities one should look for when advising the issuer on all market and regulatoryestablishing a strong shareholder base issues and for representing to the FSA that thethrough an IPO: issuer has met its responsibilities, a bank/broker or number of such institutions will be appointed tol a strong understanding of the company’s market the offering to investors. It is typical for the equity story and its positioning – it is sponsor to have a dual-role and also perform this important that a company’s shareholders function, but this need not necessarily be the case. should thoroughly grasp its investment case. For certain IPOs, it may be appropriate to have a Focusing the marketing process on investors single bank or broker performing the marketing role, who are thought leaders and highly but for larger transactions it is common to see a experienced will make this a more likely number of banks or brokers appointed. Such banks outcome or brokers are often called ‘bookrunners’ becausel the ability to maintain a shareholding over they are responsible for running the order book of the long term – investors with a long-term demand which is built during the marketing process.Generating and capturing investor demand Page 59
  • 59. Average number of bookrunners in a syndicate(IPOs on the London Stock Exchange since 2000) 3.0 2.5 Average number of bookrunners 2.0 1.5 1.0 0.5 0.0 < £50m £50m - £100m £100m - £300m £300m - £500m £500m - £1,000m > £1,000m Size of IPOThe two important questions relating to this topic ‘Exchange’) of different sizes since 2000). It maywhich face any company considering an IPO are: help companies to decide on the optimum number of bookrunners required.(i) how many bookrunners should be appointed to handle the offering, and In order to select the right bookrunners for the(ii) which are the right bookrunners IPO, many companies and their shareholders will for the IPO? invite a number of potential candidates to a formal ‘beauty parade’ (so that they can hear the views ofWhilst increasing the number of bookrunners each and make an informed decision on the backinvolved in the IPO will increase the syndicate’s of that information). This process has becomepotential marketing ‘reach’ with investors, there is more common in recent years and is well advisedlikely to be an optimal syndicate size for a given for any company considering an IPO. In certaindeal. Beyond this, the additional marketing ‘reach’ circumstances, an independent adviser may beof an extra bookrunner will be outweighed by the hired to assist in the process of selectingadditional complexities of involving another bank or bookrunners for the in the process. The chart above illustratesthe average number of bookrunners in a syndicate Some of the criteria that can be used to assess(for IPOs on the London Stock Exchange (the the candidates are listed below, but this should notPage 60 Generating and capturing investor demand
  • 60. be considered prescriptive and each company will assets using long-only strategies on behalf of bothlook for different qualities in its IPO bookrunners: institutional and retail clients.l quality of project team and commitment UK long-only investors manage equity assetsl relevant credentials and distribution representing approximately 45-50 per cent of the capabilities total UK market and are therefore of paramountl quality of research analyst and market importance to any company seeking to raise equity credibility capital in the UK. Many of these investors will onlyl industry knowledge, understanding of the have a mandate to invest in UK equities. In most issuer and its equity story IPOs on the Exchange, UK long-only investors arel ability to support the issuer in the after- the single biggest provider of demand. marketl views on valuation and positioning International investorsl proposed level of fees There is often a grey area between what might bel company’s relationship/rapport with the considered a UK investor and an international adviser. investor. A number of global investment institutions will have offices in London, some ofThe investor universe for a UK IPO which may only invest in the UK, making theThe bookrunners will be able to advise the issuer distinction even less clear. However one treatson the specific characteristics of individual international investors with offices in London,investors but an understanding of the target there is also a separate class of investors that onlyinvestor community and its different constituents operate out of offices overseas. The mostwill assist the management team to prepare itself important regions for UK IPOs have tended to beproperly for the marketing process. We set out the US and Europe and it is common forbelow general comments on the main investor companies to market their offerings in both regionsgroups for a UK IPO although in practice the lines (this is something that needs to be reviewed bybetween the long-only and hedge fund investors is the legal advisers as it impacts the due diligenceblurred. Many long-only investors have in-house exercise and the offering documentation).hedge funds and many hedge funds run long-onlyfunds and have long investment horizons and Many of those non-UK investors that arerigorous, research-based investment processes. interested in UK equities have a mandate to invest only outside of their domestic region and, inUK ‘long-only’ institutions certain cases, they may be running funds thatThe term ‘long-only’ is used to refer to investors solely invest in the UK or Europe. These types ofthat only take long positions in securities. A long fund managers are often as well-versed in UKposition is one which generates a return to the equities as domestic, long-only institutions andinvestor if the share price increases. Long-only they form an important pool of additional demandinvestors are typically traditional institutions that for IPOs on the London Stock Exchange.are seeking to generate a return on theirinvestments over a relatively longer time horizon Sector specialiststhan certain other market participants. Such While most investors will be interested ininvestors include pension funds, insurance companies in a variety of industries, somecompanies, investment trusts and mutual funds. investors are sector specialists that will only investThey include investment advisers who manage in certain sectors. This specialism can sometimesGenerating and capturing investor demand Page 61
  • 61. be at an institutional level, but is more common at The marketing processa fund level. So, for example, within some of the The marketing of an IPO can be divided into alargest asset managers, there may be certain number of stages, not all of which are equallyfunds dedicated explicitly to investing in mining public in their nature. The process described incompanies. Other sectors which lend themselves this section is a common one, but slightto specialist funds include real estate, financials modifications to it will be made in someand technology. For companies in these sectors instances.considering an IPO, it is critical to tap into thisadditional pool of demand and in-depth Syndicate analyst research and theunderstanding during the marketing process. process to publication Outside of the IPO process, investment banksHedge funds employ research analysts to monitor theHedge funds are investment vehicles which performance of different companies that theyexplicitly pursue absolute returns on their ‘cover’ in a certain sector and to make investmentinvestments. While long-only investors target recommendations to their investor clients on thoseoutperformance relative to their benchmark stocks. In most IPOs, the bookrunners’ researchindices, hedge funds target positive returns to analysts will write detailed research notes on thetheir investors, irrespective of the wider market company in order to educate investors before thebackdrop. Such funds are able to employ company’s management markets the transaction.strategies that allow them to generate positive The company’s management team typicallyreturns when security prices are falling. The term presents to the syndicate analysts early on in the‘hedge fund’ has come to incorporate any absolute preparatory process. This ensures that they havereturn fund applying non-traditional portfolio sufficient background information andmanagement techniques (including shorting, understanding of the company and its prospects toleveraging, arbitrage, the use of derivatives write a research note.and so on). This is an important part of the preparatoryThese funds have become increasingly significant process for the IPO. Ensuring that the analystsin the market place. Whilst historically there has properly understand the company’s businessbeen scepticism about their motivations among model and prospects is critical to ensuring that thesome corporates, it is important to note that a investors have a good grasp of this before meetingnumber of these funds are extremely long-term in management. Whilst investors carry out their owntheir focus. Indeed, many of the most detailed analysis ahead of making an investmentsophisticated asset managers in the investor decision, the work, forecasts and views of thecommunity are now employed in such institutions. syndicate analysts will be important in informingFurthermore, the distinction between long-only investors’ opinions. As such, it is essential for theinstitutions and hedge funds is getting company’s equity story to be effectively conveyedincreasingly less clear, as many investment to the syndicate analysts in this presentation.advisers now manage funds which employ bothtypes of strategy. Lastly, these types of investors The analysts will have a period of one to twocan provide a significant amount of demand and months to write their research note. During thatliquidity in an IPO and will always form some time, they will be in regular dialogue withcomponent of the final representatives of the company (including thebook of demand. CFO) to have their questions on the businessPage 62 Generating and capturing investor demand
  • 62. addressed. Draft research notes will be submitted This day marks the beginning of what is usually ato the company and the lawyers for a review of two-week process of investor education.their factual accuracy. The research note will needto be completed by the time the company issues Investor educationits ‘Announcement of Intention to Float’ as at that Investor education is the process through whichstage the analysts will begin a process of investor the market is educated about the company and itseducation, which is described further below. investment case. This is carried out by the research analysts of the various syndicate banks,Initial meetings with potential investors together with their equity sales forces. Equity(‘pilot fishing’) salespeople are individuals at an investment bankThis exercise is one part of the marketing process who are responsible for discussing investmentwhich certainly does vary from deal to deal. The ideas with the bank’s investor clients. Theypurpose of carrying out ‘pilot fishing’ meetings leverage the work of the research department inwith investors is to introduce the company to them these client conversations.before the transaction is publicly launched so as toobtain feedback on how the market will assess and In the IPO process, it will be common for thevalue the company. Such meetings also help to equity salespeople to book a series of investorbuild relations with potential key investors early meetings in different regions.These provide theon. However, they are not always carried out and research analysts with an opportunity to educatemay not be required if the company has a simple their institutional clients about the model with known, listed peers and Feedback from the meetings will be collated by thelimited valuation outturns. To the extent that such analyst, the salesperson responsible for that clientmeetings are held, they would be organised by the and by the equity capital markets teams. Thebookrunners and limited to a very small number of feedback is used to refine the company’s thinkinginvestors so as to maintain the transaction’s on and presentation of the investment case in itsconfidentiality. subsequent meetings. This is also the point in the marketing process when meaningful conversationsAnnouncing the intention to float about valuation begin to be held with investors.The announcement of the intention to float is the Ultimately, the feedback from this exercise needsformal start of the public marketing exercise. The to be used to set a price range for the shares thatcontent of this announcement should be carefully will be offered in the IPO.considered because it is likely to include a summaryof the company’s investment case and information Management roadshowon the offering, potentially including its size (though The final stage in the marketing process is also thethat may still be undetermined at this stage). most important. During this stage the management team (typically the CEO and CFO) will meet with aIt is usual for a number of meetings to be held with significant number of investors (usually over a two-the media on the day the announcement is week period) to explain the business, thereleased. This ensures the most positive media investment case and the rationale for the IPO.reaction to the company and the IPO. Depending on the size of the transaction and the legal restrictions around the offering, this roadshowOn the same day, the bookrunners (and any other will take place in a number of regions. For largerbanks in the syndicate which have written IPOs, it is common for the management team toresearch) will publish their notes on the company. hold meetings in the UK, Europe and the US. InGenerating and capturing investor demand Page 63
  • 63. certain instances there will be more than one team and even analysts, but there are a number ofof presenters attending these investor meetings. common methodologies which are often applied. In many cases, these methodologies will be similar toAlmost all investors will want to have spent some those used by the analysts to value the company’stime with management before committing any listed peers. Examples of the techniques usedmeaningful amount of capital. These meetings are include applying the multiples at which the listedtherefore fundamental to the entire process. The peers trade (or potentially a premium or discountanalysts will have educated the market on the to those multiples depending on the company’scompany and the investment case, but it will investment case); using a discounted cash flowultimately be the management of the company that analysis, or using a valuation of the group’smust ‘sell’ its equity story to the investors. This is individual businesses to arrive at a combined ‘sum-crucial for encouraging them to participate in the of-the-parts’ valuation.offering at an attractive valuation for the company. Throughout the process of investor education,Pricing the offer the bookrunners’ analysts and salespeople willParticipating in an IPO is an investment decision. discuss the valuation range contained in theInvestors first need to establish whether they research note with investors and this will allow‘believe’ in the investment case before deciding the bookrunners to assess the market’s reactionhow much they are prepared to pay to buy the to that valuation. Investors, at this stage, will stillshares being offered. Since there will be no public not have met management and some may still bemarket value for the business to inform them of familiarising themselves with the business model,the ‘right price’, their challenge is to establish so these initial discussions should be interpretedwhat that public market value should be. The accordingly. In many cases, there will be scopeexisting shareholders will be looking to maximise for the investor’s valuation to increase fromthe valuation of the business, either to minimise this point.their dilution or to maximise the proceeds of anyshares they sell (or both). Having said that, Setting the price rangeexisting shareholders and the company itself will At the end of the investor education exercise, theknow that it is also important to establish a strong bookrunners, the company and its existing(but not excessive) share price performance in the shareholders will discuss the feedback from theafter-market. There are therefore a number of investors meetings and agree a price range withindynamics which impact the pricing process and which the offering will be marketed. In certainmanaging these is one of the key roles of the cases (especially fund offerings), the IPO will be atbookrunners on the IPO. The process of pricing an a fixed price, but for most corporates a price rangeIPO involves a number of stages – discussed in will be used.detail below. The price range is used to generate a competitiveSyndicate analyst research valuation range auction for the shares to ensure that pricing isThe research reports written by the syndicate maximised, subject to having a stable after-analysts will typically each include a valuation market. There are different strategies for setting arange. These ranges will be the market’s first price range, but the ‘textbook’ approach is to setpublic attempt at putting a value on the company’s the bottom of the range where there is broad ‘buy-equity. The methodology used to value the in’ from the investor community. This allows thecompany will vary between companies, sectors bookrunners to generate sufficient demand to ‘getPage 64 Generating and capturing investor demand
  • 64. the book covered’ (ie have demand for all the short discussion – in the ideal scenario, the bookshares being offered) quickly. From this point on, will be many times covered by high-qualitycompetitive tension between buyers can be investors at the top of the range. However, there isestablished to increase the price. If there is no often a balance to be sought between price and‘hook’ at the bottom of the range, there is a risk of quality of investors. The debate will be aboutinsufficient momentum, which potentially means where to set the IPO price so that proceeds tothat the book might not be covered. sellers are maximised and/or dilution minimised, consistent with providing the company with aTypically, the price range is set before the strong shareholder register and stable after-management begin their roadshow, but in certain market performance. Having agreed on the price,circumstances it may be appropriate to delay the the bookrunners and the company will then agreesetting of the range by a few days. This both on the allocation of the shares and thesereduces the period of ‘market risk’ and can allow allocations will be confirmed to the investors thefor a higher and tighter price range, if early following morning, before the shares begin from the management meetingsis highly positive. The after-marketBuilding the book of demand Typical trading patterns post IPOOnce the price range has been set, the It is common after an IPO to see some turnover inbookrunners begin taking orders from investors. the shares in the first few days. Certain investorsThis process allows the bookrunners to build a book may be looking to buy more stock whilst othersof demand, showing how much demand there is for who have participated may trim their exposure.the shares being offered at different prices. The The average volume of shares traded in the firstsystem is electronic and pooled between the day post the IPO is 23 per cent of the sharesbookrunners to give the company and each offered in the transaction (based on IPOs on thebookrunner a view of the combined demand London Stock Exchange over the last five years).generated. This process of bookbuilding lasts for This number increases to 34 per cent for the firstthe full duration of the management roadshow. week post-IPO. Over time, trading will settle downOrders can come in various styles – some investors and come more into line with the typical levelsmay put a price limit on their order (ie a cap on the seen elsewhere in the secondary market.amount they are willing to pay such that they haveno demand above that price), others may give an Stabilisationunlimited order and some will give stepped orders Because there is a heightened sensitivity to thethroughout the price range (ie giving precise share price performance immediately post-IPO,amounts of demand at different prices). regulators internationally permit one of the bookrunners to support the share price in theSetting the offer price and after-market (‘stabilisation’) through buying sharesallocating the shares in the open market. In the UK, such stabilisation isAt the end of the bookbuilding process and only permitted for a period of 30 days and themanagement roadshow, the time will come to set bookrunner selected to carry out this activity isthe price of the shares in the offering. A meeting only allowed to buy stock in the market if theto agree that price will be held with the shares are trading below the issue price in the IPO,bookrunners, the company and certain of the and only for the express purpose of supporting theexisting shareholders. Sometimes this will be a share price.Generating and capturing investor demand Page 65
  • 65. To allow the stabilisation process to occur, the the development of key messages and how theybookrunners initially over-allot shares in the IPO are best communicated to the market. Their role(up to a maximum of 15 per cent of the total includes capital markets and corporatenumber of ordinary shares which comprise the transactions advice and strategic non-transactionbase offer in the UK). The proceeds from this over- advice such as dialogue on the company’sallotment may then be used to buy back up to that investment case, being a sounding board on keynumber of over-allotted shares if stabilisation is strategic issues (strategy, capital structure andrequired. By way of example, if the offer has been dividend policy) and providing support around keyset at 100 shares, the bookrunners may actually investor events. The corporate broker will alsosell, say, 115 shares to investors. They would provide its clients with relevant market intelligenceborrow 15 shares from an existing shareholder to such as share price movements, trading strategies,deliver to new investors at the time of the IPO. If key market themes and macroeconomic events. Inthe share price drops below the IPO issue price, addition, a corporate broker will carry out investorthe stabilisation bookrunner may elect to buy up to targeting exercises, organise investor meetings15 shares and return these shares to the original and collate feedback from investors.owner. If the shares trade above the IPO issueprice, no stabilisation will be carried out and the It is usual that the banks or brokers selected forproceeds of the sale of the over-allotted shares will this role will be some or all of those that acted asbe paid to the original owner. bookrunners in the IPO. In many ways, they should be the firms that best understand theThe ongoing role of the corporate broker company’s investment case and are thereforeThe IPO is the beginning of the company’s life as a best-placed to present that to the rest of thelisted entity. A critical component of that life is market on an ongoing basis. In order to performmanaging the company’s relations with the market the role well, the corporate broker must be– with research analysts, investors, the London thought of as a ‘trusted adviser’ by the companyStock Exchange, the regulators, the media and so and this is the relationship that is best forgedon. Whilst the company’s corporate broker will be from the outset of the IPO process.responsible for advising the company on regulatoryaspects, the broker will also be an important Other IPO considerations‘voice’ for the company and will act as thecompany’s eyes and ears in the market. Retail offerings In some instances, the company or its existingThe corporate broker’s research analyst will shareholders may wish to make the offeringdisseminate the company’s equity story widely to available to the general public, or to a subset ofmaximise the investor following and understanding it – the company’s customers, for instance. Theseof the story in the market. The salespeople will offers were a common feature of governmentensure the message is disseminated to a privatisations. In most cases, the public willgeneralist audience as well as to the sector participate on the same terms as the institutionalspecialists who will also be the focus of the investors. Sometimes a discount or other rewardresearch analyst. is given to encourage public participation. Retail demand can be meaningful in IPOs of certainThe corporate broking professionals at the firm will types of companies. It is most applicable whereadvise the company on all aspects of the the company has a strong brand presence andcompany’s interaction with the market, including level of customer loyalty. A retail offer can bePage 66 Generating and capturing investor demand
  • 66. made as an offering to the public, through public Summaryapplication forms (which has certain technical The Exchange provides an excellent platform forimplications on the timetable and documentation), marketing any IPO. Optimising the marketingor as an intermediaries’ offering which is made exercise is critical to the IPOs success and willavailable to clients of private client brokers only. ultimately impact the valuation achieved for the company and its shareholders. This exerciseEmployee offerings needs to be carefully designed by theThese are similar to the above, but are only made bookrunners to achieve the objectives of raisingavailable to the company’s employees. They are sufficient proceeds for the company or itsrelatively simple to execute and facilitate increased shareholders, optimising the price at which sharesemployee ownership of the business – often a are issued and establishing a strong sharepositive for the company and its staff. If this is register for the companys future.being considered, it is important to ensure that theappropriate legal steps have been taken where the The key areas to focus on, as discussed in detailemployee base is international as this can in this chapter, are as follows:constitute an offering into other jurisdictions(giving rise to regulatory implications). l ensuring the right bookrunners are appointed to market the offeringAdditional considerations for l positioning the investment case in a wayinternational issuers which effectively demonstrates theThe Exchange is a popular listing venue amongst attractions to equity investorsinternational issuers. Being incorporated outside l meeting enough and the right type ofthe UK is typically not an issue from a marketing investors on the management roadshow; andperspective. It may, however, encourage the l setting the price range to generatebookrunners to adjust the regions in which the momentum and a successful bookbuildinginvestor education and management roadshow are exercise.carried out to reflect potential investment interestfrom the company’s home country. Aside from this, Getting these critical points right is the key toand certain technical considerations around achieving a successful listing on the Main Marketensuring that the company is eligible for FTSE of the Exchange.index inclusion, there are limited differences tothe marketing process on an IPO of a UKincorporated company and an international issueron the Exchange.Generating and capturing investor demand Page 67
  • 67. Managing the company’s profile Andy Berry Fishburn Hedges
  • 68. ! !! ! !
  • 69. Managing the company’s profileFor companies looking to join the Main Market and In this chapter we explain why goodbegin the flotation process, corporate communications are instrumental in achieving acommunications can be an important and valuable successful IPO and how a well-constructed PRtool. An ongoing PR programme is fundamental to campaign can add value to your propositionestablishing and maintaining a company’s profile through building and maintaining reputation. Thisand is a key component to ensuring a successful runs from the preparation stages of defining yourflotation. objectives and understanding your audiences, through to executing an effective strategy withinJoining the Main Market offers considerable the confines of the IPO timetable. We also look atbenefits to companies. Gaining access to capital to life beyond the IPO and how communications,fund business growth and an enhanced international done well, can help you maintain the valuation yourprofile are key advantages. So, too, are offering a company currency for acquisitions and the staffmotivation that a listing encourages. But in order to Your communications objectivesrealise the full potential of these benefits, thepositioning of your business is important. Investors Set your objectives early onare selective and will look to invest in those It is critical that communications objectives are setcompanies with a strong and well-established from the start of the IPO process. Of course, it iscorporate reputation. As a company you will need to important to be flexible, but you will need a clearbe transparent, committed to building long-term plan to follow, and it is vital that yourvalue for both customers and shareholders and communications objectives dovetail with yourbecome an active member of and contributor to the overall strategy. At the core of this is the need to:communities to which you belong. l build a strong, credible story – introduceReputation adds value management to stakeholders and explain whySo, does reputation have value for a company? the company is a ‘must have’ investmentAbsolutely. Reputation is intrinsically valuable and opportunitycan set companies apart from their competitors.That might mean the difference between a high and Checklist for a successful IPOmodest valuation, or – in tougher times – between asuccessful market debut and a failed issue. l define key overall objectives – maximise advantages and minimise risksIt should also be recognised that, following the l preparation is paramount – build value inglobal financial crisis, the world is markedly advance to attract the investors you wantdifferent. In the UK, for example, an already cynical l set long-term expectations – a successful IPOmedia industry is now only too ready to voice strong is the starting point, not the finishing lineopinions about companies that stand out for the l be ready to communicate in a clear, effectivewrong reasons. There is also a growing view in many and transparent manner.quarters that companies do not just exist to createvalue for shareholders: they must also demonstrate And don’t forget…that they serve the interests of a wider group ofstakeholders, which includes employees, analysts, l work towards the good times, but preparepotential investors, the media and the community in for the worst – you must have a crisiswhich the company operates. communications plan.Managing the company’s profile Page 71
  • 70. l build the relationships that matter – ensure interests of each group will allow you to run your you have a ‘fan-club’ ready to support you communications strategy smoothly.l position the IPO as a stage in the company’s development, not as an end in itself. A strong public relations campaign is central to any flotation, particularly in an environment where manyBe prepared established norms are changing. It is important toAs part of ensuring that the IPO runs smoothly, it understand the evolving media landscape andis necessary to prepare for unexpected events that consider how different forms of media can help youhave the potential to impact negatively on the communicate with your stakeholders. Traditionalprocess. You should have a crisis plan in place to print media has gone digital with specific onlinedeal with any issues that arise, whether concerning coverage, podcasts and vodcasts; digital-onlythe IPO itself or from an operational perspective. publications have sprung up; and social media and user-generated content have exploded. In addition,Audiences and stakeholders: who are you we now have citizen journalism, where anyone withtalking to? a mobile phone can report on a story and share their views with a wide audience. (see ‘Identifying yourUnderstand your audiences audience’ chart on the next page).In order to achieve your objectives, it is importantto identify who your different audiences are, as Coordinating the communications strategywell as understanding their needs, objectives and – In the past, PR was often seen as an added extra,crucially – how they interact with each other. bolted on towards the end of the IPO process shortly before the official ‘go live’ date. ThisThe IPO will be one of your company’s most inevitably meant that external communicationsnewsworthy events, and this news will be of interest were secondary to the rest of the IPO activity. Butto a wide range of stakeholders including media, the increased scrutiny of quoted companiesinvestors, analysts, employees, trade unions, trade brought about by the financial crisis means thatassociations, customers, partners, regulators, this is at best ill advised, and at worst potentiallygovernment and a variety of opinion formers. These damaging to the entire IPO process.stakeholders form a complex matrix, informing eachother and shaping the response to your IPO. The Start your PR earlystructure of this network means that public market For this reason, PR considerations should betransactions can face a much higher level of worked into the overall strategic plan right fromscrutiny now than in the past few years, and you the beginning of the IPO process. Indeed, it isneed to be prepared for this. better to think of PR around the IPO as part of your overall communications strategy and not as aWhile communication across all stakeholder one-off project – just as the IPO itself should begroups must be consistent, it is also important to seen as an integral part of your company’s long-address the interests of individual audiences. For term business strategy. This holistic view will bestexample, all stakeholders will want assurance of be able to address the different butthe company’s long-term growth potential, but interconnecting interests of your variouspotential investors will need convincing that they audiences, so achieving the overall aim of buildingcan make a return on their money, and employees long-term value by establishing your company as awill want to know that their jobs are secure. superior investment opportunity.Anticipating and appreciating the needs andPage 72 Managing the company’s profile
  • 71. Identifying your audience Financial Stakeholders UK and international business Analysts Potential Financial correspondents investors trade mediaMedia City editors (institutional, retail, high and net worth) commentators Industry Sector bodies correspondents Regulators Newswire journalists Communications no longer operates in silos: expect your story to be part of a discussion Government Regional news and business writers Trade Unions External media Influencers Business Staff partners Customers Competitors Corporate InfluencersIdentify your story Typically, this falls into three phases:To this end, your PR agency should work closelywith you and your other advisers from early on in l the corporate or pre-offer phase – where thethe process to identify and develop your corporate objective is to raise awareness andstory. This will ensure that all regulatory guidelines understanding of the company as a potentialare followed and, if you are working on a dual investment opportunitylisting, that the needs of each regime are identified l the offer phase – where the emphasis is onand respected. Once the right story has been the details of the offer, the timetable and thedeveloped, it will be included in IPO marketing subscription periodmaterials, regulatory documents and l the post-offer phase – capitalising on thepress releases. success of the flotation and building on the long-term, strategic goals of the company.Make the most of itHaving the right communications story in place as Preparation, preparation, preparationearly as possible will allow you to make the most Your communications strategy should beof the opportunities thrown up by the IPO process. coordinated around these phases. Focusing on PRManaging the company’s profile Page 73
  • 72. during the pre-offer phase means that you can Getting the story rightstart to raise the profile of the business prior tothe live IPO work. The aim of this is to begin thevalue-building process early, raising awareness of This is crucial as it will run through the entireyour company and thus laying a good foundation IPO process, linking up the work you do withfor the later fundraising activities. potential investors, press, analysts and your own employees. The ‘story’ will need to answerOnce you enter the offer phase, communications these questions, and potentially others:activity will take place around the most importantevents typically occurring in the IPO timetable: l What aspects make your company stand out?l announcement of the intention to float l Why is your company the best recipient ofl announcement of the pricing range investors’ money?l announcement of the final pricing l Why are you right to come to a publicl announcement of first-day dealings. market? l How will you use the money you raise?A regular stream of positive announcements and l How you will ensure long-term success?updates will help maintain momentum and keep theinvestment opportunity in front of your audience. You will need to be able to answer all theseAnnouncement of intention to float questions and deliver your messages in a short,This will be the first time that you will be declaring succinct and memorable way.your plans publicly. Typically, your financial PRagency will work with you and your other advisersto choose the best time to ‘go live’ with the story Pricing rangeand decide which tactics to use in order to achieve With the issue of the pathfinder prospectus, amaximum profile. The press release that is issued further press release can be used to announceat this time will reflect the corporate story already the pricing range of the IPO. Media expectationsidentified, and will describe the company and its here need to be handled carefully to ensure thatmain attributes, set out the anticipated timetable the IPO will be perceived as a success. This isfor the IPO and include quotations from the particularly important in the UK, as the mediacompany’s management. will often look for bad news and want to highlight IPOs being priced towards the bottomIf other supporting material (such as an analyst’s of their range.note) is also available, this can be packaged upwith the press release to provide positive Announcement of final priceaccompanying commentary. Photography can also Once the marketing period is completed, the finalbe used – a good picture can enhance the IPO price can be announced. Again, care needs toattraction of the story. All in all, the intention to be taken here to ensure that this is positionedfloat announcement is a chance to start the appropriately.fundraising process in a positive, high-profilefashion – crucial when trying to compete for First-day dealingsinvestment. An announcement can also be issued to mark the first day of dealings on the stock market. This is aPage 74 Managing the company’s profile
  • 73. The communications timetable Value Pre-offer Offer Post-offer Intention First-day to float dealings Corporate profile building Connected analyst research Over-subscription Preparation Pathfinder High-quality investor base Institutional roadshow Optimum valuation Pricing range Healthy after-market Pricing Strong investor rating Perception of success Raised corporate profile Time Awareness Understanding Endorsement of the company and IPO and high regard of equity story and offer termsgood opportunity for management to brief external often, communication with staff is something of anresearch analysts on the story, as well as alerting afterthought, coming late in the process and, as amarket commentators to the stock on its market consequence, failing either to counter the fearsdebut. staff may have or to help obtain maximum value from the flotation.While these are typically the fundamental stages inthe IPO timetable, your PR agency and advisers will Keep your staff informedwork to identify any other suitable opportunities to When considering a flotation, one of the firstsupport the marketing process, if appropriate. internal communications steps is to decide whenThese could include profiles of senior management and how to advise staff of the decision to list. Thisand news of appointments or contract wins. will always be something of a balancing act: weighing up the desire for confidentiality with theInternal communications: don’t forget your staff need to ensure that staff are appropriatelyIn their annual reports and accounts statement, it informed, and see the listing as a welcome andhas become commonplace for chairmen of listed exciting event for themselves and for theircompanies to acknowledge that the company’s company.most valuable assets are its staff and to thankthem for their efforts over the year. It is important to recognise that, in most industries, few members of staff will be familiar with theHowever, it is less common for companies to process of a company joining the market. Theyremember this when planning their IPO. All too may also harbour fears that the listing will prove toManaging the company’s profile Page 75
  • 74. Create momentum – make the most best practice, with meaningful dialogue with staff of set-piece moments established as the norm rather than the exception. If that is not the case, plan well inThe communications strategy should flow from advance and work with your PR advisers to auditthe objectives which have been set out at the and upgrade your internal communications asstart. They should dovetail together in order to soon as possible.make a robust, distinctive, credible case aboutyour company’s qualities and ensure a successful Make sure they understand the processflotation. You can probably afford to tell staff about the potential listing rather earlier than you mightEffective co-ordination of communications imagine. Tell them what it means for the companyenables the release of information to take place in and – vitally – what it means for them. If you plan toa controlled and strategic manner. This will introduce incentive programmes for staff at, or priorreinforce the perception that the flotation is being to the IPO, inform them, but make sure that youprofessionally managed by the company and its communicate clearly, avoiding financial jargon. Staffadvisers. also need to understand what they can and cannot say to their contacts – most likely your customers.It is essential that the flow of communications There is little point in setting out on a campaign ofshould build momentum and keep the story intact, customer communications if the customers’ day-to-maintaining the focus on the business and the day contact points – your staff – are uninformed andinvestment case. Clear, consistent communication uncertain of what the listing means.with all stakeholders will not only help yourcompany navigate through potential pitfalls, but None of this is to suggest that your staff should orwill build and protect its reputation and brand in could become official spokespeople for yoursubsequent years. company at this important time. Rather it is to recognise that they need, at the very least, to beThroughout the duration of the campaign, it is aware of the issue and to whom any questionsessential that the timing and sequence of should be referred.messages are carefully managed and themomentum of the campaign maintained. Without Engage and communicatecareful preparation and guidance, it is all too easy The increasing use of social media will have ato create misleading perceptions or expectations, significant influence on the way that you shouldwhich will adversely affect the outcome of the communicate with your staff. You can be sure thatflotation. Communication of key information must once informed of the listing, staff will discuss thisbe clear, comprehensively prepared and among themselves online, and equally sure that, asconsistent with the agreed timetable. a result, this debate will be visible to the outside world. So any evidence of disquiet among staff will be only too clear to potential investors and a catalyst for additional change within the Engage and communicate with staff, understandbusiness – something that may threaten their job their concerns, address their questions and ensuresecurity. that achieving the listing becomes a joint objective – something to which they can allHopefully, internal communications procedures contribute.within the company are already compliant withPage 76 Managing the company’s profile
  • 75. When the IPO has happened and you are quoted communicating with the market. Any sense thaton the Main Market, you must continue to the market is being informed of anything less thancommunicate openly. Make sure your members of the full story will be punished by a lower valuationstaff are all aware of their responsibilities in than might otherwise be achievable.connection with the handling of material or price-sensitive information. Remember them when you There is, of course, a balance to be struck here.are communicating company results or corporate Investor and analyst appetite for information ondevelopments, such as major contracts or joint listed companies is potentially limitless. You mustventures. There can be few things more decide what information is most relevant, mostdemotivating for staff than finding out about news helpful and which – vitally – will not be damaging toaffecting their company and their working lives your business if it were in the hands of competitors.from the newspapers or social media outlets. There is an increasing and welcome trend forInternal communications – done well – will add information given to investors in corporatesignificant value to your IPO and your presentations to be made available more widely,communications with staff could, over time, prove often via a dedicated Investor Relations section onto be the most valuable of all. the company’s website. Making information available in this way limits the scope forPost-flotation: ongoing financial PR strategy accusations of selective briefing of institutionalAfter many months of preparation and much investors in advance of the dissemination ofanticipation of a successful outcome, you have information to the wider market.finally made it – trading in your company’s shareshas started, hopefully at a premium to the offer Make disclosure work for youprice. You have become a member of one of the In the early meetings with your new investors, andworld’s most exclusive clubs. It is unlikely to mean, in the information that is released more widely athowever, that now is the time to relax. the same time, you will set the benchmark for what investors can expect from you on an ongoing basis.Keep up the good work Bare compliance with the rules will be noticed andThe regulatory rules are clear on what is required may well be marked down. In contrast, fulsomefrom listed companies in terms of disclosure and disclosure in a style that indicates the value youcommunications – and the mindset which should be place on stakeholders’ understanding of youradopted throughout the IPO marketing process is business and the role it plays in its variousno less meaningful once a company is on market. communities, will stand you in good stead. Remember, too, that the market may well beIn order to achieve and retain an optimum suspicious of those companies that start withvaluation for your shares, only those companies admirably high levels of disclosure but backtrackwith the highest reputation for transparency will over time.succeed. Put simply, increasing cynicism frommedia and investors alike means that merely Take advantage of the communicationscomplying with the minimum levels of disclosure opportunitiesrequired is not likely to be enough. Investors and Having set the tone and content for earlythe media are only too ready to judge companies, communications, what are the opportunities fornot just on the accuracy and completeness of telling your story? Well, the good news is that thedisclosure, but on their whole approach to financial calendar offers plenty of chances toManaging the company’s profile Page 77
  • 76. Typical financial calendar JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC Trading AGM update Comms (31 March Full-year review of the Interim Half-year Trading year Key dates Management full-year update results Interim (30 Sept results and look Statement end) announced Management announced half-year ahead to Statement next year end) Developing messaging Developing messaging Drafting statements Drafting statements Agreeing media Agreeing media strategy strategy Pre-close Pre-close Drafting Q&As Drafting Q&As meetings meetings Results with Rehearsals with Rehearsals analysts Analyst feedback analysts Analyst feedback Organising media Organising media interviews interview s Organising Organising analyst briefing analyst brie fi ng Monthly meetings with key media Positive share price movement Feature opportunities Media Corporate and personal Promoting analyst research Proactive/reactive commentary engagement profi le opportunities Bylined articles Site visits Analyst Introduction to new analysts Individual visits to broking houses One-to-one briefings engagement Site visits to addr ess sales teams Conferences Annual drinks event Events Roundtables/seminars Corporate hospitality JAN FEB MAR APR MAY MAY JUN JUL AUG SEP OCT NOV DECupdate the market throughout the year (see chart company, expanding on the information in the pressabove). release and offering an opportunity for questions around your strategy and details of delivery. TheseThere are of course the annual and six-month presentations – and the dialogue that they generateresults announcements, when full disclosure is – are pivotal in developing relationships with themade of the financial results for the period. These analyst community and ensuring that those analystsalso offer the opportunity to provide an update on understand your company and the markets in whichcurrent trading and the outlook for your business. you operate sufficiently well to provide realistic estimates of your expected financial performance.In addition, you can update the market in InterimManagement Statements twice a year and again But while investors, analysts and the media willat your Annual General Meeting. want regular communication, beware of issuing too many press releases. You will want the market toKeep up the dialogue listen closely to what you have to say; that is farFollowing the formal announcement of your results, more difficult if they become used to a frequentanalysts will expect a presentation from the stream of largely inconsequential announcementsPage 78 Managing the company’s profile
  • 77. about your latest customer win. Consult closelywith both brokers and financial PR advisers on thisto ensure you get the balance right.You should also think carefully about yourapproach to social media and how to managemessaging in the digital age. News travels fast andcan cross from customers to investors, and fromanalysts to financial journalists, in seconds. Thepower of the internet means that theseconversations are increasingly conducted in public,via social media channels.Invest in PR and reap the rewardsMost of all, the media demands transparency andready access to the senior management of yourcompany. You should expect to commit your owntime to building relationships with importantjournalists and analysts. By helping them tounderstand your business and the challenges itfaces, you are far more likely to get a fair hearingwhen things are tough – or to get the coveragethat you want on a busy news day.Taking communications seriously from thebeginning of the IPO process, right through to yourlife as a listed company, will add value to yourbusiness and pay dividends. Done correctly, it willallow you to take advantage of all the benefits ofthe raised profile that a listing on the Main Marketcan bring.Managing the company’s profile Page 79
  • 78. The role of the registrar in antitle Section IPO Paul Etheridge and Phil Roberts Capita Registrars
  • 79. Shaped to fit your business yourMake the right choiceMake the r To find out why so many companies T y so many companiesfor your IPO and sharefor your IPO and share choose Capita Registrars to handle their c Registrars to handle their IPO, please contact Paul Etheridge IPO, please contact Paul Etheridgeregistration servicesregistration services on +44 (0)20 7954 9706 or email on +44 (0)20 7954 9706 or email petheridge@capitaregistrars.comMore companies choose Capita than any otherMore anyregistrar. So far in 2010 we have managed more IPOs*registrar. have morethan any of our competitors. No one offers a better anycombination of value, service and reliability. reliability.We work in partnership with our clients to ensure they are totally satisfied e work in partnership with our clients to ensure they are totally satisfiedthroughout the project and beyond, delivering innovation, flexibility and athroughout the project and beyond, delivering innovation, flexibility andwide range of services.wide range of services. rv– Full range of receiving agent and corporate action services Full range of receiving agent and corporate action services– Specialist support from an experienced team of company secretaries Specialist support from an experienced team of company secretaries– Extensive investor relations capability Extensive investor relations capability– Market leading employee share plan expertise Market leading employee share plan expertise– And the strength and reliability of a FTSE 100 parent company And the strength and reliability of FTSE 100 parent companyFifty six appointments in the first nine months of 2010, are proof that we offerFifty six appointments in the first nine months of 2010, are proof that we offerthe IPO service that issuers are looking for.the IPO service that issuers are looking for. w*In the UK, Ireland and Channel Islands. Source: Euroclear UK and Ireland. Figures correct as at 09 Sept 2010.*In the UK, Ireland and Channel Islands. Source: Euroclear UK and Ireland. Figures correct as at 09 Sept 2010.Capita Registrars Limited, Registered office: The Registry, 34 Beckenham Road, BR3 4TU. Registered in England No. 2605568.Capita Registrars Limited, Registered office: The Registry, 34 Beckenham Road, BR3 4TU. Registered in England No. 2605568.
  • 80. The role of the registrar in an IPOFor companies considering an IPO, what a share Engagement periodregistrar actually does might be something of a As soon as it is brought into the IPO process, themystery. Simply put, the role of the registrar is to registrar should begin by finding out as muchupdate and maintain the official register of about your company as it can so that it can bestmembers (or shareholders) of the company whilst advise you on the correct course of action. Thereconciling the total number of shares authorised first – and initially most important – question is toand issued by the company on a daily basis. But evaluate the structure of the company coming toputting this apparently simple objective into market. From a registrar’s point of view these canpractice requires a great deal of careful planning typically be divided into three categories:and specialised work – and this is where a goodregistrar will prove its worth many times over. l UK-incorporated entities, l offshore companies, usually established inEarly involvement the Channel Islands, Isle of Man or Ireland;The complex and painstaking work that registrars orneed to complete ahead of an IPO cannot be l international companies, incorporatedcarried out overnight, or as part of a last-minute overseas.rush. So whether you approach the registrardirectly or through your advisers – be they a law As we will discuss later, the third of these optionsfirm, investment bank or another adviser – you requires a very different approach to the first twoshould leave a minimum of four weeks between and, as a result, a longer lead time should beinvolving the registrar and the proposed date of taken into account.the flotation. Be aware that more complicatedcases may require an additional four to six weeks But the engagement period does not begin andon top of that. For this reason, it is always end with your choice of location. The type of offeradvisable to get your registrar involved as early you are wanting to bring to the market is alsoas possible in the IPO process. crucial. You may opt for an IPO targeting institutional investors, but it is possible to launchBecause the relationship with your registrar is a to a mix of institutional and retail investors.long-term one and does not end with the Alternatively, you may only be interested in ansuccessful flotation of your company, you should introduction to the market that does not involvelook for a registrar that has strong capabilities in raising any capital. The answers to these initialboth project management (a dedicated questions will dictate the core registrationimplementation manager to oversee your listing services your registrar provides on your behalf.plans is strongly advised) and relationshipmanagement, which can be of enormous value in As with any major project, a good understandingmeeting future goals throughout your life as a between all the parties is vital if your goals are tolisted company. be met successfully. The registrar will want to know a lot of detail about your business – yourAccuracy is also paramount. Your registrar is growth strategy, your sector profile and yourlooking after an integral part of your business on goals, both short term and further ahead. It willyour behalf, so you need to be confident that solid also want to get an insight into your companyplanning and attention to detail is present within ethos and values so that it can better advise you.its organisation. For example, if your firm has a strong online presence or a brand commitment to protectingThe role of the registrar in an IPO Page 83
  • 81. the environment, the registrar may well suggest Other early considerationsrunning an online IPO. This kind of information is This is also a good time to talk about share plansbest exchanged in an early project meeting – with and other share-based employee incentives. Theyou and all your advisers present. registrar will take into account your future plans for such schemes at the IPO stage, even if theThis initial period of discussion is very valuable as share plans are not going to be put in place untilthe accuracy and clarity of the information later. This will help smooth the process when theprovided at this stage will greatly assist the plans actually commence.registrar – both in meeting your needs goingforward and in avoiding potential pitfalls later in Moving to a successful implementationthe implementation phase. Based on your Following the engagement period and now armedresponses, your registrar should be able to assign with a complete picture of your business and itsan appropriate relationship manager with relevant future goals, your registrar will work, wheresector knowledge and experience. applicable, with your other advisers, to establish the mechanics of effectively transferring theSupporting your company secretary shareholdings of the selling shareholders –This is also an excellent time to consider, in typically the founders of a company or privatediscussion with your advisers, the impact the equity investors – to the buying institutions (orflotation will have on your company secretariat. A retail shareholders, if applicable) at the IPO. Thegood registrar will consider itself to be an registrar will make sure all the documentation isextension of your company secretary’s office, but in place if new shares are being issued and on theeven with its assistance, you will find that the day of the float it will ensure an effective deliverycompany secretary’s role expands hugely in the of shares.period before, during and especially after the IPO. When acting as a receiving agent to a publicThat is why it is advisable to look for a provider offer, your registrar will help write and commentthat can offer value-added support for company on the prospectus and application forms to besecretaries in the form of pre- and post-IPO issued and provide despatching or onlinehealth checks. These will rigorously examine your services. Once the offer opens the registrar willarticles of association and even the structure of provide banking facilities, and keep you and youryour secretariat team to ensure that you are advisers up to date with the number of applicantsready to deal with the increased scrutiny and and the value or amount of stock applied for.governance that comes with being a listedcompany. In addition there are various technical and operational aspects of bringing a company toThis kind of company secretarial advice is market. These are described in more detailparticularly valuable for rapidly growing below.companies that may not have had experience ofthe kind of requirements involved in running a CREST set-uppublic company. It also applies to international Operated by Euroclear UK & Ireland Ltd, CRESTcompanies that may not be familiar with the is the electronic settlement system for the UKrequirements of a London listing and the level of and Ireland. Your registrar will guide you throughgovernance that is necessary. the process of setting this up and ensuring that all Euroclear requirements have been compliedPage 84 The role of the registrar in an IPO
  • 82. with so that the shares can be electronically Closing the dealsettled from Day One. Throughout the progress of the IPO, your registrar should be keeping you up to date withShare certificates weekly progress meetings or conference calls toIn a world of electronic trading of shares it might ensure that everyone is aware of key milestonesseem old-fashioned to have to arrange for paper and what remains to be done.share certificates to be produced. However, itremains an essential part of the IPO process. As the IPO heads towards listing and admissionYour registrar will create, proof and print share of the securities to the Main Market, the registrarcertificates as required. ensures that everything is up and running for the first day of trading.Articles of AssociationYour registrar will undertake a careful review of Ahead of that date, the registrar will need to haveyour company’s Articles of Association, especially taken on the existing register of shareholderswith a view to identifying any transfer restrictions incorporating any capital reorganisation requiredthat might appear and the possible effect they on the register. The registrar will also make suremight have on the IPO. that any deadlines issued by CREST Euroclear are understood, and adhered to, by everyoneDue diligence involved in the deal.Like all your professional advisers, your registraris required to carry out due diligence. Once the IPO is complete and shares have begun to be traded and settled, the registrar will updateElectronic communications the register to keep a record of the legal owner ofIncreasingly, companies coming to the market are the shares.opting to use electronic communications. As wellas saving on the costs associated with printing After the IPOand postage, this is considered to be the After the dust has settled and your company has‘greener’ option. E-comms also covers been successfully brought to market, theestablishing an online portal that will give you registrar’s function does not stop – indeed youconvenient access to consolidated register should aim to form a long-term relationship withinformation via the web, as well as the ability to your registrar. As well as being able to assist yougenerate management information. with your growth strategy by managing the operational aspects of key corporate tasks, suchInvestor relations strategies as takeovers, your registrar should also keep youAs part of the value-added services that it offers, abreast of industry matters through regular newsa registrar will typically provide investor relations updates and . It will then be able to work with you todevelop appropriate IR strategies, particularly in The compliance requirements can be one of therelation to fund manager and beneficial ownership biggest challenges for a company post-IPO, andinformation, combined with peer group and sector your registrar’s relationship manager should becomparisons. If you already have an IR provider, able to help you to meet some aspects of thesethe registrar will work alongside them to assist obligations. This will involve assisting with regularyou. review meetings, reporting accounts, annual general meetings and dividends.The role of the registrar in an IPO Page 85
  • 83. As well as relying on your registrar for advice and In summary, while you may not have worked withsupport, you should also ask it to put you in touch a share registrar before the point at which youwith other clients who are in the same position as consider an IPO, you will find it an invaluableyou now find yourself. These peer networks can adviser and ally as your listed company an excellent source of practical advice fromother firms that have already faced and overcomesimilar challenges, and a good registrar should bemore than happy to use the strength and diversityof its client base to help you.Depositary interests: a specialist solution for overseas companies Shares of international companies cannot always be because the relevant processes are all UK standard settled in CREST. As a result, some international practice). In the case of a DI, the additional companies choose to issue Depositary Interests (‘DI’). requirements can include a trust deed and depositary agreement, as well as a registrars’ agreement if What is a DI? appropriate. Furthermore, Euroclear requires various The DI is a method that allows overseas companies legal opinions, such as a UK tax opinion and two legal issuing shares to benefit from the competitive opinions from the country in which the company is advantages of being electronically traded on one of the incorporated – for example the Netherlands, the world’s leading equity exchanges, such as the London British Virgin Islands or another jurisdiction. Stock Exchange. This is achieved by a subsidiary of There are further considerations around complying with your registrar (authorised by the Financial Services local laws about where the share register (if one is Authority) acting as custodian and depository. That allowed) can be kept, along with other compliance and body will then hold all the shares related to the DI for disclosure requirements. There are also licences, the shares that are listed in London. takeover provisions and threshold limits to take into account. These considerations vary from jurisdiction to The instrument that is actually traded through CREST jurisdiction, so the registrar must undertake a good is a security in its own right, known as a DI – literally deal of preparatory work – both in London and the an interest in the depository shareholding. The chosen country. International Security Identification Number (‘ISIN’) of the share is identical to that of the DI, so there is no In essence then, the DI is an alternative solution for requirement to list the DI separately from the share. overseas entities, but one that requires an enormous amount of careful implementation on the part of the Why is a DI important? registrar to get right. So while it is a proven method The advantage of a DI is that it looks, feels and – around 250 international companies have DIs in behaves like a share. In addition, it gives you full London – it is advisable to choose a registrar that has transparency so that, for example, when it comes to long experience of bringing DIs to market and, investor relations, looking at a DI register is exactly particularly, developing new and existing jurisdictions. like looking at a share register. While the timeline for an IPO will usually be set by the lead adviser, it is always the case, as we noted earlier, that the sooner you can get the registrar involved the Your registrar will need to set up the necessary legal better. And this is especially the case for DIs. framework ahead of the IPO. That requires considerably more documentation – and time – than in the case of a UK or offshore company (which can be covered by a straightforward registrars’ agreementPage 86 The role of the registrar in an IPO
  • 84. London: a unique investment Section title opportunity FTSE Group
  • 85. London: a unique investment opportunityGiven London’s vibrant and varied trading history, it is by no means confined to domestic investment,is not surprising that many UK companies listed on being widely followed by both retail andthe London Stock Exchange are themselves institutional investors.geographically diverse with a broad range ofbusiness interests. In recent years, this dynamic has This ensures that no single group of investorsbeen reflected in the origin of profits and the dominates the share registers of UK listedlocations of operations for companies listed on the companies. The combination of this globalMain Market. What this means for London as a economic exposure and attraction of global fundsfinancial centre is a dramatically different offering ensures that the UK is less exposed to specificfrom most other markets, which primarily feature conditions pertaining to any one economy. Indomestic securities and provide a snapshot of the recent years, such factors have led to a wealth oflocal economy. companies showing an interest in Premium Listings to qualify for the FTSE UK Index Series,The UK’s headline tradable index – the FTSE 100 particularly the top two tradable indices – theIndex (the ‘FTSE 100’)– is a prime example of the FTSE 100 Index and FTSE 250 Index.diverse nature of the companies listed on the MainMarket. Most of its constituents’ operations are not Inspiring investor confidencelimited to the UK, with companies, including As a financial market, London imposes some of theGlaxoSmithKline and Vodafone, instead having a highest standards in the world for governance andcorporate structure which reaches across the globe. investor protection. This inspires confidence in investors following the UK market and its majorAlthough the FTSE 100 is often thought of as a indices. Governance comes in the form of listingyardstick for the UK economy, its purpose is rules, company law and market practice, all ofactually to capture the returns of the largest 100 which are designed to protect shareholdercompanies domiciled in the UK. This index has interests and allow them to hold management tofulfilled this purpose since its inception in 1984, account.providing a global measure that spans far beyondthe UK economy. This includes rules such as pre-emption rights, which offer shareholders any new issue of sharesSetting standards before being offered to non-shareholders. TheAs companies in the UK continue to expand and purpose of this rule is to ensure that shareholdersadapt their business models against a global are able to prevent their stake from being dilutedbackdrop, the UK stock market is set to grow and by new issuance.diversify further, creating a unique opportunity forLondon. The following section covers some of the Similarly, factors such as strict disclosure, whichkey elements that underpin the UK market and set are included in company law and the UK’s Listingit apart from other financial centres Rules, are important, as they allow investors toacross the globe. assess companies in an accurate and timely manner. This focus on transparency remains theA diversified investment landscape key to building trust amongst investors, which inSituated in the middle of the world day, the UK turn leads to strong market activity, creating amarket enjoys unique exposure during its trading more liquid market.hours to investors around the world. As a globallyrecognised index provider, FTSE’s UK Index SeriesPage 88 London: A unique investment opportunity
  • 86. FTSE indices – July 2000 - 30 July 2010 250 Index Level Rebased (31 July 2000 =100) 200 150 100 50 0 0 1 2 3 4 6 7 8 9 5 l-0 l-0 l-0 l-0 l-0 l-0 l-0 l-0 l-0 l-0 Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju FTSE 100 Index FTSE 250 Index FTSE All-Share Index Source: FTSE Group data as at 30 July 2010All indices in the series are market capitalisation-weighted and currently priced off trading on the London Stock Exchange.Ensuring liquidity .access the UK market, but has also provided aAs an award-winning index provider, FTSE creates further catalyst for the increase in liquidity withinmarket-leading indices using robust data and the market.methodologies, keeping tradability front of mindthrough the use of tough liquidity and market The FTSE UK Index Series has been one of thecapitalisation screening. By doing so, FTSE ensures most sought-after indices upon which productsthat its indices are highly suitable for the creation of such as ETFs are built. The year 2000 saw the firstfinancial products such as Exchange Traded Funds ETF listed on the Exchange and based on the(‘ETFs’), derivatives and structured products. The FTSE 100 Index. Many have followed since then.availability and proliferation of these products has There are now over 350 ETFs admitted to the Mainnot only increased opportunities for investors to Market from major global providers including i- shares, Lyxor and db-X trackers, with £58.4 billionCommitted to market quality in Assets under Management. Throughout the years, and on the advice of The engagement process investors, FTSE has taken governance very Companies incorporated in the UK looking to be seriously. Indeed, alongside the Financial included in the FTSE UK Index Series, and in Services Authority (‘FSA’), FTSE has led the particular the FTSE 100 Index, need to comply debate on improving market quality through its with the requirements of a Premium Listing, which stringent requirements to include securities with go beyond the minimum standards set out by EU Premium Listings (previously known as Primary legislation. Listings), as well as its treatment of non-UK companies. These publicly available rules are For companies domiciled overseas which aspire to set out in the index series’ ground rules. They be constituents of the FTSE UK Index Series, the are reviewed regularly, together with market process works a little differently and involves a consultation, to ensure the FTSE UK Index programme of engagement with FTSE, through the Series remains robust and in line with investors’ company’s chosen corporate broker. FTSE is requirements. committed to working closely with a company toLondon: A unique investment opportunity Page 89
  • 87. assess it against the relevant requirements. This The FTSE UK Index Seriesprocess is normally undertaken well before thepublication of the prospectus, giving the company FTSE 100 Indexenough time to understand the steps it may need The FTSE 100 Index is one of the world’s mostto take to ensure its eligibility for inclusion in the recognised indices and accounts for 7.8 perindex series. cent of the world’s equity market capitalisation. It represents the performance of the 100 largestThe requirements these companies must meet UK-domiciled blue chip companies which meetinclude a wealth of reporting requirements, FTSE’s size and liquidity screening. The Indexcompliance with the UK Corporate Governance represents approximately 85.2 per cent of theCode and the City Code for Takeovers and UK’s market and is currently used as the basisMergers. By meeting these criteria, companies for a wealth of financial products available onshow their ability to adhere to good practice the Exchange and globally.across several elements of business including:board structure, accountability and relations with FTSE 250 Indexshareholders. In order to be included in an index in The FTSE 250 Index is comprised of mid-sizedthe FTSE UK series, companies without a UK companies. This index is designed to measureincorporation must be incorporated in a developed the performance of the mid-cap capital andmarket or other domicile approved by FTSE, as industry segments of the UK market which fallwell as having a minimum 50 per cent free float. just below the FTSE 100 Index in both size and liquidity. The FTSE 250 Index representsThough the requirements for a Premium Listing are approximately 12.5 per cent of the UK marketthe toughest in Europe, the benefits of entering capitalisation.the liquid and internationalised UK market, as wellas achieving FTSE 100 status, often far outweigh FTSE Small Capas well as justify these, especially amongst more The FTSE SmallCap consists of companiesambitious companies. outside of the FTSE 350 Index and represents approximately 2 per cent of the UK marketThe FTSE UK Index Series capitalisation.The FTSE UK Index Series has been designed torepresent the performance of UK-domiciled FTSE All-Share Indexcompanies with a Premium Listing on the The FTSE All-Share Index represents theExchange’s Main Market. Investors are provided performance of all eligible companies listed onwith a comprehensive and complementary set of the Exchange’s Main Market. It is considered toindices that measure the performance of a range of be the best performance measure of the overallcapital and industry segments within the UK equity London equity market, with the vast majority ofmarket. In addition to the standard UK series UK-focused money invested in funds which aredetailed below, FTSE has also launched a range of benchmarked to it. The FTSE All-Share Index isinvestment strategy versions, such as the FTSE 100 the aggregation of the FTSE 100, FTSE 250 andand FTSE 250 Short and Leveraged indices. These FTSE Small Cap Indices and currently coversenhanced indices are created with FTSE’s 630 constituents with a combined value ofquantitative expertise and provide investors with nearly £1.6 trillion – approximately 99 per centnew passive strategies and risk management of the UK’s market capitalisation.opportunities.Page 90 London: A unique investment opportunity
  • 88. Preparing to list depositary receipts Raj S.Panasar and Stephen Glasper Cleary Gottlieb Steen & Hamilton LLP
  • 89.
  • 90. Preparing to list depositary receiptsDepositary receipts (‘DRs’) are negotiable Structure of a typical DR listinginstruments issued by a depositary bank thatessentially repackages shares in another company. A typical DR listing will adopt the followingDRs are securities in their own right and can be structure:listed and traded on the capital markets. l issuer’s shares (either newly-issuedDRs are typically listed by companies incorporated shares, existing shares currently in theoutside the EU, frequently from emerging markets hands of a shareholder, or both) aresuch as Russia and India. For such companies, a deposited with the custodian bank of thelisting of DRs on an international exchange such as issuer’s depositarythe London Stock Exchange can provide access to l depositary becomes legal title holder ofa significantly wider pool of international shares and is entered into issuer’s shareprofessional investors than a listing of shares on a registercompany’s domestic exchange. l depositary issues to investors DRs representing a certain number of issuer’sAdvantages of listing depositary receipts sharesCompanies issue DRs principally to raise capital. l depositary holds the underlying shares onDRs provide a particularly effective means for non- bare trust for the holders of the DRsEU issuers to raise capital because of their appeal l depositary will exercise its rights as ato international professional investors: they offer a shareholder – including voting rights andmeans to invest in non-EU issuers while avoiding rights to unpaid dividends – in accordancesome of the inconveniences often associated with with investors’ wishes, subject to thedirect investments in the underlying shares, terms and conditions of the DRsparticularly as regards settlement. l investors are free to sell DRs in the secondary market, or, alternatively, toStructure of a depositary receipt listing instruct the depositary to cancel the DRs and deliver the underlying shares instead,The depositary mechanism subject to the terms and conditions of theSetting up the requisite mechanics for a DR listing DRs and relevant securities laws.requires close coordination between the issuer, itsadvisers (principally its legal counsel and ‘Listing’ of depositary receiptsunderwriters) and its chosen depositary bank (see There are two distinct aspects to the process of‘Establishing a depositary receipt programme’ ‘listing’ DRs in London, which occur simultaneouslychapter on page 105). with each other:The deposit agreement l Admission to the Official List (the ‘OfficialThe deposit agreement sets out the legal rights List’) of the United Kingdom Listing Authorityand obligations of the depositary and the issuer. (‘UKLA’), the United Kingdom regulator forMore importantly, the deposit agreement details the purpose of securities listings. DRs will bethe rights of the DR holders, set out in the terms admitted to the Standard segment of theand conditions of the depositary receipts, which Official List – Premium Listings are onlyare typically annexed to the deposit agreement available to issuers of shares (the Premiumand reproduced in the listing prospectus. and Standard Listing taxonomy is discussed in full in the UKLA’s chapter on page 14)Preparing to list depositary receipts Page 93
  • 91. l Admission to trading on the London Stock ‘Reg S only’ deal. The main requirements of Exchange’s Main Market (the ‘Main Regulation S are that (i) the offer or sale of DRs is Market’) or the London Stock Exchange’s made outside of the US in an offshore transaction; Professional Securities Market (the ‘PSM’). and (ii) no marketing of the DRs takes place in the US (referred to as ‘directed selling efforts’).The admission of DRs to the Official List and totrading on the Main Market will usually (though For issuers that intend to market DRs tonot always) be conducted in conjunction with an investors in the US (to access demand from USoffering of DRs to investors, to create the institutional investors), the US portion of therequisite ‘public float’ of 25 per cent of the DRs. transaction is typically framed within the scope ofIf a listing of DRs represents the first time an Rule 144A of the US Securities Act, whichissuer has offered securities to investors, it will provides an exemption for resales of securities tobe commonly referred to as the issuer’s initial sophisticated institutional investors, known aspublic offering (‘IPO’). qualified institutional buyers (‘QIBs’). Such a transaction, which would also need to rely onBlock listings Regulation S in respect of sales to investorsIt is common for a DR issuer to request admission outside of the US, would be referred to as ato the Official List of a greater number of DRs than ‘Reg S/144A’ intends to have admitted to trading on the MainMarket at the time of its IPO. This is sometimesknown as a ‘block listing’. A block listing of DRs Example of a block listingenables an issuer to have additional DRs admittedto trading on the Main Market, up to the aggregate l issuer applies for up to 100 DRs to besize of the block listing, without having to publish a admitted to the Official List but limits thenew prospectus or submit new applications to the IPO to 25 DRs (ie only 25 of the DRs will beUKLA or the London Stock Exchange. For an issuer admitted to trading on the Main Market)planning to issue DRs on an incremental basis or l issuer is permitted to have up to 75who cannot control secondary deposits into the DR additional DRs admitted to trading on thefacility, a block listing is important. Main Market at any time following the IPO and in as many increments as it wishesUS considerations (provided the initial listing on the OfficialUS securities law is relevant to any listing of DRs. List is maintained)The US Securities Act 1933 (the ‘Securities Act’) l no requirement to apply to the UKLA orrequires any issuer that proposes to offer London Stock Exchange for subsequentsecurities anywhere in the world to undertake a DRs admitted to trading (up to the upperlengthy US Securities and Exchange Commission limit of the block listing)(‘SEC’) registration process, unless an exemption l no requirement for a new prospectus foris available. subsequent DRs admitted to trading (up to the upper limit of the block listing)For issuers that do not intend to market DRs to l to enable the UKLA to monitor the statusinvestors in the US, an exemption from the SEC of a block listing, the issuer is required toregistration requirement is typically available under submit a form on a six-monthly basisRegulation S of the Securities Act (‘Reg S’). Such stating how many of its DRs are admitteda transaction would be referred to as a to trading.Page 94 Preparing to list depositary receipts
  • 92. Whether the DR listing is a Reg S only, or a Reg time of admission to the Official List)S/144A deal, great care must be taken to ensure l at least 25 per cent of the DRs for whichthat the conditions of the relevant exemptions are application is made must be in public handsmet; sanctions for breach of US securities (ie part of a public float, not held by majorlegislation can be severe and concerns about shareholders or persons connected with thecompliance with the Securities Act can impede the issuer) at the time of admission to the Officialability of legal counsel to deliver the requisite List and for the duration of the listing. Inopinions to underwriters, which can result in certain limited circumstances the UKLA willsignificant delays in the IPO process. Hence the agree to lower the 25 per cent thresholdimportance of complying with the ‘publicity l issuer must publish a prospectus approved byguidelines’ drafted for the issuer and the parties the UKLA. This requirement works inworking with the issuer on its IPO. conjunction with the FSA’s Prospectus Rules, which set out the circumstances in which anAssessing suitability and eligibility for listing issuer must publish a prospectus. Note thatdepositary receipts the issuer’s ability to meet the disclosure requirements for a prospectus – in particular,Eligibility criteria in relation to financial statements –Issuers seeking admission of DRs to the Official effectively operates as an additional criterionList in connection with a Main Market listing must for eligibility.satisfy both the general eligibility requirementsthat apply to all applicants to the Official List and As noted above, issuers of DRs are not required tothe specific eligibility requirements that apply to satisfy some of the more demanding eligibilityissuers of DRs (set out in Chapters 2 and 18 of criteria that apply to an issuer conducting athe Financial Service Authority’s (‘FSA’) Listing Premium Listing of equity shares. For example, aRules, respectively): DR issuer is not required to produce a three-year financial track record that relates to at least 75 perl issuer must be duly incorporated and cent of its business, nor is a DR issuer required to operating in accordance with its constitution publish audited accounts no older than six monthsl DRs must (i) conform to the law of the from the date of the prospectus, or satisfy the issuer’s place of incorporation; (ii) be duly UKLA that it has sufficient working capital authorised according to the requirements of available for at least the next 12 months. The the issuer’s constitution; and (iii) have any prospectus does, however, need to contain all necessary statutory or other consents material information, so financial statementl DRs must be admitted to trading on the Main requirements still need serious consideration, Market particularly where the issuer has made significantl DRs must be (i) freely transferable; and (ii) acquisitions or disposals. fully paid-up and free from all liens and from any restriction on the right to transfer Eligibility letterl DRs, once listed, must be expected to To demonstrate compliance with the UKLA’s achieve an aggregate market value of at least eligibility requirements, the issuer must submit to £700,000 the UKLA an ‘eligibility letter’ no later than on thel application must relate to the entire class of date of the first filing of the prospectus (see the relevant DRs (ie the application must example transaction timetable on pages 96 and cover all DRs in issue or to be issued at the 97). In addition, although not required by the rules, continues on page 98Preparing to list depositary receipts Page 95
  • 93. Example transaction timetable for listing DRsStage Timeline ActionPlanning 24 weeks prior to • issuer and underwriters to plan strategy and structure of listing pricing (referred to • underwriters and legal advisers commence due diligence as T) (date on • assess issuer’s eligibility for listing which price of DRs • prepare and submit UKLA pre-eligibility letter (if appropriate) is agreed, • prepare and submit UKLA eligibility letter (no later than on date of first underwriting agreement is signed submission of draft prospectus) and conditional dealing in DRs commences)Document T - 16 weeks • begin drafting prospectusdrafting • conduct diligence meetings and drafting sessions • when draft prospectus is substantially complete, submit to UKLA with annotations (directing the UKLA as to how the issuer has complied with its specific disclosure obligations) with: o cover letter (drafted and signed by issuer’s legal counsel) o prospectus disclosure checklist (not signed) o application for prospectus to be approved by the UKLA (Form A) (signed by issuer) o UKLA listing and document vetting fees • UKLA requires 10 full working days for review of first submission and 5 full working days for subsequent reviews • work towards clearing UKLA comments on draft prospectus; make further submissions of the prospectus by filing: o comparison document showing amendments to prospectus since previously submitted version o updated prospectus disclosure checklist o completed document response sheet (demonstrating how UKLA comments have been resolved) T-8 weeks • begin negotiating underwriting agreement (‘UA’)Marketing T- 2-6 weeks • obtain ‘no further comments’ clearance on prospectus from UKLA • arrange date for UKLA approval of the prospectus (‘stamp off’) • ensure ancillary UKLA listing documents are submitted at least 20 business days prior to desired date for stamp off (10 business days for issuers with securities already admitted to the Official List): o issuer contact details form o prospectus publication form o issuer board resolution authorising listing • liaison with London Stock Exchange: o submit draft application for admission of securities to trading (Form 1 ), draft prospectus and other documentation requested by London Stock Exchange o underwriters to discuss conditional dealings (if required) with London Stock Exchange • print preliminary prospectus (with all information finalised save for price) • marketing/roadshowPage 96 Preparing to list depositary receipts
  • 94. Example transaction timetable for listing DRs (continued) Pricing T • issuer and underwriters to agree price • issue press release to announce price • finalise and sign UA • DRs allocated to investors / conditional dealing (if required) begins • obtain UKLA stamp off on prospectus by submitting: o two clean copies of final prospectus dated with the date of approval o comparison document showing any changes to prospectus since previous UKLA review o completed prospectus disclosure checklist (signed by issuer, dated date of approval) • print and publish final prospectus • arrange listing hearing with UKLA (for no sooner than 48 hours following prospectus stamp off) by submitting: o application form for listing hearing o application for admission to the Official List (signed by issuer) o stamped final prospectus o issuer board resolution confirming number of DRs to be issued • arrange for London Stock Exchange to consider application for admission of DRs to trading (at least two business days before unconditional trading in DRs is requested to begin, if applicable) by submitting: o completed Form 1 o copy of final prospectus o front cover of prospectus with UKLA stamp o London Stock Exchange fees to be paid following admission to tradingClosing T+2 • DRs delivered to investors, payment transferred to issuer (‘settlement and delivery’) • Listing admission hearings: o UKLA considers the application for admission of the DRs to the Official List o London Stock Exchange considers application for admission to trading of the DRs to trading on the Main MarketAdmission T+3 • DRs are admitted to listing and trading from 8:00am (when London stock Exchange publishes its dealing notice) • settlement of trades with investors • unconditional dealing in DRs begins • announce admission of DRs via Regulatory Information Service (RIS) / press releaseNot all DR transaction timetables include a period of Conditional Dealing (also known as When Issued Dealing (WID)). Issuersshould assess whether a period of WID dealing is required in conjunction with their advisers. WID is a period of conditional dealingwith deferred settlement ahead of full admission. Trades during the WID period, are conditional on the security being listed and canonly settle once trading has become unconditional. Where the security does not list, all transactions effected during the period ofWID are void. WID is made available by the Exchange on request and at its discretion. WID will normally last for a period of threebusiness days.Preparing to list depositary receipts Page 97
  • 95. it may be prudent to submit a pre-eligibility letter l meetings with key shareholdersto address any particular issues unique to the l review of material documents relating to theissuer, for example, issues related to the financial issuer and its group (usually the issuer willdisclosure the issuer plans to present in the create a physical or electronic data room forprospectus. this purpose) l site visits to view the issuer’s principalSince DR issuers are not required to appoint a assets and operationssponsor, the issuer’s legal counsel will typically l prospectus drafting sessions, at whichliaise with the UKLA on the issuer’s behalf, initially further questions are put to the issuer’sto establish its eligibility for listing and ultimately to senior management in the context of theachieve the admission of its DRs to the Official List. actual text of the draft prospectus l preparation of specialist reports, such asAdmission timetable mineral experts or property valuationThe timetable for a DR listing will differ from deal reports, or a report of financial reportingto deal and will depend on each company’s proceduresindividual circumstances. For illustrative purposes, l representations and warranties from thethe table on pages 96 and 97 presents an example company and selling shareholderstransaction timetable for an IPO of DRs on the l delivery of comfort letters from theMain Market, based on a total transaction length accountantsof 24 weeks. l delivery of legal opinions from counsel.The prospectus General content of the prospectusRequirement for a prospectus The overriding disclosure obligationIn connection with an application for DRs to be The principal purpose of a prospectus is to provideadmitted to trading on the Main Market an issuer potential investors with the information necessarymust publish a UKLA-approved prospectus. The to make an informed assessment of the issuer andpreparation of the prospectus requires a significant the rights attaching to the DRs. In other words, theeffort on the part of the issuer and its advisory prospectus must contain all information that couldteam and is one of the principal determinants of be relevant to an investor’s investment decision –the deal timetable. this is the overriding disclosure obligation. It supplements the equivalent overriding disclosureDue diligence obligation under US rules if the transactionDue diligence is typically undertaken by the includes a placement in the US.underwriters and, particularly if the deal involves aplacement in the US, both the issuer’s and Detailed disclosure requirementsunderwriter’s legal counsel. Due diligence helps In addition to satisfying the overriding disclosureprotect the issuer, its directors, and the obligation, the prospectus must meet a number ofunderwriters from liability and reputational damage. detailed contents requirements, which are set out in Annex X to the FSA’s Prospectus Rules.The due diligence process might include: The detailed disclosure requirements that applyl meetings with senior management and other to prospectuses for DR listings differ in certain key personnel respects from those that apply to prospectusesPage 98 Preparing to list depositary receipts
  • 96. for share listings. For example, unlike in a and the US are considered equivalent for thisprospectus relating to a share listing (either a purpose)Premium or a Standard Listing), there is no l interim financial statements (which may berequirement for a DR prospectus to include a unaudited) covering at least the first sixworking capital statement (to the effect that the months of the year if the last audited annualissuer and its group has sufficient working capital financial statements will be older than nineavailable for its requirements for the 12 months months from the date on which thefollowing the date of the prospectus), and the prospectus will be approved.requirements relating to financial disclosure canbe more demanding in the context of a share In certain cases, however, it is not sufficient for anprospectus, particularly where the issuer has a issuer to limit the financial disclosure in thecomplex financial history. prospectus to the Annex X requirements. The issuer also must meet the overriding obligation toDespite these differences, the disclosure in a DR disclose all material information, which in certainprospectus is likely to look very much like that in a circumstances will demand the disclosure ofshare prospectus, largely because of the overriding additional financial information, above and beyonddisclosure obligation to ensure that it contains all that required under Annex X.material information (an obligation which appliesequally to shares and DRs). This is particularly the For example, it is not uncommon for an issuer tocase in DR deals that will be marketed to US have been incorporated as a new holding companyinvestors – Reg S/144A deals – where the for the listing. Such an issuer might not have anydocument is likely to be drafted with a keen eye on financial history of its own. In such circumstances,the stringent disclosure requirements in the US. investors would reasonably expect to see the financial history of the underlying business in orderFinancial disclosure to make an informed investment decision.The issuer’s consolidated financial statements and Alternatively, the issuer might have recentlythe accompanying analysis set out in the operating purchased, or agreed to purchase, another largeand financial review section of the prospectus are business. The disclosure will likely need to dealcritical to an investor’s investment decision. Under with that new business, perhaps through pro formaAnnex X, a DR prospectus must include: and/or separate financial statements related to that business depending on its materiality andl audited financial statements prepared in other information that can be provided about that accordance with International Financial business. Reporting Standards (‘IFRS’), covering the latest three financial years, or such shorter To ensure that an issuer in circumstances such as period that the issuer has been in operation. these meets the overriding disclosure obligation, Non-EU issuers that do not prepare IFRS one typically cross-refers to the rules that apply to financials will be spared the requirement to share listings. An issuer of shares whose financial restate their financials into IFRS if they have statements do not provide investors with a full been prepared in accordance with generally picture of the underlying business is deemed to accepted accounting standards (‘GAAP’) that have a ‘complex financial history’. are ‘considered to be equivalent to IFRS’ (as of the date of publication the GAAP of Such an issuer is required to disclose (i) the Canada, China, India, Japan, South Korea financial statements of another entity (forPreparing to list depositary receipts Page 99
  • 97. example, the entity that operates the issuer’s Responsibility and liabilityunderlying business); and/or (ii) pro forma A DR issuer is required to make a statement in itsfinancial statements that demonstrate the impact listing prospectus to the effect that it takesof a recent or anticipated transaction (such as the responsibility for the contents of the prospectus. Inacquisition or sale of a large business) on the addition, third-party experts who have preparedissuer’s financial statements. information or reports for use in the prospectus (such as reporting accountants and mineralWhile the complex financial history regime for share experts) are required to accept responsibility forissuers does not apply to DR issuers, it is not the contents of their reports. Unlike in a shareuncommon for DR issuers to look at it by analogy to listing, there is no requirement for the issuer’shelp satisfy the overriding disclosure obligation – in directors to take express personal responsibilityparticular, by including the financial statements of for the entity other than the issuer. The issuer and itslegal counsel would usually address issues relating Any party that takes responsibility for ato the financial statement package with the UKLA prospectus will be liable under the Financialby means of a pre-eligibility letter and agree an Services and Markets Act 2000 (‘FSMA’) to payapproach at an early stage in the transaction. compensation to any person who acquires DRs and suffers a loss as a result of any untrue orDrafting style misleading statement, or a material omission, inl the prospectus should be drafted in a manner the prospectus. Depending on the circumstances, that is comprehensible and easy to analyse investors may be able to bring a claim under al it should avoid bullish rhetoric and ‘marketing different head of liability (for example, under the speak’ in favour of neutral language, balanced common law either for negligent misstatement, or and complete descriptions, and factual false or misleading pre-contractual misstatement) statements that can be substantiated against the issuer and potentially others; however,l discussion of the issuer’s prospects requires the FSMA offers investors a clear, purpose-built particular care route to recovery.l forward-looking statements will to some extent be necessary (for example, to describe In practice, steps will be taken to help guard the issuer’s strategy or material capital against the issuer’s (and its directors’) potential expenditure plans). These statements should liability through the due diligence carried out by it be drafted carefully to avoid unnecessary and its advisory team prior to, and in connection exposure to liability (ie if the anticipated with, the drafting of the prospectus prior to its event or outcome does not occur) publication.l drafting should try to ensure that the issuer’s beliefs and expectations are not construed as Advising the issuer after listing statements of fact and, for material matters, might be accompanied by discussions of the Continuing obligations regime factors that could cause actual outcomes to An issuer with DRs trading on the Main Market is differ from those envisaged required to comply with a range of continuingl profit forecasts – statements that could be obligations. The majority of these requirements are taken to suggest, for example, that the issuer set out under the FSA’s Disclosure and will generate a particular income in the future Transparency Rules. The key theme in this context – should generally be avoided. is disclosure. Disclosure of pertinent information toPage 100 Preparing to list depositary receipts
  • 98. the market allows investors to make informed which directly concerns it, save in a narrow set ofinvestment decisions. This, in turn, promotes circumstances in which the rules entitle it to delayinvestor confidence and facilitates the proper disclosure.functioning and development of the market. In the context of DRs, inside information isFor many issuers, particularly those conducting an information that:IPO, the practice of disclosing material informationto the market is likely to represent a significant l is precisedivergence from previous practice. It is therefore l has not been made publiccrucial that the issuer is properly advised of l relates (directly or indirectly) to the issuer orexactly what it will be required to do once its DRs the DRsare listed. This advice must be delivered at a l would be likely to have a significant effect onsufficiently early stage in the listing process to the price of the DRs if made public (ie isenable the issuer to introduce procedures to ‘price sensitive’).ensure that it is able to comply with its continuingobligations immediately after listing. The issuer must consider each set of circumstances on its own merits and reach aOne of the very first steps a DR issuer needs to judgement as to whether it is in possession oftake, in advance of listing, is to appoint a inside information and, therefore, whether anRegulated Information Service (‘RIS’), such as the announcement is required (or, alternatively,London Stock Exchange’s Regulatory News whether there are grounds to justify delaying anService. The issuer is required to make its announcement). Very often, the key considerationdisclosures to the market via its appointed RIS. is whether the information in question is price sensitive. The requirement to disclose insideDisclosure obligations information is also discussed in the chapter ‘TheIn overview, a DR issuer admitted to trading on the legal framework for an IPO’ on page 31.Main Market is required to disclose to the marketvia its appointed RIS: Periodic financial reporting In addition to the requirement to disclose insidel information that could affect the price of the information on an ad hoc basis, a DR issuer on DRs (‘inside information’) – as soon as the Main Market must publish its annual financial possible after it arises report as soon as possible after it has beenl periodic financial reports – DR issuers are approved and, at the latest, four months after the required to publish an annual financial report, end of the financial period to which it relates (six no later than four months after the relevant months for issuers on the PSM). year end (six months for issues of DRs admitted to the PSM). In addition, DR issuers In summary, the annual report must contain: customarily publish half-yearly reports. l audited consolidated IFRS financial statementsDisclosure of inside information l management report, including a corporateAs soon as an issuer submits its application for its governance statement (disclosing theDRs to be admitted to trading on the Main Market corporate governance code to which theor the PSM, it is required to notify its appointed issuer is subject; the extent of itsRIS as soon as possible of any inside information compliance with such code; and aPreparing to list depositary receipts Page 101
  • 99. description of the issuer’s internal control and risk management arrangements in PDMRs relation to its financial reporting process)l responsibility statement, attesting to the Some DR issuers comply with the PDMR accuracy of the information in the report. regime on a voluntary basis as a matter of best practice.Unlike issuers of listed shares, DR issuers are notrequired to produce half-yearly reports or interim A PDMR is a director or a senior executive ofmanagement statements. However, it is common the issuer who:for DR issuers to publish half-yearly reports as aresult of market expectation and best practice. 1. has regular access to inside information relating, directly or indirectly, to the issuer;Disclosure of transactions by persons anddischarging managerial responsibilities 2. has power to make managerial decisionsThe requirement to publish details of transactions affecting the issuer’s future development andin the issuer’s shares carried out by ’persons business prospects.discharging managerial responsibilities’(‘PDMRs’) and their connected persons does not If the regime were voluntarily followed to theapply to DR issuers. However, the UKLA has at letter, PDMRs and their connected personsleast informally stated that compliance with the would notify the issuer in writing of thePDMR regime by DR issuers would be best occurrence of all transactions conducted onpractice. their own account in the issuer’s securities, within four business days of the day on whichRegulation of market behaviour the relevant transaction occurred. TheIn addition to the continuing obligations notification would include:disclosure regime described above, DR issuers,by virtue of having securities admitted to trading l name of the PDMR or, where applicable,on the Main Market, must refrain from certain the connected personbehaviour – broadly referred to as ‘market abuse’ l name of the issuer– that could prejudice investors and jeopardise l reason for requirement to notifythe efficient operation of the market. Both civil l description of the relevant securityand criminal market abuse regimes apply to l nature of the transaction (for example, anissuers with DRs listed on the London Stock acquisition or disposal)Exchange, as well as to their directors and other l date and place of the transactionofficers. l price and volume of the transaction.Continuing obligations that do not apply to The issuer would then notify the aboveissuers of depositary receipts information to an RIS as soon as possible (and,As noted earlier, DR issuers are not subject to the in any event, by the end of the business dayfull demands of the continuing obligations regime following receipt of the information by thethat applies to issuers of shares (particularly those issuer).with a Premium Listing of shares).Page 102 Preparing to list depositary receipts
  • 100. DisclosureIn terms of disclosures to the market, DR issuersare not required to publish:l half-yearly financial reports or interim management statementsl details of acquisitions or disposals of major shareholdingsl details of transactions in the issuer’s securities carried out by PDMRs and their connected persons.However, as noted above, many DR issuers makesome or all of the above disclosures on a voluntarybasis as a matter of best practice.Corporate governanceDR issuers are not required by the rules to followthe expansive corporate governance regime withwhich issuers of Premium Listed equity sharesmust comply, including:l Listing Principlesl UK Code on Corporate Governancel Model Code (while the Model Code does not apply to DR issuers, the guidance it provides on when an issuer and its senior management may conduct trades in the issuer’s shares is instructive to DR issuers planning to conduct such trades)l requirement to obtain shareholder approval for related-party transactionsl requirement to prepare circulars and obtain shareholder approval for major transactions.An issuer might nevertheless give seriousconsideration to complying with certain of thesecorporate governance rules to assist with themarketing of its DR listing and if it has ambitionsto progress to a Premium Listing of equity shares,to acclimatise to the more demanding regime itwould be required to follow as a Premium Listedissuer.Preparing to list depositary receipts Page 103
  • 101. Establishing a depositary receipt programme Alex H.Hickson and Peter Russell J.P. Morgan
  • 102. Capital without borders When companies need to access investors beyond their borders, they Best Depositary Receipts Bank turn to the recognized leader in Depositary Receipts. At J.P. Morgan, we The Asset, Triple A Transaction commit the entire resources of our firm to your success - that means Banking Awards 2009 focused advisory up front, aggressive support in the aftermarket, and the strength of our research and global reputation throughout. Best Depositary Receipts Program emeafinance, Achievement J.P. Morgan manages some of the world’s most widely held DR programs. Awards 2009 Our DR professionals use their market knowledge and strong deal execution capabilities to structure innovative, well-invested, liquid and cost-effective DR programs for issuers. Since we created the world’s first depositary receipt program over 80 years ago, there is no question about our leadership or commitment to our clients. To learn more about our depositary receipt services, please contact: Asia Kenneth Tse at +852 2800 1859, EMEA Alex Hickson at +44 207 777 2805, WHEM Joseph Dooley at +1 212 622 9225, joseph.dooley@jpmorgan.comThe products and services featured above are offered by JPMorgan Chase Bank, N.A., a subsidiary of JPMorgan Chase & Co. JPMorgan Chase Bank, N.A. is registered by the FSA for investment businessin the U.K. JPMorgan is a marketing name for Worldwide Securities Services businesses of JPMorgan Chase & Co. and its subsidiaries worldwide. © 2010 JPMorgan Chase & Co. All rights reserved.
  • 103. Establishing a depositary receipt programmeGlobal Depositary Receipts (GDRs) have risen to Benefits of GDRsprominence in recent years, becoming the favouredinstrument used by companies from emerging Benefits to an issuer:markets, such as Russia and India, to raise capital l offers a flexible mechanism for capitalon western stock exchanges: raising and a currency for mergers and acquisitionsl companies from more than 70 countries have l diversifies the shareholder base, with depositary receipt programmes providing them potentially greater liquidity for the with new investors outside their home markets underlying sharesl more than 1,500 issuers have a sponsored l enhances visibility among international depositary receipt programme investors, consumers and commerciall more than 350 GDR programmes are listed on customers stock exchanges, of which 190 are listed on l enables price parity with global peers the London Stock Exchange (the ‘Exchange’). through the provision of internationally recognised informationFor investors, GDRs facilitate investment in these l may increase research coverage outside theforeign issuers while limiting many of the home market.complexities and costs associated with cross-border investments, such as the settlement and Benefits to an investor:custody of shares and foreign exchange GDRs also offer tangible benefits to investorstransactions. seeking to diversify their portfolios globally:GDRs can carry many attributes of an issuer’s local l easier to purchase and to hold than anshares; they can provide similar economic rights issuer’s underlying ordinary shares(including the right to receive dividends), and if l trade easily and conveniently in US dollarsstipulated in an issuer’s deposit agreement, voting and settle through established clearingrights in the issuer. For both issuers and investors, housesthere are many more measurable benefits to l eliminate unfamiliar custody arrangementsestablishing a GDR programme and listing on an l limit risks associated with limitedinternational exchange. transparency or instability resulting from changing regulatory procedures in emergingStructuring the GDR programme marketsGDRs have proven to be very flexible. When using l option to acquire the underlying sharesGDRs to access Western capital markets, issuers directly upon cancellation.interested in attracting international investors haveseveral options: capital and increase their profile in the market in which the offering will be conducted. A GDRPublic offering and listing offering can be aimed at European investors in aIn a public offering, GDRs are offered to single tranche under Regulation S (‘Reg S’) whichinstitutional investors and listed on an international exempts offerings conducted outside of the USstock exchange outside the issuer’s home market. from Securities and Exchange Commission (‘SEC’)The offering will be underwritten by an investment registration and reporting, or in two tranches: Reg Sbank. A public offering is generally used by to non-US investors and to US institutionalcompanies seeking to raise substantial amounts of investors via Rule 144A (see below). A listing on anEstablishing a depositary receipt programme Page 107
  • 104. international exchange provides transparent trading place outside a dedicated platform and thereforeoutside the usual market hours. GDRs will typically provides little visibility to the offered to investors in the exchange’s region.For example, a listing on an exchange in Europe Creating GDRswould be aimed at attracting a substantial portion A GDR is issued and administered by a depositaryof European investors. bank on behalf of the (underlying) corporate issuer. Depositary receipts can be created or cancelledRule 144A tranche depending on supply and demand, with brokersTo access a broader pool of liquidity, GDR issuers either bringing additional ordinary shares to thecan include a US institutional element through a depositary to create more GDRs, or withdrawingrestricted private placement of DRs, which is ordinary shares to cancel from the GDR facility.exempt from US securities law registration and GDRs are created when the shares of a foreignreporting. Institutional investors legally able to issuer – either those currently trading in its localparticipate in Rule 144A offerings are known as market or newly-issued shares in connection withQualified Institutional Buyers (‘QIBs’). an offering of securities – are deposited with a depositary’s custodian in the issuer’s homeListing market. The depositary then issues GDRsIssuers can list their GDRs without raising capital representing those shares. At any time thereafter,– known as an ‘introduction’. By listing, issuers will an investor can sell these GDRs in the secondaryhave access to a wider group of institutional market (eg the Exchange’s International Orderinvestors as well as increasing their visibility and Book), or deliver the GDRs to the sponsoringname recognition. From a documentation and depositary bank for cancellation in order to receivedisclosure perspective, there is generally little the underlying ordinary shares for settlement ordifference between an introduction and a capital sale in the foreign issuer’s local market.raising, other than the description of the sale ofshares that would be included in an offering Typically, GDR programmes are governed by aprospectus. While listing alone does not raise Deposit Agreement agreed to by the issuer andcapital, it does enable companies to enter a the depositary bank, which, among other things,market and get to know the participants without outlines the terms and conditions of the GDRincurring the expense and requirements of a raising. At the same time, an introductionshould only be considered together with initiatives Setting the GDR-to-share ratioaimed at raising secondary market liquidity. The initial price of a GDR primarily depends on the ratio between the number of GDRs and thePlacing (private placement) underlying shares (‘GDR ratio’). This ratio can varyA placing is usually a more selective process widely; one GDR may represent an ownershipwhereby GDRs are offered to a small number of interest in many shares of corporate stock orselected institutions. While this route gives the represent only fractional shares, depending onissuer more control over the distribution, it can whether the GDR is priced higher or lower thanrestrict the shareholder base and naturally limit the underlying ordinary shares.liquidity. In the secondary market, such privately-placed GDRs would be trading Over-The-Counter There is no particular rule for setting the ratio, with(‘OTC’). Unlike in the US, where OTC platforms the ease of calculation and relevance of the GDRare regulated, GDR OTC trading in London takes price to the international norm for share pricesPage 108 Establishing a depositary receipt programme
  • 105. being primary considerations. Most GDRs are The deposit agreementpriced comparably to shares of peer companies As a first step toward establishing a GDRtrading on the same exchanges. While many programme, the foreign issuer and its chosensuccessful programmes are established with a depositary bank jointly sign a deposit agreement.ratio of 1:1, many issuers with low home market This contract details the legal relationship andprices have GDR-to-share ratios of 1:5, 1:10, or obligations of the depositary bank and the issuer,even 1:1000 etc. Companies deciding on a GDR describes the services the depositary and issuerprice and the corresponding ratio should consider will provide, and sets out the rights of GDR holdersthat: and the fees they must pay the depositary bank. While some terms are standard, deposit agreementl liquidity is enhanced when there is a significant provisions may vary from programme to number of GDRs eligible for trading; investors programme, depending on the legal requirements are more likely to buy GDRs that are perceived of the foreign issuer’s home market and the to be liquid and fairly priced objectives of the issuer.l while the fundamentals may be the same, an investor typically prefers to buy 100 shares of The deposit agreement includes provisions relating a US$20 stock instead of 10 shares of a to the following: US$200 stock. l deposit of the issuer’s sharesThe GDR ratio initially selected may affect the l execution and delivery of the GDRstransaction costs that investors will pay. For l issuance of additional shares by the issuer ininstance, since fees for issuance (and cancellation) compliance with applicable securities lawsare assessed in cents per GDR, a GDR that is l transfer and surrender of the GDRspriced ‘too low’ can add incremental transaction l setting of record dates by the depositarycosts for investors (see chart ‘Issuance and bankCancellation of GDRs’ on page 113 for a l voting of the foreign issuer’s underlyingdescription of the issuance and cancellation shares (ie the shares evidenced by theprocess). A ratio is established at the outset, but GDRs)can be changed at any time by the issuer l obligations and rights of the depositary banksubsequently if the GDR price moves too far and holders of the GDRsoutside market parameters. l distribution by the depositary bank of cash dividends, stock dividends, rights to acquireMost of the factors driving GDR prices are the additional shares of the issuer and othersame as those affecting the underlying shares: distributions made by the issuercompany fundamentals and track record, relative l circumstances in which reports and proxiesvaluations and analysts’ recommendations and, of are to be made available to GDR holderscourse, market conditions. The international status l tax obligations of depositary receipt holdersof the company is also a key factor. Investors l fees and expenses to be incurred by thebuying GDRs pay in dollars but are investing in an issuer, the depositary bank and GDR holdersasset that moves in line with a foreign currency l pre-release of GDRsand foreign market. The ratio is simply part of the l protections for the depositary bank and thestructure surrounding the investment that makes it issuer (ie limitations on liabilities).easier to manage.Establishing a depositary receipt programme Page 109
  • 106. Admission to listing on the l publishing an annual financial report, withinLondon Stock Exchange four months of its fiscal year-end. The annualThere are two London Stock Exchange markets financial report must include audited financialwhich admit GDRs to trading: statements, a management report and responsibility statements and must remainl the Main Market publicly available for at least five yearsl the Professional Securities Market (‘PSM’). l publication of inside or price-sensitive information via a Regulated InformationWhen applying to the Exchange for admission, the Service (‘RIS’). By keeping the marketcompany specifies the market on which it would informed in a timely manner through presslike its GDRs to trade. releases and other announcements, the issuer allows all investors on all its markets to tradeMain Market in a knowledgeable manner and on an equalMost GDR issuers choose to list on the Main footing. Further, if the issuer believesMarket. GDRs traded on the Main Market are information has been leaked regarding aobliged to follow the rules for EU-regulated confidential or price-sensitive corporatemarkets, which are enshrined in the FSA’s matter, it is required to communicate with theProspectus Rules, Listing Rules and Disclosure and market to remove uncertainty regarding theTransparency Rules. As in the case of any other stock.issuer, the FSA requires full disclosure of all majorrisk factors in the prospectuses of GDR issuers. It should also be noted that American DepositaryGDR issuers are also required to comply with the Receipts (‘ADRs’) can also be listed on theLondon Stock Exchange’s Admission & Disclosure Exchange. For example, several Russian ADRsStandards. For full details of the prospectus have been listed by way of an introduction on thecontents requirements see ‘Preparing to list London Stock Exchange.depositary receipts’ chapter on page 91. The Professional Securities MarketListing requirements for entry include: The Professional Securities Market is operated by the Exchange within the scope of its status as a(i) a prospectus prepared in accordance with the Recognised Investment Exchange. Prospectus Directive, including IFRS accounting (this applies to both a capital The PSM is only accessible by ‘wholesale’ raising or listing by introduction) investors and, as such, the FSA is able to exercise(ii) three years of trading history (or such shorter flexibility in the application of European directives. period for which the issuer has been in Issuers wishing to list on the PSM must meet the operation) following criteria:(iii) a minimum GDR market capitalisation of £700,000; and (ii) latest three years of audited accounts (or(iv) a minimum of 25 per cent of floated DRs in such shorter period for which the issuer has public hands. been operating) (iii) minimum GDR market capitalisation ofBy listing on the Main Market the company is £700,000; andagreeing to abide by the relevant continuing (iv) national GAAP may be used in the preparationobligations. These include: of the prospectus.Page 110 Establishing a depositary receipt programme
  • 107. Flexibility with respect to accounting requirements and post-trade anonymity. Firms wishing tomay be a cost saving for many companies as advertise their presence on the book can choose toreconciling to IFRS, or providing additional identify themselves by using Named Orders. Andisclosure as required by the Prospectus Directive, optional netting service is available on the IOB,could be very expensive. However, issuers may provided by LCH.Clearnet, which enables firms toneed to provide a description of the key differences net same-day, same-security trades at the CCPbetween their local accounting standards and IFRS. level for trades in cleared securities. Trades in DRs executed on the Exchange’s Cleared IOB serviceIssuers choosing the PSM will have their listing settle within Euroclear.particulars approved by the UK Listing Authority(the ‘UKLA’, a division of the FSA). Although IFRS GDRs (including those that are constituents of thedoes not apply, disclosure obligations for listed Main Market and the PSM) can be traded incompanies do apply to companies represented on parallel on alternative platforms – quotationthe PSM. platforms of other exchanges as well as multilateral trading facilities (MTFs) such as Turquoise.Issuers admitted to trading on the PSM must meetcertain continuing obligations, including: Parties involved in establishing a GDR programmel disclosing price-sensitive information and Establishing a GDR programme requires close trading matters to the market as soon as coordination between the issuer, its chosen possible depositary bank and each firm’s legal advisers.l publishing an annual report and financial When raising capital, the issuer also relies on accounts within six months of the year-end; accountants, investment bankers and investor and relations firms. The table ‘Key roles andl preparing and maintaining a list of persons responsibilities of parties to a GDR programme’ on considered ‘insiders’. page 112 summarises the roles and responsibilities of each programme partner.Notable examples of celebrated GDR listings onthe Exchange include Tata Steel’s US$500m capital GDR certificateraising in July 2009 on the PSM and Rosneft’s GDR certificates are typically not issued toUS$10.6bn offering on the Main Market in July investors holding GDRs or those holding 144A2006. DRs. A master certificate is issued either directly to a securities depositary, such as the DepositaryTrading in GDRs Trust Company, or to a Common Depositary whichGDRs, on both the Exchange’s EU-regulated Main will hold the master certificate on behalf ofMarket and the PSM, are traded on separate settlement systems such as Euroclear andsegments of the Exchange’s International Order Clearstream, investors and the depositary bank. AsBook (‘IOB’). GDRs are issued and cancelled, the number of GDRs represented by the master GDR is adjustedThe IOB trading matches and executes incoming up and down accordingly.electronic orders in DRs from over 46 countriesranging from Central and Eastern Europe, Asia and Euroclear and Clearstream are the two centralthe Middle East. Central Counterparty (‘CCP’) is depositaries in Europe, through which the tradingprovided for over 70 of the most liquid DRs and settlement of GDRs is documentedmitigating counterparty risk and ensuring both pre- electronically. These two entities work under theEstablishing a depositary receipt programme Page 111
  • 108. Key roles and responsibilities of parties to a GDR programmeDepositary bank• provides advice/perspective on type of programme, exchange or market on which to list or quote• advises on ratio of depositary shares to ordinary shares• appoints custodian• coordinates with all parties to complete programme implementation steps on schedule• coordinates with legal counsel on Deposit Agreement and securities law matters• announces GDR programme to market (brokers, traders, media, institutional investors via news releases and internet)• works with issuer to maintain active GDR programme• coordinates with issuer to announce and process corporate actions such as dividends and shareholders’ meetingsCustodian• receives local shares in issuer’s home country• confirms deposit of underlying shares• holds shares in custody for the account of depositary in the home marketIssuer• provides depositary and custodian with notices of dividends, rights offerings and annual and special shareholder meetings• interacts with listing authority and responds to all questions• IR/PR targeted programme• adheres to stock exchange regulations and accepted corporate governance standards, including reporting and transparencyLegal adviser (for the depositary and for the issuer)• reviews draft deposit agreement received from depositary bank• submits requisite documents to local regulatory authorities and exchanges• manages compliance with securities laws, rules and regulations and perfects any securities law exemptions• provides corporate action support, as appropriateAccountant• prepares company’s accounts for insertion into prospectus• reviews prospectus and interacts with authorities• annual audit and prepares accounts in accordance with accepted standards such as IFRSInvestor relations adviser• develops long-term plan to raise awareness of issuer’s programme in the markets in which GDRs will trade• develops communications plan and information materials for launch activities (roadshow and presentations to investors, meetings with financial media)• coordinates with issuer’s advertising and public relations teams on specific programme plans to support and develop company imageInvestment banks/Underwriters• advise on size, pricing, marketing of offering, type of programme and selection of exchange or market, and ratio of DRs to ordinary shares• act as placement agent or underwriter in offering• conduct roadshows with management/introduce issuer to institutional and other investors• lines up dealers and co-underwriters• cover issuer through research reports/promote DRs to investors• advise on roadshows, investor meetings, investors to targetPage 112 Establishing a depositary receipt programme
  • 109. Issuance and cancellation of GDRsIssuances Cancellations1. Investor calls broker with an order to buy 100 GDRs in an 1. Investor calls broker with an order to sell 100 GDRs in an issuer. issuer. At settlement (usually T+3), the investor will deliver the GDRs to the broker.2. Broker can fill order by either buying GDRs on the 2. Broker completes the sell order by either selling GDRs on the international exchange on which they trade, or purchasing international exchange on which they trade, or converting the ordinary shares in the local market and having them GDRs to ordinary shares and selling such underlying shares converted into GDRs. in the local market.3. If the broker chooses to buy in the local market, they will 3. If the broker sells in the local market, they will conduct their conduct their trade via a local broker. The broker will then trade via a local broker. If the broker converts the GDRs to notify the depositary bank to expect the delivery of shares at ordinary shares, the broker will deliver the GDRs to the the local custodian. depositary bank for cancellation and provide the necessary delivery instructions for the ordinary shares.4.The custodian notifies the depositary bank when the shares 4. The depositary bank instructs custodian to deliver local are credited to its account and instructs it to deliver the shares to account provided by broker, subject to seller’s GDRs to an account specified by the broker. payment of GDR cancellation fees and any other applicable charges.5.The depositary bank delivers GDRs to the investor’s broker, 5. Custodian delivers shares as instructed. subject to the buyer’s payment of GDR issuance fees.6. Broker delivers GDRs to investor. 6. Local broker receives shares.rules of ‘client confidentiality and non-disclosure’ When the dividend record date and payment dateand consequently neither the issuer nor the for the domestic shares have been established bydepositary is able to obtain and confirm information the issuer, the dates are given immediately to theregarding the identity of beneficial holders of GDRs. depositary so that it can:Specialist vendors may assist with shareholderidentification using proprietary databases of l set the record and payment dates for the GDRcustodian accounts and regulatory methods of based on the agreed-upon calendar andengagement with institutional investors. market requirements, and then communicate these dates to the markets. For example, theCorporate actions and dividends Exchange expects at least three businessWith respect to corporate actions, the depositary days’ notice of any record date. This allows itbank acts as a bridge between the issuer and GDR to notify the market and properly announce theholders outside its home market. To the extent ex-datepossible, the depositary provides GDR holders with l announce preliminary (estimated) dividendbenefits comparable to those received by the payment amounts based upon the exchangeissuer’s domestic shareholders. rate between the issuer’s domestic currency and US dollars on the date of theIf dividends are to be paid on the underlying announcementsecurities, the depositary bank provides for l arrange for the dividend, received from thedividends to be converted and net proceeds, after issuer directly or via the depositary’sdeduction of any taxes and fees, to be paid out in custodian, to be converted from thethe currency of the GDR, (typically US dollars). The domestic currency into US dollars. The finalGDR investor carries the foreign currency risk, as rate per GDR will be announced once thethe amount of the dividend will be affected by any dividend has been converted and the actualmovement of the US dollar against the investor’s rate per GDR has been calculatedhome market currency. l distribute to GDR holders the dividend, net of any required tax withholding and/or any fees.Establishing a depositary receipt programme Page 113
  • 110. Where possible the depositary bank will also directly using proxy solicitation vendors to discussfacilitate dividend tax reclaim or relief at source to any questions they have regarding the resolutionsallow GDR investors to benefit from favourable tax and to encourage them to submit their vote.rates under double taxation treaties. Investor relations (‘IR’)For more complex corporate actions, such as rights As a company transitions to a publicly-listed entity,issues and corporate restructurings, the depositary it must provide the investment community withis typically made a party to the transaction so that increased transparency into the organisation,it can work with the issuer and its advisers to comply with regulations and communicate goals,devise the appropriate structure and distribution market opportunities and growth strategies. Inchannel for the GDR investors. practice, this requires the issuer to develop its readiness for IR in the pre-IPO phase and sustainShareholder meetings clear and consistent communications after theThe deposit agreement outlines the issuer’s GDRs begin trading.responsibilities, if any, to GDR holders with respectto shareholder meetings. For good corporate Driving sufficient demand for a company’s GDRs,governance purposes, issuers typically give their over time, requires a comprehensive IR strategyGDR holders the right to vote at the shareholder aimed at continually raising the company’s visibilitymeeting. The issuer’s depositary bank provides among GDR investors and effectivelyguidance as to the timing and mechanics for communicating its investment story. It is importantdistributing information and voting cards to GDR that the depositary bank is well placed to provideinvestors. IR advisory services in support of the issuer’s GDR programme.The issuer provides the depositary bank with thenecessary information as far in advance as possible A depositary bank can help enable the issuer toof a shareholder’s meeting. Six to eight weeks’ make the best first impression in the capitalnotice is optimal. This timeframe enables the markets, immediately begin building trust withdepositary bank to prepare the voting instruction GDR investors and set the stage for optimalcard, distribute it through the clearing systems to valuation over the long term. The services providedthe GDR holders, receive voting instructions from by a depositary bank’s IR advisory team include:them and arrange to have the underlying sharesvoted at the meeting in accordance with those l IR strategy and calendar – assistance in theinstructions. development and execution of an IR action plan aimed at achieving specific goalsThe depositary bank also assists the issuer with l investor targeting, with a focus on GDR-preparation and review of the documentation specific investors (analysis to identifyrequired to comply with general GDR market investors for roadshows)practices. This includes coordination with the local l best practice advice on investorcustodian and regulators to prepare authorisations communications, including performanceand documentation to comply with local market guidance and disclosureregulations and procedures for GDRs. l internal IR reporting procedures.Some issuers are keen to get a high level ofparticipation from their overseas holders. In thiscase, issuers may contact their GDR investorsPage 114 Establishing a depositary receipt programme
  • 111. Sample timetable for establishing a GDR programme Issuer UKLA LSE Broker Sponsor Depo A L IR12-24 weeks before admissionEstablish/organise transaction team √ √ √ √ √ √ √Detailed timetable and responsibilities agreed √ √ √ √ √ √ √ √ √6-12 weeks before admissionDraft preliminary offering circular (Note: depositary bank provides √ √ √ √ √ √‘description of GDRs’ for offering circular)Initial review of pricing issues √ √ √Begin planning US and European roadshow and ongoing investor relations: √ √ √ √create communications materials and target institutional investorsSelect GDR/ordinary share ratio √ √ √ √3-6 weeks before roadshowDue diligence on prospectus √ √ √ √ √Roadshow meetings √ √ √ √ √Formally submit and agree all documents with UKLA √ √Print pathfinder prospectus for Regulation S component if required √ √ √Negotiate Deposit Agreement √ √ √Translate Deposit Agreement, if applicable √ √Specific to Russia-incorporated issuers:Prepare applications to FSFM and FAS, if applicable √ √ √ √Apply and receive FSFM approval for GDR programme establishment and √ √ √ √FAS clearances1 week before admissionAll documents completed and approved by UKLA √ √ √ √Pricing and allocation meeting √ √ √ √ √Register prospectus √ √ √Admission weekFormal application for London Stock Exchange listing and admission to √ √ √ √tradingApply for PORTAL system eligibility (for Rule 144A programme in the US) √ √ √ √Arrange Euroclear, Clearstream and DTC eligibility for book-entry √ √ √ √settlement and deliveryClosing: execute Deposit Agreement; placement agent delivers cashproceeds to issuer; depositary bank’s custodian receives underlying shares; √ √ √depositary delivers GDRs to lead placement agent through DTC,Clearstream and/or EuroclearWhere permitted, send announcement of programme to broker community √ √ √ √Post-Closing40 days after the last closing of the Regulation S-only issuance, the issuerand depositary bank may file a Form F-6 with SEC to establish a Level I √ √ √ADR programmeTimeframes are indicative. Regulator’s involvement and issuer’s programme specifics may vary and can materially affect timing. The UKLA’s listingrules require that the minimum amount of time between the initital submission of documents and approval is 20 working days.Key to parties involved: UKLA = UK Listing Authority, I = Issuer, Depo = Depositary Bank, A = Accountant, L = Legal adviser; IR=Investor relations.Other parties, specific to Russian-incorporated issuers: FSFM = Federal Service for Financial Markets, FAS: Federal Antimonopoly Service.
  • 112. Useful contactsLondon Stock Exchange Freshfields Bruckhaus Deringer LLPUK companies: + 44 (0)20 7797 3429 Simon Witty, PartnerInternational companies: + 44 (0)20 7797 4208 Email: Phone: +44 (0)20 7832 7018Capita Registrars David Cotton, Senior AssociatePaul Etheridge, Head of Corporate Advisory Email: david.cotton@freshfields.comEmail: Phone: +44 (0)20 7785 2686Phone: +44 (0)20 7954 9706Phil Roberts, Deputy Head of Corporate Advisory J.P. MorganEmail: Depositary Receipts GroupPhone: +44 (0)20 7954 9703 Alex H. Hickson, Regional Head EMEA Email: Phone: + 44 (0)20 7777 2805Cleary Gottlieb Steen & Hamilton LLPRaj S. Panasar, Partner Peter Russell, Investor Relations Advisory ServicesEmail: Email: peter.russell@jpmchase.comPhone: +44 (0)20 7614 2374 Phone: + 44 (0)20 7742 1480Stephen Glasper, AssociateEmail: UBSPhone: +44 (0)20 7614 2354 UBS Investment Banking John Woolland, Managing Director Email: john.woolland@ubs.comErnst & Young LLP Phone: +44 (0)20 7568 2336David WilkinsonUK IPO Partner David Seal, DirectorEmail: Email: david-l.seal@ubs.comPhone: +44 (0)20 7951 2335 Phone: +44 (0)20 7568 2025Guy Carr UBS Equity Capital MarketsUK IPO Director Christopher Smith, Managing DirectorEmail: Email: christopher-mp.smith@ubs.comPhone: +44 (0)20 7951 0166 Phone: +44 (0)20 7568 4389 Alex Bloch, Associate Director Email: alexander.bloch@ubs.comFishburn Hedges Phone: +44 (0)20 7567 4597Andy Berry, DirectorEmail: +44 (0)20 7839 4321Useful contacts Page 116
  • 113. QUOTEDPublishing editor: Nigel Page A guide to listing on the A guide to listing on the London Stock Exchange London Stock ExchangePublisher: Tim Dempsey is published by: © 2010 London Stock Exchange plc and White Page LtdDesign: London Stock Exchange plc White Page Ltd, 17 Bolton Street London W1J 8BH Copyright in individual chapters rests with thePrinting and binding: Argent Litho Ltd United Kingdom authors. No photocopying: copyright licences Whatever your company’s size or sector, we can put you at the heart Phone: + 44 20 7408 0268 do not apply. Fax: + 44 20 7408 0168 of one of the world’s most sophisticated financial communities. Email: This guide is written as a general guide only. It Web: should not be relied upon as a substitute for The Main Market is home to approximately 1,400 companies from specific legal or financial advice. Professional advice should always be sought before taking over 60 countries, including some of the world’s most successful and white page any action based on the information provided. dynamic organisations. So far this year £20.8 billion has been raised Every effort has been made to ensure that the on the London Stock Exchange, of which £17.9 billion has been First published: November 2010 information in this guide is correct at the time of raised on the Main Market. ISBN: 978-0-9565842-1-2 publication. The views expressed in the articles contained in this guide are those of the authors. Here at the London Stock Exchange we help companies to access the London Stock Exchange, AIM and the coat of deepest pool of international capital. Premium Listed companies on the arms device are registered trademarks of Main Market meet the highest listing standards helping to raise their London Stock Exchange plc. The publishers and authors stress that this publication does corporate profile and increase their exposure to investors. not purport to provide investment advice, nor do they bear the responsibility for any errors or Learn more about the Main Market and why leading omissions contained herein. companies choose to list on the London Stock Exchange – Copyright November 2010 London Stock Exchange plc London Stock Exchange, the coat of arms device and AIM are registered trademarks of the London Stock Exchange plc. London Stock Exchange statistics as at end September 2010