This article examines the key considerations for a company contemplating listing, including: factors to consider when deciding whether an IPO is desirable; choosing a market; appointing advisors and their respective roles; pre-IPO reorganisation options; corporate governance considerations; and structuring the IPO.
The decision to take a private company public must be well reasoned as the process and costs involved are significant. In addition, once listed, a company will be subject to many ongoing requirements of a regulatory nature. On that basis, there need to be strong reasons to support the decision to do an IPO.
In practice, however, when a company is considering an IPO it often focuses on two things only:
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How long it will take to do the offering and commence trading on a stock exchange.
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How much it will cost.
Companies thus often fail to realise that many decisions need to be made and a large amount of work needs to be undertaken before the advisors even commence due diligence for the transaction.
Factors to consider
All of the factors below need to be taken into account when a company decides to list. Some are advantages, while others are disadvantages of the IPO. The decision that an IPO and listing is the right mechanism should be taken early in the process before too much cost is incurred.
Capital raising
It is normal (although not essential) for companies seeking to list to raise capital in an IPO. This capital can be raised entirely by the company through the issuance of additional securities or can be partially raised by the shareholders should they decide to sell-down some of their securities into the IPO as well.
Where an issuer is considering allowing major shareholders to liquidate some of their investment through a sell-down, issuers will need to be aware that on many reputable markets there will be shareholder lock-in regulations which will restrict the percentage any shareholder can divest into the IPO and require the remaining shares to be held for a minimum period post-listing. These rules prevent entrepreneurs from creating companies and then, after a few years, taking them public and stepping away entirely by capitalising on their investment, leaving the company to flounder without their direction and control.
Whether the company should issue new securities to fulfil the entire IPO or shareholders should themselves receive some of the funds raised will partly depend on how much capital the company needs to raise and what it will use the funds for. In any IPO the regulator will usually expect to see clear disclosure in the offering document of the use to which the funds raised will be put. An investment is unlikely to be attractive to investors if a company is raising US$500 million but does not need that money to grow, expand or diversify. In effect, this likely means the funds are being raised purely for working capital and will sit in a bank account prior to being employed at a later date.
Increased profile
Too often issuers wish to be listed on a stock exchange because of the increased profile they believe it attracts, but profile itself should not be the main factor in any decision to list. While increased profile should not be the only reason a company has to list, it is a factor to consider. Increased profile facilitates doing business internationally. Companies that are listed and subject to rigorous continuous disclosure regimes and corporate governance requirements may find it easier to contract with counterparties as there may be more trust in the ability of the listed company to deliver on contracts and more transparency on the financial position of the company.
Public exposure
As a result of the continuous disclosure obligations on listed companies, stock exchanges have sophisticated systems for dissemination of price sensitive and other information about companies on their market. This can be used to the advantage of listed companies who may choose to actively disseminate press releases about their business which show them in a positive light through the same channels. News providers like Bloomberg are more likely to disseminate information about a listed company where the information has been published through a stock exchange system. However, companies should seriously consider the implications for their business being subject to continuous disclosure regimes in advance of any decision to list. For example, if a company wants to keep their dealings private then being listed will not allow that.
Company valuation
The valuation can be another compelling reason for a company to list. Not only will the company have an obvious value at the outset, but once the company begins trading on the market a valuation of the company can be reached quickly and cheaply on any given day based on the market capitalisation at close of trading on that day.
This equally facilitates further investment into the company, as the value of new securities issued is usually based on the market price. In such circumstances, the extent of due diligence required is reduced.
However, on the flip side, once the market price of the company’s shares is available to the public a company may become a target for a takeover by a competitor or other third party. In these circumstances, takeover regulations will apply, and it may be difficult or impossible to prevent the transaction.
Before a company decides to list, the advisors will give an indicative valuation for the company. If the valuation is substantial there is a better argument for listing. As the IPO progresses the true value of the company will often be determined during a book building process whereby a register is created of the wholesale market bids for the securities on offer. From this list of offers the most appropriate company value can be determined on the basis of supply and demand principles. (A fuller discussion of the bookbuilding process is beyond the scope of this article.)
Liquidity
The shareholders of a company considering listing may be keen to go public to the extent they have plans to divest their own holdings either fully or partly in the short to medium term. Once listed there is generally a constant liquid market for the securities meaning that any person wishing to divest can easily find buyers at the current market price.
Compliance and compliance costs
Listed companies have significantly higher compliance costs and often need personnel or entire departments employed just to ensure continuous disclosure and corporate governance obligations are met consistently. To the extent the regulator perceives a breach, costs will be incurred in engaging with the regulator and satisfying them that no action should be taken.
In addition, there are generally restrictions placed on how listed company boards must be structured and how decisions should be taken at the board and shareholder levels through the corporate governance requirements.
Share dealing/ insider trading
Once a company is listed, its directors and officers will be subject to restrictions in relation to when and how they can buy or sell securities in the company. Insider trading legislation often applies to listed entities only and many exchanges also have regulations around dealings in shares by directors and senior officers even when no inside information is present.
Deciding on a market
Once it has been decided to conduct an IPO, deciding on a market is the next step. This is normally a decision made in consultation with the issuer’s advisors but there are a number of factors which will be taken into account. It should not be seen as natural for the company to list on the market operated in the jurisdiction where it is incorporated or operates, as many of the established markets permit entities from anywhere in the world to list.
One of the factors advisors will consider is whether the entity will have a higher profile listing on its local market if its operations are restricted only to that market. For example, there is no point in a company that operates in Australia and is not known outside Australia listing on the Singapore Stock Exchange if there is not something specific about the industry the company operates in that would draw investors in Singapore to it.
In addition, the following should be taken into account:
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Industry considerations. An entity which has a specific industry focus may well perform better on the secondary market if it is listed with other entities in a similar industry. For this reason REITs will often list on the Singapore Stock Exchange, technology companies will often choose NASDAQ and mining companies will often list on the Toronto or Australian Stock Exchanges.
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The size of the issuer. For example, if a UK based company is likely to be included in the FTSE index then there may be no reason to look at any alternative venue than the London Stock Exchange. The increased profile and aftermarket performance of such a company are likely to be compelling enough reasons to list on the London Stock Exchange with inclusion in the index, irrespective of industry or other considerations.
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Ability (ease) to list on a market. Not all exchanges are open to all companies and this is one of the reasons advisors need to be consulted. Some smaller exchanges do not lend themselves well to foreign issuers. For example, it is not easy for a foreign company to list on the Tadawul Exchange in Saudi Arabia.
In some circumstances dual listing (shares traded on two separate markets in two jurisdictions) may be appropriate. This will afford the company a wider potential investor base but may also mean two sets of regulations will need to be complied with. There are a number of structures to achieve this.
Appointing advisors
The issuer needs to think about appointing key advisors fairly early in the process. What advisors will be required will vary depending on the chosen market and the proposed structure of the offering. The main advisors that usually get appointed first are:
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The investment bank that will be the lead manager and perhaps underwriter for the issuance.
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Counsel to the issuer.
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Counsel to the investment bank.
The issuer will select the investment bank and may select its counsel. The investment bank will generally select its own legal counsel and may also have some input into the legal counsel the issuer selects if the issuer has not already appointed one when the investment bank is engaged.
The following advisors may also be appointed later in the process:
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An underwriter (if different from the lead manager).
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A legal advisor to the underwriter (if different from the legal advisor to the lead manager).
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A placing agent.
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A reporting accountant.
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A depository (if any securities being issued are global depository receipts).
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A sponsor (if required and different from the lead manager).
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A public relations consultant.
The role of the advisors referred to can be summed up as follows.
Lead manager/sponsor
In many jurisdictions these roles will be performed by a single investment bank. The roles will generally be split if the lead manager is not prepared to underwrite the entire offering or not qualified to (or not willing to) assume the sponsor role.
The lead manager is the key advisor and its role comprises:
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Assisting the issuer in determining if a listing is right for them, which market they should list on and how much capital should be raised and when.
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Advising on the best structure for the offering in conjunction with the legal advisors, and on the price range which should apply to the securities being offered.
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Assisting the issuer with the drafting of the offering document.
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Arranging road shows immediately prior to the offer commencing.
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Advising the issuer on gaining more publicity and what jurisdictions should be targeted.
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Running the bookbuilding process to enable the price of the securities to be set.
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Attending to all trading, clearing and settlement arrangements at the time of listing.
If a separate underwriter is required the lead manager will generally assist the issuer to identify the best entity and help negotiate the fee arrangements. In some cases the lead manager will also undertake market making or stabilisation activities post-listing to ensure the trading price in the securities stays reasonably stable and that there is adequate liquidity, but these functions can be undertaken by another service provider or may not be needed at all.
The sponsor confirms to the regulator and/or the exchange that the issuer has been properly advised and the offering document meets the requirements of the regulations. Many jurisdictions require a public offering to be sponsored (for example, certain types of listing on the London Stock Exchange and NASDAQ Dubai).
Issuer’s counsel
Where the offering is global in nature this role will often be split between global counsel and local counsel in one or more jurisdictions where the offering takes place.
Prior to the IPO the issuer’s counsel will advise on the following, among others:
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Reorganising the issuer group in preparation for listing, where necessary.
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Corporate governance procedures and practices to prepare the company for the governance requirements which will apply post-listing. The articles of association (Articles) (or equivalent document) will then generally be amended.
As the listing transaction proceeds the legal advisor to the issuer will arrange and conduct due diligence on the issuer, so that the offering document discloses all material information about the company. A formal legal opinion will often be required on the offering document to protect the directors of the issuer from liability and this will usually be given by the issuer’s legal advisors. In most developed jurisdictions a company director can be held personally liable for material misstatements in an offering document.
The issuer’s counsel will take a lead role in liaising with the regulatory authorities involved in the offering and in the listing. Thus, they will:
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Apply for any necessary regulatory approvals and waivers required by the issuer.
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Arrange any necessary corporate approvals from shareholders or directors of the issuer to permit the offering and the listing to proceed.
When any additional advisor is appointed the issuer’s counsel will review and provide advice upon the terms of business and contracts between the company and such advisors.
Counsel to lead manager/sponsor/underwriter
As with legal advisors to the issuer, there may be separate global and local counsel for the lead manager. The role of this advisor is to:
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Conduct due diligence investigations on the issuer on behalf of the lead manager to ensure the lead manager has enough information about the company to advise on the valuation of the company at listing and on the offering document. The lead manager’s counsel will participate in drafting the offering document.
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Advise on any agreements the lead manager will have with the issuer and on the proposed offering structure. The advice in connection with the offering will include advice on the offering requirements in each jurisdiction where the offer of securities will be made and whether the lead manager will need any type of licence in such jurisdiction or will need to appoint a placing agent. This advice will form the basis on which the lead manager will advise the issuer of the jurisdictions where the offering should be made.
The lead manager will often seek legal opinions from its advisors, including opinions on the completeness of the offering document where the lead manager is also taking responsibility for such offering document as a sponsor.
In many cases US securities law legal opinions will also be sought as many global offerings now have a US component to them. These legal opinions and advice can form a major part of the counsel’s role, particularly in respect of Rule 144A offerings and where an opinion or letter concerning disclosure requirements is required for market reasons.
The legal advisors to the underwriter will conduct more elementary due diligence to ensure the valuation of the company is correct and will advise the underwriter on the terms of the underwriting agreement.
Underwriter
The underwriter subscribes for some or all securities which are not taken up by investors directly during the offering process. They will either subscribe for securities directly and on-sell them subsequently or will find other investors from their client base to subscribe. An offering is usually underwritten as it guarantees the funds required will be raised.
Placing agent
The placing agent assists with marketing the securities being offered and distributes the offering document and securities to investors. A placing agent is not always required for an IPO. Where one is most commonly seen is where the lead manager itself is not licensed to distribute the securities being offered in all jurisdictions where the offering will be made. Where the lead manager is licensed in some but not all of the relevant jurisdictions, different placing agents may be appointed for each jurisdiction which is not covered.
In rare cases, a placing agent may be appointed in a jurisdiction which the lead manager already has covered if it is felt that this will maximise distribution and marketing of the securities being offered.
Reporting accountant
The reporting accountant conducts a financial due diligence on the issuer and ensures the financial information in the offering document is accurate. They may also need to:
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Complete the preceding year’s audit (if not done already).
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Review interim financial statements.
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Advise on tax issues, if the group will be restructured pre-IPO.
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Prepare restated historical financial statements if the prior years have been reported in accordance with financial reporting standards which are not acceptable to the chosen market.
Towards the end of the IPO process, the reporting accountant will provide a series of letters and reports, some of which are included in the offering document.
Where the lead manager acts as the sponsor too, it will often require the reporting accountant to report to it on the financial position of the company to minimise its liability.
Depository
The depository is usually a bank. It will be the legal owner of the underlying securities where depository receipts will be issued to investors. The depository issues depository receipts over the underlying shares and it is those receipts that represent the investor’s beneficial ownership in the underlying securities. The depository will:
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Maintain a register of holders of the depository receipts.
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Pass the issuer’s information and documentation (including annual reports and notices of annual meeting) on to the holders of the depository receipts.
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Arrange for voting by the depository receipt holders (who have no direct right to vote at shareholders meetings of the issuer since they do not legally own shares).
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Administer dividend payments and facilitate other corporate actions.
The depository’s role is administrative in nature. Its rights and obligations, and fees are subject to a depository agreement (which the depository receipt holders also benefit from).
Public relations consultant
The appointment of a public relations consultant for an IPO is optional but becoming more common. This consultant will take responsibility for publicising the IPO at the right time and using the right methods.
Pre-IPO reorganisation
In many cases no pre-transaction reorganisation is required prior to an IPO. If the group is already coherently structured and the parent company is domiciled in a jurisdiction which enables it to list on the chosen market, the securities offered in the IPO will simply be securities of the parent company, which will entitle their holder to the benefit of the group.
A reorganisation will occasionally be required in a situation where the shareholders of the group conducting an IPO wish to attract public interest to a part of the business only, not the entire group. In this case a pre-IPO spin-off may be required such that the entities and assets within the group which will be going public are legally separated from the rest of the group. Such a spin-off is likely to be a fairly complex process and will involve not only a series of transfers of assets and shares which are within the group, but could also involve contractual arrangements being entered into between the parts of the group which will remain private and the parts which will be listed. This is the case where the businesses may be intertwined in the way they operate and dependent on each other. Should such a spin-off be required several months should be allowed to successfully complete this process. The impact on employees (some of whom may need to be re-employed by the new entities which are spun-off) should not be forgotten. There will often be a period of uncertainty and unrest following such a major reorganisation, which may make delaying the IPO slightly a good idea.
More often minor reorganisations take place simply because the parent company is not domiciled in a jurisdiction which is conducive to listing on the chosen market (for example, if the jurisdiction has inflexible laws and regulations, or does not permit tailored Articles). The exchange itself may require entities which list on its market to be domiciled in the same jurisdiction as the exchange, although this is less common.
Occasionally, the lead manager may perceive that the jurisdiction of domicile is not going to be very attractive for investors perhaps because that jurisdiction does not have a good reputation.
Where the jurisdiction of domicile of the parent company is determined not to be suitable for a listed vehicle, there are three principal options available:
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A holding company may be established above the existing parent company in a more suitable jurisdiction. This involves the shares in the existing parent company becoming 100% owned by the new holding company and the shares in the new holding company being owned in the same proportion by the existing shareholders. Such a change in the shareholding structure is often achieved by way of a share-for-share exchange so that the existing shareholders give their existing shares as consideration for the shares they receive in the new holding company. This avoids the need for additional subscription monies to be paid by those shareholders.
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The existing parent company is wound-up and the assets are transferred to a new holding company which is established in a more suitable jurisdiction. The existing shareholders take the shares in the new holding company in the same proportion as in the existing company. They may pay for these by way of funds paid to them during the winding-up process or a share-for-share exchange type transaction could take place in advance of the asset transfers, with the assets being moved after the event and the old parent company being wound-up once it no longer holds any assets.This method is much more complex and is rarely adopted. It raises issues in respect of fund flow given shares and assets of value will be changing hands. In addition, it involves the assignment or novation of all key contracts the existing parent company has in place. Where counterparties must approve such amendments, there is a danger that one or more key contracts will be lost.
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A more common method of pre-IPO reorganisation is redomiciliation. This involves the existing parent company moving its place of incorporation from one jurisdiction to another. The parent company stays in existence continuously and all contracts and assets it has in place remain with the entity as such a process does not trigger change of control provisions that require counterparty approval in almost all cases.For a redomiciliation to be possible:
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The laws of the jurisdiction where the parent company is currently established need to permit companies to redomicile and provide a process to do so.
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The laws of the jurisdiction where the parent company will move need to permit companies to move into that jurisdiction from elsewhere and provide a process to do so.
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Provided both jurisdictions permit the redomiciliation the process is generally straightforward, often requiring shareholder approval and submission of certain documents to both authorities. A certificate of redomiciliation is issued by the new jurisdiction at the end of the process to evidence the company’s existence in the new jurisdiction, and a certificate of exit is issued by the old jurisdiction evidencing it is no longer domiciled there.
Consideration also needs to be given to whether there will be any impact on employees in moving the jurisdiction of incorporation of the issuer.
Corporate governance considerations
Minimum standards
A company preparing for an IPO must:
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Ensure it has adequate systems and controls in place to meet the corporate governance requirements of the market where it will list.
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Amend its Articles of association.
Corporate governance requirements that must be met by a public company vary from market to market. In practice, large well established companies may already meet most of the required standards, whereas companies which are newly formed or smaller may need to undertake a fair amount of work to ensure compliance.
Broadly speaking, most markets have minimum standards with respect to:
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Board compensation and appointment. For example, a minimum number of independent directors may be required and nomination and remuneration committees may need to be appointed.
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Insider trading. Insider trading policies are often put in place and communicated to all staff. There will also be policies developed to address how related party transactions must be reported and approved.
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Matters requiring shareholder approval. Corporate governance regulations will often prescribe certain important matters which shareholders must vote upon and these will feed into the amended Articles.
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Financial reporting. The regulator will often prescribe that listed companies must report semi-annually or (in some cases) quarterly. The financial statements must be fully audited annually, give a full and clear picture of the financial position of the company and, in many cases, be reported in compliance with certain standards such as IFRS.
An internal audit department is often appointed within the company to oversee and regularly monitor governance policies and procedures and to ensure staff at all levels of the company group are adequately trained and updated about the above.
Amended Articles
The Articles of a listed company will often be much longer and more complex than the Articles of a closely held private company. The board of directors in a private company typically represents most shareholders and makes all but the most important decisions about how the company is run, but in the case of a listed company the Articles will usually prescribe a far greater list of matters upon which shareholders must be consulted. This is primarily to offer minority shareholders some protection against decisions which benefit only the majority shareholders.
Some of the corporate governance requirements will appear in the listed company’s Articles as well, so the board appointment and composition provisions will differ significantly from provisions in private companies’ Articles.
In addition, depending on the jurisdiction, many types of corporate actions may be covered by the Articles, for example:
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The Articles will often mandate a maximum percentage of shares which may be subject to a buyback by the company in any year, and what must happen to any shares once they are bought back.
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Share consolidations and splits are often covered, as well as additional issuances of shares.
Pre-emption rights are unlikely to be covered, by contrast to private companies. This is because such rights are impossible to administer for a company that may have thousands of shareholders and where its shares are traded through buy and sell orders which get matched on the market. However, there are likely to be provisions stating that new shares must be offered on a pro-rata basis to all shareholders first unless they are offered only in small quantities (for example, no more than 5% per year).
Substantial provisions will be included which determine how and when shareholder meetings are called and how votes are administered at such meetings. In addition, there will usually be untraced shareholder provisions which set out how long unclaimed dividends are kept for and how shareholders are treated if they identify themselves after several years seeking unpaid dividends.
Unlike in a private company, the Articles will not list all shareholders and directors as there will be many. Instead registers will be kept by a registrar noting them and any changes to these positions.
The amended Articles do not formally take effect until immediately prior to the listing. If adopted earlier it will mean approvals for parts of the IPO process will be more cumbersome to obtain if, for example, the shareholders and not the board may be required to pass the required resolution.
Structuring the IPO
This involves the issuer, in conjunction with its counsel and the lead manager, determining the type of securities that will be offered and which jurisdictions should be targeted.
Securities offered
The following types of securities may be offered.
Ordinary shares. The most common structure involves a straight issuance of new ordinary shares in the issuer ranking pari passu with the existing shares. This will result in the funds being raised by the company as equity. In some cases the existing shareholders may be selling some of their shares as part of the IPO.
Global depository receipts. Global depository receipts are used where either:
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The listing is a secondary listing and the ordinary shares are already listed on another market or will list on another market simultaneously with the global depository receipts.
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There is a regulatory reason for not being able to list the underlying securities directly on the exchange.
Jurisdictions targeted
When the structure of the offering is considered, a decision is made with respect to what jurisdictions will be targeted. It is rare for an IPO to be restricted only to the jurisdiction where the exchange is located. More often investors in the region where the issuer will list and/or the region where the issuer is headquartered will be targeted. For example, if an issuer has its head office in Dubai but is present throughout the Middle East, a decision will often be made to seek investment from many of the jurisdictions in the GCC and North Africa.
Above is our advice on the issue. If you need more detailed advice as well as how to access this service, please contact Lawyer – Mr. Nguyen Duc Trong directly via hotline: 0912.35.65.75, 0912.35.53.53 or call Free Consultancy Center 1900.6575 or send a service request via email: info@hongbanglawfirm.com
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Hong Bang Law Firm.
