Preparing for an IPO. Overview. In less than 30 minutes

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1 Preparing for an IPO In less than 30 minutes Adam Farlow Association of Corporate Counsel International Legal Affairs Committee 12 September 2013 Overview What is an IPO? Who are the working parties in an IPO? What are the key stages in the IPO process? With an emphasis on roadblock removal and IPO readiness Appendices A What is the main legal documentation? B Should we use a dual track? C Where do we list? 2

2 What is an IPO? 3 What is an IPO? Initial Public Offering Of shares (or depository receipts) (equity) Typically combined with a listing on a securities market Subject to regulatory supervision requiring a prospectus and subject to listing requirements Different types of offerings: L Primary offering vs. secondary offering Primary offering: offering of new shares by company Secondary offering: offering of existing shares by selling shareholders Combinations are possible Public offer vs. private placement Public offer: retail investors ( requires prospectus) Private placement: institutional investors, qualified investors, high net worth individuals 4

3 Who are the working parties in an IPO? 5 Who are the parties? Counsel Selling Shareholder Selling Shareholder Governmental Regulators Counsel Issuer* Sponsor Securities Market Listing Authority Counsel Underwriters Settlement Agency Counsel Depository *Possible: Independent financial or transaction adviser to the Issuer Independent industry expert (mineral companies, real estate vehicles, etc.) Investors Auditor 6

4 Characteristics of the typical debut Issuer Often inexperienced in the capital markets Has a financing need that will be covered with equity capital Customer of the banks Needs to run a company besides attending to the needs of the transaction Management is the main source of information for prospectus, which is ultimately the Issuer's document Issuer primarily liable for the accurary of statements to investors Management will be part of the selling effort ("road show" with institutional investors) 7 Role of the investment bank/underwriter Adviser in the structuring of the transaction Co-ordinator of the process Builds syndicate of underwriters Has relations with investors to place the securities ("placement power") Knows the arguments for convincing investors to purchase the stock ("equity story") Lends its name to the transaction (creates relationship of trust) In many jurisdictions, bank has co-liability in a prospectus liability lawsuit 8

5 What are the key stages in the IPO process? 9 Key decisions on the road to an IPO Start of preparation Strategy and equity story, which businesses/assets to float Appointment of advisors Tax and legal structuring, holding company location Financial reporting and track record audit requirements Choice of market and timing Transparency and corporate governance People and resources, key management Board composition IPO launch 2013 Baker & McKenzie LLP 10 10

6 Typical timetable Publish pathfinder/ Price-range prospectus (May) Announce intention to float (April) Publish final prospectus (June) Beauty parade (January) Issuer appoints advisers Appropriate audited financial information available Research published, blackout commences Admission to trading and payment for shares (June) Due diligence & drafting Document Initial discussions with regulatory with regulatory authorities for authorities comment Finalize Internal preparations for floating Marketing/ Bookbuilding Pricing and Signing Conditional dealings Postclosing Finalize offer structure Mountain represents estimated level of legal work involved - Not to scale 2013 Baker & McKenzie LLP Main stages Readiness Preparation Execution Laying the groundwork Resolving outstanding issues Business restructuring/tax structuring Etc. Kick-off Confirmation of earlier structuring decisions Preparation of disclosure Pre-marketing Marketing and offering Underwriting Settlement Post-completion Stabilization Clear market Ongoing listing requirements 12

7 Readiness Removing roadblocks prior to kick-off Objectives: Removing problems which could hinder, delay or prevent the transaction Maximizing potential value Streamlining preparation process and reducing demands on management time Reducing total transaction cost Considerations: Resolving outstanding issues Business restructuring Tax structuring Corporate governance Financial statements/reports Other technicals Straw-man structures 13 Readiness Getting started on the right foot Appoint the internal deal team with a single point of contact/responsible person with decision-making power and information Consider appointing issuer counsel Consider IPO readiness audit both legal and financial Lock down publicity about the deal issuer counsel will prepare publicity guidelines, but before that, no comment about any potential deal Consider gathering key documents for due diligence/verification and placing documents in virtual data room we can provide draft document request lists to use as a first cut Virtual data room providers are also typically financial printers, and will generally cut a deal to get both roles Talk to banks, but don t sign any engagement letters without counsel Best to start small, ensure that additional banks are truly additive 14

8 Readiness Resolve outstanding issues What needs to be resolved first: consolidating material subsidiaries perfecting title to main assets resolving any issues with key licenses resolving other regulatory issues wrapping up major litigation getting waivers in connection with covenants restricting the Offering (e.g. change of control) 15 Readiness Pre-IPO Business Restructuring Integrity of the Group: transparency the degree to which companies integrate or cooperate in the operation of their business Shareholders Issuer economic interdependence group structure Operating Subsidiary Operating Subsidiary Operating Subsidiary requirements for listing 16

9 Readiness Pre-IPO Business Restructuring (II) 1. Hive off non-core business segments and companies: Side businesses Loss-making or dilutive businesses Problem-ridden businesses Shareholders Shareholders Issuer Issuer Side business company Core business company Core business company Side business company Core business company Core business company 2. Ensure profit-generating companies are captured in the listed group: Shareholders Shareholders Issuer Trading company Issuer Production company Production company Trading company Production company Production company Objectives: Increase in value Increase in transparency and attractiveness for investors No changes once transaction begins in earnest 17 Readiness Get the tax structuring right Issues to consider: restructuring holdings/group structure for tax purposes tax for investors upon exit tax impact on the company and on new investors withholding tax on interest or dividends transfer pricing deductibility of interest thin cap rules capital / stamp duties / property transfer tax 18

10 Readiness Corporate Governance Corporate Governance Protection of Shareholders Rights Equitable Treatment of Shareholders Independence and Effectiveness of the Board Transparency and Disclosure Now is the time to begin to refresh corporate governance and to put in place best practices for listed companies in targeted listing venue / market generally: Dis-entanglement from selling shareholders Arm's length assessment of the relationship Service level agreements/relationship agreements Amendment of the articles of association/bylaws New corporate governance charter Remuneration and compensation Agreements with executive management New employee stock option plan Management information systems / financial reporting up to task of a listed company Anti-bribery, OFAC/OECD sanctions systems in place 19 Readiness Corporate Governance (ii) Issues to consider regarding the Board: Appointment of independent directors Appropiate committees in place Board make up experience, diversity, expertise (esp. financial), term length, excessive directorships, succession planning Training for board in anticipation of being listed including around new age business skills like social media, IT, cybersecurity, disaster recovery 20

11 Readiness Ensure financial statement and report availability/reporting readiness IFRS Financial Statements: Three years full audited financial statements Interim financial statements for an offering in June, third or fourth quarter (i.e., accounts no more than 6 months old) If US tranche, no more than 135 days between date of interim financials and closing Additional financial statements: For material subsidiaries acquired during the last financial year or to be acquired EU Prospectus Rules US Regulation S-X Criteria: significant gross change Required: pro-forma financials Threshold: variation of 25% relative to indicators of the size of the business Criteria: significant business combination or disposal I. Required: pro-forma financials Threshold: 20% of assets / income / investments II. Required: standalone financials Thresholds: >20% and up to 40% - One-year Financials >40% and up to 50% - Two-year Financials >50% - Three-year Financials Long-form, working capital and financial reporting procedures reports for LSE premium listing; financial reporting readiness review 21 Readiness Ensure the technicals begin to fall into place For example, are the shares eligible to list? Due incorporation, validly issued Ability to be admitted to trading, including transferability, entire class to be listed Sufficient market capitalisation Sufficient free-float If English company, conversion to plc 22

12 Readiness Begin to develop straw-man structure Will the process be dual track? (see Appendix B) Listing vehicle and venue (see Appendix C) Arrangements with existing shareholders Capital structure: debt vs. equity, how much leverage will market bear Will there be a management sell-down of their shares? If PE Sponsor deal, how much will Sponsor retain Will there be a US tranche? pros and cons! additional demand/price tension, but US-style disclosure and 10b-5 documentary processes, etc. 23 Kick-Off External parties that need appointment at beginning of process include (if not already in place): underwriters underwriters counsel issuers counsel auditors sometimes other advisers (e.g., independent financial adviser or independent transaction adviser, industry experts) Once the parties are appointed, the next step is usually a kick-off meeting involving all of the above 24

13 Preparation Structuring Preparation phase includes any actions indicated above for the Readiness phase Finalize structuring the transaction with the underwriters Size (including greenshoe / over-allotment option) New (primary) vs. existing (secondary) shares Retail vs. institutional tranche Employee tranche or not Target market for the offering Listing venue, listing vehicle Allocation of offered securities Commitments of the issuer (clear market, etc.) Commitments of existing shareholders (lock-up, etc.) Commitments of management (lock-up, availability, etc.) 25 Preparation Due Diligence Due diligence by the working parties Business, financial, legal (documentary), accounting, etc. Data room process Separate meetings with management Prospectus drafting sessions Prospectus verification vs. due diligence report vs. 10b-5 style 26

14 Preparation Prospectus drafting Prospectus Drafting Both a selling and legal document Legal purpose: defense against liability for incomplete, misleading or inaccurate disclosure Marketing purpose: generate interest with investors Must contain all material information to allow investors to make an investment decision May be subject to specific disclosure requirements (U.S., or EU Prospectus Directive), but always subject to market expectations Structure: summary, risk factors, business section and equity story, operational and financial review, terms of the offering, financial sections Review by securities or listing authorities 4 to 6 weeks 27 Preparation Marketing Process Pilot-fishing - testing the market for interest (without prospectus) Research Presentation to research analysts Research reports to assist in pre-marketing and marketing Research black-out begins Intention to float (common, but not always) Pre-marketing - determination of initial pricing range Marketing sometimes retail investors, always institutional investors Roadshows by management Organized by bookrunners One-on-one meetings with institutional clients of bookrunners Meetings with investors 28

15 Execution Pricing Price determination Offering on the basis of a price range Bookbuilding to determine final price (supply vs. demand) Bookbuilding commonly limited to institutional investors Underwriting At the end of the offering: pricing Signing underwriting agreement: underwriters are bound Underwriters allocate the offered securities Underwriting typically "Soft": only a payment guarantee 29 Execution Closing and settlement Conditional trading Pending the settlement: trading on an if-and-when-issued-anddelivered basis Allows investors to mitigate market risks Transaction still subject to conditions precedent (material adverse changes) Printing of final prospectus Settlement Structure: commonly T+3 Bringdown due diligence by the underwriters Closing under the terms of the underwriting agreement Trading becomes unconditional 30

16 Post-completion Stabilization Via over-allotment and over-allotment option (greenshoe option) Typically limited to 30 calendar days after completion Clear market Lock-up by the issuer and existing shareholders Terms differ from transaction to transaction Duration: typically 180 days (but can be longer) Carve-outs: stock based incentives, limited M&A, etc. Ongoing requirements Listing requirements Transparency (ongoing disclosure) requirements Certain (time limited) covenants vis-à-vis underwriters 31 Execution lessons from recent IPOs Successful IPOs had Speed to market and early investor communications Pricing well supported Strong momentum Broad range of investors Unique / differentiated investment cases Delivery post IPO Unsuccessful IPOs Played out in press Priced too aggressively Narrow investor base Large syndicates / confusing messages Disappointing results post IPO 2013 Baker & McKenzie LLP 32 32

17 Key IPO Considerations Timetable Pilot Fishing / Anchor Marketing Syndicate Structures PE Sponsor Sell Down Management Sell Down Current Issues Market windows likely to remain volatile consider options for accelerating process However, investors expect time to analyse offering and will be cyncial over overly accelerated offerings Investors highly receptive of early engagement with management Anchor marketing / cornerstone processes highly beneficial in driving pricing Increasing trends for larger syndicate structures especially in larger deals Criticism from shareholders that message is diluted with multiple research analysts, etc. Some cynicism over sponsor exits remain, equally important is tradeoff with overhang Key factor for deals in momentum and coverage messages Recognition that management have majority of their personal wealth tied up in business, therefore acceptable that they should be able to monetise part of their holding Recommendation Build flexibility into the timetable Engage as early as possible to build relationships Ensure incremental bookrunners bring additive distribution Use spectrum of wider titles or active status Maintain flexibility to start small and upsize Amadeus, Brenntag and KDG examples of riding upside Typically more important than sponsor sell down Leverage Some investors remain wary of back door rights issues for sponsor assets Be wary of pushing envelope on leverage Listing Venue Arbitrage Dual Tracks No longer necessary to issue into home jurisdiction Robustness of various markets vary depending on economic cycles, extraneous factors Continue to be important method of maintaining pricing tension and maximising value Important that are run in parallel so perception isn t created that an IPO for example is a result of a riled auction If opportunities exist, exploit them Needs to be sound logic behind listing location Maintain optionality for as long as possible without blurring IPO execution 2013 Baker & McKenzie LLP Understanding the Drivers for Project Success Mitigating Risk, Ensuring Success A successful transaction hinges on a number of key variables that can greatly impact the timing and cost of the project. From our experience we have identified a handful of elements that impact the success of the entire project. Mitigating and ideally, avoiding these risks will go a long way to achieving a successful outcome. At the same time, we have also identified opportunities that, when proactively implemented, can greatly assist in delivering the project on-time and within budget. These include: A central point of contact within the company with decision making power Adhering to deadlines Swift and complete response to information requests An efficient review and approval process for all legal documentation Constant communication between company and its counsel Baker & McKenzie LLP 34 34

18 Appendix A What is the main legal documentation? 35 Preliminary Matters Organizational meeting agenda Transaction timetable drafts prepared by bankers Working group list Engagement letter with underwriters Forms basis of subsequent underwriting agreement, summarises transaction features Establishes fees/costs/roles Contains covenants, including lock-up/clear market/exclusivity and indemnities Termination rights 36

19 Publicity guidelines Prepared by Issuer counsel Scope of application From initiation until (typically) 40 days after completion All offering participants: issuer, shareholders, banking/underwriting syndicate, advisors, etc. Purpose Establish procedure regarding disclosures and publicity in relation to the issuer or the offering To avoid early disclosure, inconsistency in disclosure, and compromising statements (forward looking statements, etc.) 37 Due diligence Non-disclosure agreement with participants (underwriters, expert advisors) Due diligence request lists Agreement with electronic data room providers Management and shareholder questionnaires 38

20 Prospectus and other marketing documents Prospectus is key document see above Analyst presentation for research analysts Research reports Both of above subject to research guidelines Following publication, research blackout Roadshow presentation Retail flyers / summary of the prospectus (depending on jurisdiction) Tombstone / summary publications Intention to float, pricing announcement, closing announcement 39 Underwriting agreement Key agreement among Issuer, Shareholders and Underwriters Governs issue and sale of the shares and completion mechanics Payment of fees and expenses Material undertakings, representations, warranties given by the Issuer and shareholders, including lock-up, indemnities, etc. Establishes closing CPs and termination rights Indemnification for underwriters Often also an agreement among underwriters, to which Issuer is not a party 40

21 Corporate documentation Issuer Board resolutions to approve transaction (offering and listing) Board resolutions to approve prospectus Board or shareholders' resolution to approve offering (primary issue of shares) Board or shareholders' resolution to amend governance structure (Selling) Shareholders Board resolutions to approve transaction (offering and listing, new governance structure, etc.) Board resolutions to approve prospectus New shareholders' agreement (as the case may be) Powers of attorney 41 Regulatory documentation Applications with the securities regulator Prospectus filings Application with the listing authorities Listing application Supporting documentation (depend on market rules) Application with depository / settlement / clearing agencies Application of ISIN numbers Deposit of shares Clearing agreements Other back-office documentation 42

22 Closing deliverables Legal opinions from Issuer, Underwriter and Shareholder counsel Disclosure letters from Issuer and Underwriter counsel Auditor comfort letters Officers certificates Share certificates Copies of marketing documents Agent for service process appointment, if appropriate If depositary structure depositary agreement, custodian agreements, etc 43 Appendix B Should we use a Dual Track? 44

23 What is a dual track? Parallel processes: Trade Sale vs. IPO Shareholders (Founders, Private Equity) Trade Sale Purchaser Stake Company IPO Listing 45 Why is a dual track process chosen? Competition of processes è aim to get a higher price Potential purchasers Trade Sale Potential purchasers IPO Potential purchasers of the Company Higher competition = higher price 46

24 Advantages of a trade sale Advantages for Seller Advantages for Purchaser 100% exit of the investor Price: private equity pays more than public equity Seller's market: high urge of PE investors to invest Less disclosure to the public Purchaser can profit from leverage effect Existing high debt capital of the target is accepted 47 IPO considerations PROs CONs Management: can keep "control" after IPO Popular with existing shareholders Liquidity for their investment Limited warranties and indemnities to be provided by selling shareholders Raising of issuer's profile Potentially higher price obtained if market conditions allow Issuer has access to capital markets to fund future growth Inability to achieve complete exit: investors take market risk Post IPO lock-ups and standstills Increased regulatory burden on issuers: transparency, disclosures, corporate governance constraints Volatility of market conditions Liability of selling shareholders 48

25 Potential pitfalls of a dual track Higher transaction costs due to two processes Motivation of the banks involved "Overload" of the management Loss of autonomy for the parties Different disclosure requirements Possible consequences if IPO is cancelled Timing issues 49 Higher transaction costs, but some synergies Due Diligence Corporate Repair Work IPO Info Memo / Prospectus Trade Sale Consultants / Advisers (Integrated teams) 50

26 "Overload" of management Management as potential risk Doubled burden of work (Roadshows / Management presentations and Trade Sale negotiations) Favouring one alternative Uncertainty De-Motivation e.g.: Pro IPO Affirmation of profitability Independence of the company Status as member of the board 51 Different disclosure requirements IPO Trade Sale High publicity Obligation to inform the public Marketing / roadshows Detailed disclosure in prospectus Low publicity Aim: Low publicity Information and known risks are used to lower the price 52

27 Timing issues As long as possible confidentiality of the Dual Track process? Degrades competitive environment Disclosure required for IPO Early disclosure of the Dual Track process? Doubts about the seriousness of the Trade Sale or the IPO Some investors might hold off Offer prices might be lower 53 Dual track process timeline at a glance Q1 Q1- Q2 Q2 Q3- Q4 TBD Trade Sale Process IPO Process Preparation Marketing Closing & IPO Negotiations, final offers Indicative offers Preparation 1 Due diligence Prospectus drafting Business Plan sessions Legal documentation Select lead bank(s): Preparation Investor education 2 Approach buyers: Credible buyers? If not, allows focus on IPO Due diligence Finalise buyers list Drafting of Info memo Vendors due diligence Launch trade sale process? Filing Filing of prospectus Analysts presentation Continue both processes? Investor education commences Road show Final decision Final binding offers Shortlisted candidates commence due diligence/mp Non-binding offers Distribute Info memo Send Teaser & Confi. Agmts. commences Completion Finalise contract negotiation 54

28 Careful navigation required Balance between Disclosure / Publicity High competition Achievement of pricing objectives Timing & Co-ordination of a complex process Nondisclosure of information Protection of concerns of the company Prevention for risks of a failure Appropriate timing for One Track 55 Appendix C Where do we list? 56

29 Criteria for Choice of Listing Venue Possible Venues: London Listing: AIM Premium listing Standard listing New York (NYSE, NASDAQ) Hong Kong Warsaw Toronto Singapore Frankfurt Local listing Criteria: Investor base Liquidity and funding needs Eligibility criteria Financial statements Tax impact Continuing obligations Costs & expenses Geography Analyst coverage Industry sector Valuation / peers / reputation Dual listing? Regulated vs. Unregulated? 57 Choice of Listing Vehicle Jurisdiction Considerations: Existing holding companies Choice of listing venues Foreign listing permits Foreign ownership limits Double tax treaties Optical & political considerations Passporting 58

30 Cross-Border Listings We commissioned mergermarket to survey 200 corporate executives and investment bankers familiar with cross-border listings 59 Cross-border listing activity enabled by globalisation and convergence IFRS as a common language Global advisor community Global funds invest crossborder Increasingly common platform for prospectus disclosures Technology/ Internet Stock trading platforms ADRs, GDRs, HDRs, IDRs, BDRs New players emerging 60

31 Market choices and their implications Market size and liquidity Market Valuation Geographic proximity Likely investor base Regulation and process Domestic Regional International Global Regulated / Unregulated Single / Primary or Dual / Secondary listings Ongoing obligations Corporate governance Ease of further fundraising 61 Key themes Survey findings include: Both emerging and developed markets find cross-border listings attractive Liquidity and opportunism drive cross-border listings Mid-caps dominate No single stock exchange is right for all companies On-the-ground expertise is paramount 62

32 Emerging vs. developed markets Traditionally, cross-border listings have been dominated by companies from emerging markets listing on exchanges with established investor bases and high liquidity Companies from developed economies are increasingly considering raising capital abroad in order to access a new pool of investors 63 Liquidity is king Corporate respondents top three reasons for choosing to list on a particular foreign exchange relate to market liquidity: 98% 92% 83% 64

33 but it s not everything Benefits of listing abroad, according to corporate respondents. 78% 60% 38% 36% 35% 26% Increased liquidity Timing of offering Fewer disclosure requirements Simpler accounting Fewer listing requirements Reduced transaction costs 65 No one stock exchange is right for all companies Respondents top exchanges for meeting specific desired goals: ACCESS TO NEW INVESTORS VISIBILITY / MARKETING FUTURE ACCESS TO CAPITAL INCREASED LIQUIDITY COMPARED TO HOME MARKET RAISING CAPITAL ASX NYSE TSX TSX LSE TSX LSE ASX HKSE NYSE FSE HKSE 66

34 On-the-ground expertise is paramount Factors respondents found most important when choosing their financial, legal and accounting advisers: 98% 71% 59% 67 Key differences among leading exchanges London Hong Kong Singapore US Known for UK/CIS companies, natural resources Luxury goods, local companies Regional companies; REITs NYSE blue chips NASDAQ - techs Eligibility minimal Financial tests; management continuity Similar to HK, but lower fin. tests No registration criteria, exchanges have thresholds Financials 3 years IFRS 3 years HKFRS, IFRS or US GAAP 3 years SFRS, IFRS or US GAAP 3 years US GAAP or IFRS Corporate Governance City Code comply or explain Similar to London Good, but poor enforcement Sarbanes-Oxley Takeover Code Yes Yes Yes Only disclosure Timing 4 months 1 year + 4 months 6 months Regulators moderate substantive review lighter touch than HK close review, emphasis on financials 68

35 Questions? References For more information on cross-border listings, listing requirements, guide to being a listed company, etc., see: For more information on internal reorganizations, see: 69 Contact Details Adam Farlow Partner, London Adam.Farlow@bakermckenzie.com Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm Baker & McKenzie LLP #

36 Preparing for an IPO In less than 30 minutes Adam Farlow Association of Corporate Counsel International Legal Affairs Committee