A guide to listing on the London Stock Exchange

Transcription

1 A guide to isting on the London Stock Exchange Pubished by White Page Ltd in association with the London Stock Exchange, with contributions from:

2 Pubishing editor: Nige Page Pubisher: Tim Dempsey Design: London Stock Exchange pc Printing and binding: Argent Litho Ltd A guide to isting on the London Stock Exchange is pubished by: White Page Ltd, 17 Boton Street London W1J 8BH United Kingdom Phone: Fax: Emai: [email protected] Web: white page First pubished: November 2010 ISBN: A guide to isting on the London Stock Exchange 2010 London Stock Exchange pc and White Page Ltd Copyright in individua chapters rests with the authors. No photocopying: copyright icences do not appy. This guide is written as a genera guide ony. It shoud not be reied upon as a substitute for specific ega or financia advice. Professiona advice shoud aways be sought before taking any action based on the information provided. Every effort has been made to ensure that the information in this guide is correct at the time of pubication. The views expressed in the artices contained in this guide are those of the authors. London Stock Exchange, AIM and the coat of arms device are registered trademarks of London Stock Exchange pc. The pubishers and authors stress that this pubication does not purport to provide investment advice, nor do they bear the responsibiity for any errors or omissions contained herein.

3 A guide to isting on the London Stock Exchange Contents 3 Foreword London Stock Exchange 5 The Main Market the standard for exceence London Stock Exchange 13 The roe of the UKLA The United Kingdom Listing Authority 19 Preparing for an IPO UBS Investment Bank 31 The ega framework for an IPO Freshfieds Bruckhaus Deringer LLP 43 Accounting requirements and advice through the IPO process Ernst & Young LLP 57 Generating and capturing investor demand during an IPO UBS Investment Bank 69 Managing the company s profie Fishburn Hedges 81 The roe of the registrar in an IPO Capita Registrars 87 London: a unique investment opportunity FTSE Group 91 Preparing to ist depositary receipts Ceary Gottieb Steen & Hamiton LLP 105 Estabishing a depositary receipt programme J.P. Morgan 116 Usefu contacts

4 A guide to isting 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 buit on a ong history of integrity, expertise and market knowedge. It has become one of the word s argest and most internationa stock exchanges, paying a pivota roe in the deveopment of goba capita markets. We offer the widest choice of routes to market, which are avaiabe to both UK and internationa companies, and today we have cose to 3,000 companies from over 70 countries isted and trading on our markets. In chaenging market conditions, the London markets have proved their vaue by providing companies with access to capita when other funding channes have not been avaiabe. At the Exchange, we strive to buid on this success by working with market reguators and the wider financia community to ensure that our markets are we-reguated, transparent, iquid and neutra. 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 pubic market is one of the most significant decisions a business wi ever take; the sheer range of topics that need to be considered buiding up to IPO can seem ike a daunting task. With this in mind, this guide has been deveoped with input from some of the key advisers experienced in bringing companies to our Main Market and our Professiona Securities Market, providing you with a practica outine of the isting process, as we as an insight into ife as a pubic company. I hope you find this pubication usefu and wish you every success, both in bringing your company to market and as a pubicy-traded company. A guide to isting on the London Stock Exchange Page 3

5 The Main Market the standard for exceence London Stock Exchange

6 QUOTED Whatever your company s size or sector, we can put you at the heart of one of the word s most sophisticated financia communities. The Main Market is home to approximatey 1,400 companies from over 60 countries, incuding some of the word s most successfu and dynamic organisations. So far this year 20.8 biion has been raised on the London Stock Exchange, of which 17.9 biion has been raised on the Main Market. Here at the London Stock Exchange we hep companies to access the deepest poo of internationa capita. Premium Listed companies on the Main Market meet the highest isting standards heping to raise their corporate profie and increase their exposure to investors. Learn more about the Main Market and why eading companies choose to ist on the London Stock Exchange Copyright November 2010 London Stock Exchange pc London Stock Exchange, the coat of arms device and AIM are registered trademarks of the London Stock Exchange pc. London Stock Exchange statistics as at end September 2010

7 The Main Market the standard for exceence Estabished in 1698, the London Stock Exchange s (the Exchange ) Main Market has ong been home to some of the UK s, and indeed the word s, argest and best-known companies. There are over 1,400 companies on the Main Market with a combined market capitaisation of 3.7 triion. Companies of a types, nationaities and sizes together represent some 40 sectors. As we as sectora and geographica diversity, the Main Market accommodates the admission to trading of companies with a Premium Listing or a Standard Listing. The FSA s isting categories are described in detai in the chapter The roe of the UK Listing Authority on page 13. A isting on the Main Market demonstrates a commitment to high standards and provides companies with the means to access capita from the widest set of investors. Over the ast 10 years, 366 biion has been raised through new and further issues by Main Market companies capita that has seen companies through the good times and the bad. Why join a pubic market? Joining a pubic market the Main Market or AIM (our market for smaer, growing companies) is a way to grow and enhance your business. When considering the avaiabe financing options, the foowing factors are frequenty cited as the key benefits of admission to a pubic market: providing access to capita for growth, enabing companies to raise finance for further deveopment, both at the time of admission and through further capita raisings creating a market for the company s shares, broadening the sharehoder base pacing an objective market vaue on the company s business encouraging empoyees commitment and incentivising their ong-term motivation and performance, by making share schemes more attractive increasing the company s abiity to make acquisitions, using quoted shares as currency Joining the Main Market Responsibiity for the approva of prospectuses and admission of companies to the Officia List ies with the UK Listing Authority (UKLA). The Exchange is responsibe for the admission to trading of companies to the Main Market. Joining the Main Market consequenty invoves two appications: one to the UKLA and one to the Exchange. UKLA admits securities to the Officia List London Stock Exchange admits securities to trading on the Main Market Officia List notice issued to the market Admission to trading notice issued to the market The Main Market the standard for exceence Page 7

8 creating a heightened pubic profie stemming from increased press coverage and anaysts reports heping to maintain iquidity in the company s shares enhancing the company s status with customers and suppiers. Companies that choose to seek admission to a pubic market in London have a range of options depending on their size, stage of deveopment and capita-raising requirements. The options open to companies shoud be discussed in detai with their team of advisers. Companies which are successfu on AIM and reach a certain size and stage of deveopment, may seek to transfer their securities from AIM to the Main Market, provided that they meet the eigibiity criteria. Whie a move to the Main Market may subject the company to increased reguatory requirements, it can bring benefits in terms of a heightened profie and attracting different investors. and why the Main Market? The success of the Main Market is buit on a wide range of factors: a respected and baanced reguatory environment choice access to capita from a broad and knowedgeabe investor base expert advisory community enhanced profie and status. The Main Market has attracted companies of a sizes and from a sectors over many years. Irrespective of their sector, origin or strategic direction, they have a sought to take advantage of the range of benefits a isting on the Main Market affords. Those benefits incude: A respected and baanced reguatory environment The UKLA s isting framework underpins London s reputation for baanced and gobay-respected standards of reguation and corporate governance. Reguatory requirements in London are principesbased and provide an appropriate baance of investor protection, practitioner certainty and fexibiity. The Exchange aims to be invoved in a reevant processes where amendments or additions to the reguatory framework are considered. This is to ensure that London s competitive advantage remains undiminished; that istings and subsequent capita raisings are costeffective and efficient for our companies; and that investors have the appropriate amount of information to make informed investment decisions. Choice Companies with either a Premium or a Standard Listing can choose to admit to trading on the Main Market. A Premium Listing means that a company must meet standards that are over and above (often described as super-equivaent ) those set forth in the EU egisation, incuding the UK s corporate governance code. Investors trust the superequivaent standards as they provide them with additiona protections. By virtue of these higher standards, companies may have access to a broader range of investors and may enjoy a ower cost of capita owing to heightened sharehoder confidence. A Premium Listing is ony avaiabe to equity shares issued by commercia trading companies. With a Standard Listing, a company has to meet the requirements aid down by EU egisation. This means that their overa compiance burden wi be ighter, both in terms of preparing for isting and on an ongoing basis. Standard Listings cover the issuance of shares and Depositary Receipts Page 8 The Main Market the standard for exceence

9 ( DRs ) as we as a range of other securities, incuding fixed-income. Large companies from emerging markets may wish to ist their DRs, thus attracting investment from the significant internationa poo of capita avaiabe in London. (A tabe showing the key differences between a Premium Listing and a Standard Listing can be found in the chapter The roe of the UK Listing Authority on page 18). In this guide, the chapters Preparing to ist depositary receipts and Estabishing a depositary receipt programme are dedicated to the isting and admission to trading of DRs on both the Main Market and the Professiona Securities Market ( PSM ). The PSM provides an aternative route to a isting on the Exchange for issuers of DRs. Access to capita We provide access to the argest poo of internationa equity assets in the word. This cuture is embedded in London s investment management community, which understands companies from home and abroad and wants to invest in the goba economy. Once they are isted and admitted to trading on the Main Market, companies shoud not underestimate the vaue of being abe to return to the market to raise funds through further issues. Even during the recent difficut market conditions, the Exchange successfuy faciitated significant eves of capita raising. Further issues by Main Market companies provided capita injections that were used to pay off debt, rebuid baance sheets and fund further growth. Expert advisory community The decision to join the Main Market is a pivota one. To achieve a successfu isting and admission to trading, companies must deiberate over many considerations. Underpinning the Main Market is a network of experienced advisers who wi guide you on the journey to an initia pubic offering ( IPO ) and provide ongoing advice once your company is isted. Seecting the right advisers for you and your company is vita. Getting it right eary on wi hep ensure that disruptions to the process are minimised and you are abe to get on with the task at hand. Factors to consider when appointing advisers incude the firm s reevant and recent experience in reation to your business and the sector you operate in, as we as the persona rapport you deveop with the individuas with whom you wi be working. The diagram on page 10 beow shows the different advisers typicay invoved in a fotation on the Main Market and briefy highights their varying roes and responsibiities. Profie Foating a company on the Main Market raises your company s profie and heps you to meet your strategic objectives. You wi have the opportunity to project your company onto a goba stage with increased media coverage, investor interest and broad anayst coverage. With a Premium Listing comes the potentia for incusion in the FTSE UK series of indices which incudes the FTSE 100, FTSE 250 and FTSE Sma Cap indices. Access to these indices is often seen as one of the key benefits of achieving a Premium Listing since so many investment mandates particuary in respect of the vast amount of capita represented by tracker funds are driven by FTSE indexation. For more information see chapter London: a unique investment opportunity on page 87. Our commitment to the primary markets There is a continuous stream of proposed reguatory The Main Market the standard for exceence Page 9

10 Advisers roes and responsibiities Sponsor Overa co-ordination and project management of IPO process Co-ordination of due diigence and prospectus Ensure compiance with appicabe rues Deveop investment case, vauation and offer structure Manage communication with LSE and UKLA Act as adviser to the company s board Ongoing support/advice after fotation Bookrunner Prepare company for roadshow Faciitate research Buid the book pre-foat Marketing and distribution Pricing and aocation Other advisers Registrars Financia printers Remuneration consutants THE COMPANY Lawyers Lega due diigence Draft and verification of prospectus Corporate restructuring Provide ega opinions Financia PR Reporting accountant Deveop communication strategy Review financias assess company s to support pre-ipo process readiness for IPO Enhance market perceptions to Tax structuring deveop iquidity and support Financia due diigence - ong form, share price short form and working capita reports Pre- and post-ipo press reeases changes affecting companies on our markets, with egisation stemming from changes here in the UK and in Brusses. With companies best interests front of mind, we continue to obby on their behaf to ensure our markets are fit for purpose. It is crucia that through our obbying we continue to promote a reguatory regime based on principes, seeking to imit disproportionate egisation appicabe to issuers that are admitted to trading on our markets, whie ensuring sufficient investor protection. Once you are isted on the market, we are committed to heping you raise your profie and keeping you abreast of market deveopments. We hep to do this through the provision of brand marks (see page 11); a dedicated page on our website specific to your company (incuding atest news and pricing information on the trading of your securities); educationa initiatives, such as seminars and practica guides; and investor-focused events such as capita markets days that bring companies and investors together. Page 10 The Main Market the standard for exceence

11 Main Market brand marks L I S T E D S T A N D A R D SHARES L I S T E D P R E M I U M L I S T E D S T A N D A R D DEPOSITARY RECEIPTS These brand marks are provided excusivey to companies isted on the Main Market. Companies may use the brand mark across corporate and investor reations materias to showcase their association with the London Stock Exchange and provide information as to their isting status. More information is avaiabe on the Exchange s website: And finay Listing and admission to trading on the Main Market is an efficient way for companies to access capita to fund their growth, whie simutaneousy benefiting from enhanced profie and iquidity within a we-governed and reguated market structure. As an ambitious company with pans to take your business to the next eve, joining the Main Market is an idea way to assist you in reaising your goba aspirations. The Main Market the standard for exceence Page 11

12 The roe of the UK Listing Authority UKLA

13 The roe of the UK Listing Authority The UK Listing Authority ( UKLA ) is the name used by the Financia Services Authority ( FSA ) when it acts as competent authority for isting, as competent authority for the purposes of the European Prospectus and Transparency Directives, and as competent authority for certain aspects of the Market Abuse Directive. These roes have a statutory basis in Part VI of the Financia Services and Markets Act 2000 ( FSMA ). Three sourcebooks in the FSA Handbook impement the reevant rues. These are: Listing Rues these rues incude the eigibiity requirements for admission to the Officia List (or isting ) and the continuing obigations that appy thereafter. They come party from the European Consoidated Admissions and Reporting Directive, but aso incude a significant body of rues that are super-equivaent or additiona to the European minimum requirements. These additiona requirements incude substantive eigibiity requirements such as the need for a three-year track record, the cass test and reated party regimes, and the requirement for a sponsor in reation to a Premium Listing. Prospectus Rues these rues stem primariy from the enactment of the European Prospectus Directive and detai the circumstances when a prospectus is required and the discosures a prospectus shoud incude. Discosure and Transparency Rues ( DTRs ) these rues govern the periodic and ad hoc discosure of information by isted companies. Periodic information incudes interim and annua accounts, and ad hoc discosures, incuding major sharehoding notifications and detais of significant deveopments that might affect the price of the securities. These rues originate from the Transparency Directive and part of the Market Abuse Directive, and aso from the 4th/7th Company Law Directives. As a consequence, when a company wishes to make an initia pubic offering ( IPO ) of its securities onto a reguated market such as the Main Market of the London Stock Exchange, the UKLA has two principa roes to perform: to review and approve the issuer s prospectus, and to admit those securities to isting once it is happy that the issuer compies with a reevant eigibiity criteria. Listing categories The term isted is used in a number of different contexts, but in the UK this technicay means admitted to the Officia List of the UKLA. The UKLA has created a number of different isting categories which determine the eigibiity criteria and continuing obigations that appy to the issuer and its securities. The UKLA introduced the isting categories to hep carify that isting refers to admission to the Officia List of the UKLA, and does not reate to the market to which a security is admitted to trading. Listing categories are aso intended to carify the reguatory standards that appy to different types of isting. A Standard Listing requires compiance ony with EU minimum standards, whist a Premium Listing aso requires compiance with the more stringent superequivaent standards. Note that ony equity shares may be admitted to a Premium Listing; issuers of other securities may ony seek a Standard Listing for their securities. A tabe showing the key differences between Premium and Standard Listings can be found on page 18. Eigibiity An issuer wi generay seect its preferred market and isting category in consutation with its advisers prior to engagement with the UKLA. For issuers requesting a Premium Listing of their equity shares, contact with the UKLA wi be undertaken by the issuer s appointed sponsor firm. The roe of a sponsor is to guide the issuer on the appication of the Listing Rues and the Prospectus Page 14 The roe of the UKLA

14 Listing segment Premium Standard Listing category Equity shares Equity shares Equity shares Shares GDRs Debt & debt-ike Securitised derivatives Misc. securities Exampes of types of companies/ securities Commercia companies Cosedended investment funds Openended investment companies Equity shares* Non-equity shares Debt securities Asset-backed securities Convertibe securities Options Subscription warrants - Preference shares (speciaist securities) Listing Rue chapter LR6 LR15 LR16 LR14 LR18 LR17 LR19 LR20 * an investment entity wi ony be abe to benefit from this Standard Listing category for a further cass of equity shares if it aready has (and ony for so ong as it maintains) a Premium Listing of a cass of its equity shares Rues. This incudes iaison with the UKLA on behaf of the issuer, and to provide certain decarations to the UKLA that provide comfort that the reevant rues have been compied with and the issuer has estabished appropriate procedures. The UKLA maintains a ist of approved sponsors and conducts supervisory activities in order to ensure that the ist of sponsors contains ony those firms that meet the eigibiity criteria for a sponsor. For issuers that are seeking a Standard Listing, the UKLA has no preference as to whom the main point of contact shoud be, athough it shoud be someone that is reasonaby knowedgeabe about the UKLA and its processes. To start the eigibiity process, the UKLA generay expects that a etter is submitted detaiing the issuer s compiance with the appicabe eigibiity requirements. The UKLA suggests that such etters are sent in as eary as possibe in the IPO process and that they are as detaied as possibe, incuding reevant background information on the nature of the issuer s business. This is because unnecessary deay can be caused to the timetabe where significant eigibiity concerns arise ate in the IPO process. Issuers seeking a Premium Listing of equity shares wi be required to compy with the more substantive eigibiity requirements that are imposed by the super-equivaent parts of the Listing Rues, in addition to those requirements in the Listing Rues based entirey on EU aw. For commercia companies, these additiona requirements incude the requirement for a cean three-year track record of operations, and the requirement for a cean working capita statement for at east the next 12 months. For investment The roe of the UKLA Page 15

15 entities, these requirements incude an additiona degree of reguation in reation to the corporate governance of the issuer. Overseas issuers wishing to compy ony with the minimum standards appied by the EU Directives can appy for a Standard Listing of either equity shares or GDRs. The UKLA has recenty aso extended the Standard Listing category to UK issuers of equity shares which coud previousy ony have had a Premium (formery Primary ) Listing. Prospectus review and approva An admission of securities onto the Officia List and the Main Market of the London Stock Exchange requires the production of an approved prospectus. As the UKLA is the UK s competent authority for the purposes of the Prospectus Directive, it typicay approves prospectuses produced during an IPO. Athough fina confirmation of an issuer s eigibiity can ony be given once its prospectus has been approved, the UKLA wi generay try to resove any major eigibiity issues prior to starting its review of an issuer s prospectus. This review invoves an iterative process of reviewing and commenting on drafts of the prospectus unti the UKLA is satisfied that a appicabe rues have been compied with. The number of drafts necessary to reach this point wi depend on the compexity of the issues and the quaity of the submissions. By way of exampe, many arge IPOs can invove the review of five or more substantive drafts for one reason or another. The UKLA seeks to compy with its pubished service standards for the document review and approva process, and aims to provide comments on an initia draft of a new appicant prospectus within 10 working days, and comments on each subsequent draft within five working days. On average, the review and approva of a prospectus takes around 6-8 weeks for an IPO. The prospectus can be pubished once it has been formay approved by the UKLA. The actua timing of that approva wi depend on the issuer s choice of issuance method for exampe, if the issuance invoves a retai offering then approva and pubication must occur sufficienty in advance of the beginning of the offer. A prospectus reating ony to an introduction where no offer to the pubic is made may be approved as itte as 48 hours prior to admission to isting. Listing Particuars Athough no prospectus is required for the admission of securities to unreguated markets such as the Professiona Securities Market (the PSM ), the UKLA does require Listing Particuars for the admission of those securities to isting on the Officia List. In these cases, the process for reviewing the document, and the content requirements, are very simiar to the requirements for a prospectus. The principa difference is that the financia information in a prospectus must be prepared in accordance with IFRS or an equivaent GAAP. In the case of Listing Particuars where securities are to be admitted to the PSM, the financia information can be prepared in accordance with oca standards. Passporting An overseas issuer may aso seek to passport onto a UK-reguated market, using a prospectus that has been approved by another competent authority. Athough in these circumstances the UKLA wi rey upon the passport to satisfy the requirement for an approved prospectus, it wi sti separatey assess the issuer against the reevant eigibiity requirements. As part of this process, the UKLA reviews the issuer s proposed prospectus to hep in its assessment of eigibiity, so again the UKLA recommends that an issuer makes contact sufficienty eary in the process, and certainy before the prospectus has been approved by the home competent authority. Page 16 The roe of the UKLA

16 Post-IPO interaction with the UKLA DTRs a isted issuer must compy with the DTRs on an ongoing basis, as faiure to compy with these rues may resut in the suspension of the isting of its securities. The UKLA has a team dedicated to monitoring issuers compiance with the DTRs, and to providing guidance on these rues on a reatime basis. Prospectus requirements if the issuer seeks admission of further securities of the same cass it wi be required to produce a prospectus, uness an exemption appies. Exemptions incude, among other things, the issue of shares under empoyee share schemes and bonus issues. The UKLA woud typicay be required to approve any future prospectus. Significant transactions if the issuer has a Premium Listing of its equity shares, it wi be required to consider whether any significant transaction that it undertakes wi need announcement or, if it is of sufficient size, sharehoder approva. Lower size threshods are appied if the transaction is being undertaken with a reated party such as a director or substantia sharehoder. The Listing Rues incude rues governing the discosure requirements in circuars where sharehoder approva is sought, and aso carify which circuars require UKLA approva. Timetabes the UKLA staff (or readers ) aocated to a particuar case wi typicay be working on a arge number of transactions at any one time. Whist the UKLA makes every effort to accommodate tight timetabes it cannot dea with every issue immediatey or meet unreaistic timetabes. Compex issues wi need time for proper consideration prior to resoution and therefore the UKLA aways advises that such issues shoud be brought to its attention as eary as possibe. Hepdesks the UKLA offers severa different hepdesks to provide guidance on the Listing Rues, Prospectus Rues, and the DTRs. This enabes compex issues to be discussed and agreed prior to the submission of documents, or in reation to significant transactions (Te: +44 (0) ). The roe of the UKLA Page 17

17 A summary of the key differences between Premium and Standard istings Key eigibiity criteria Premium Equity Shares Standard Shares Standard Depositary Receipts Free foat 25% 25% 25% Audited historica financia information Three years Three years or such shorter period Three years or such shorter period 75 per cent of appicant s business supported by revenueearning record for the three-year period Contro over majority of the assets for the three-year period Requirement for cean working capita statement Required n/a n/a Required n/a n/a Required n/a n/a Sponsor Required n/a n/a Key continuing obigations Free foat 25% 25% 25% Annua financia report Required Required Required Haf-yeary financia report Required Required n/a Interim management statements Required Required n/a EU-IFRS or equivaent Required Required Required UK Corporate Governance Code Compy or expain n/a n/a Mode Code Appies n/a n/a Pre-emption rights Required Significant transaction ( Cass tests ) As required by reevant company aw n/a Rues appy n/a n/a Reated-party transactions Rues appy n/a n/a Canceation 75 per cent sharehoder approva required No sharehoder approva required No sharehoder approva required This ist is not exhaustive and shoud be read in conjunction with the FSA Handbook (Listing Rues, Prospectus Rues and Discosure & Transparency Rues). Page 18 The roe of the UKLA

18 Preparing for an IPO John Wooand and David Sea UBS Investment Bank

19 Advertisement Persona weath management At UBS Weath Management we Most peope who IPO a business want to reaise part of the vaue in cash. A higher proportion of their assets may now be in stocks or shares. Eary weath management advice can hep the owners extract and maximise the vaue of the investments they have buit up. Drawing on the expertise of the UBS opportunities, bending traditiona asset casses with private equity, hedge funds, commodities and rea estate (where suitabe to the cient). UBS provides brokerage services, foreign exchange execution and strategy, coatera backed ending and whoe-ofmarket advice. Where there is a need for provides advice on structuring persona and corporate assets, pensions options and succession panning, with fu backup at every stage of ife. For more information about UBS Weath Management pease contact Michae Bishop on

20 Preparing for an IPO Initia pubic offerings ( IPOs ) are among the most chaenging transactions that a business can undertake. The decision on whether to ist a company s shares on a pubic market is a significant one; obtaining a pubic quote is a major miestone in any company s ife. The process of going pubic is time-consuming, but it is an opportunity for a company to criticay examine itsef. A company, its management and its owners are ikey to be in the pubic eye to a much greater extent than before. A company s decision to aunch an IPO must be based on a reaistic assessment of its business, its management resources, its stage of deveopment and its prospects. Pubic ownership offers significant advantages, such as access to the pubic equity and debt markets to finance growth and strengthen a company s financia position, as we as the creation of an open market for a company s shares. However, a company wi face heightened scrutiny and greater demands on its management. Panning is a key eement in any IPO. In order to avoid unnecessary deays and distraction, which coud be costy, management shoud evauate in detai how it wi commit adequate resources to meet the pressing deadines of an IPO process. The run-up to a company seeking a isting on the Main Market can be broady divided into two phases pre-ipo preparation and the IPO process itsef. Pre-IPO preparation incudes the critica review of a company s business pan and growth prospects, assessing the management team, appointing an appropriate board, tightening interna contros, improving operationa efficiency and resoving issues that may adversey affect the isting eary on. The United Kingdom Listing Authority s ( UKLA ) Listing Rues set the specific reguatory requirements that a company has to meet to be aowed to ist on a market. Unsurprisingy, a number of the UKLA s requirements coincide with the attributes which investors are ooking for in a company. The precise reguatory requirements are covered in the chapter The ega framework for an IPO on page 31. Areas such as a demonstrabe trading record and appropriatey experienced directors ceary hep to satisfy both the reguators and the potentia sharehoders. Utimatey, the abiity to meet the market s commercia expectations is crucia. For management and owners, an IPO may aso crystaise the need to examine their tax panning and persona weath management. This shoud be addressed eary to avoid distraction during the fina, and often hectic, few weeks of the IPO process. Pre-IPO preparation Businesses often begin their preparations for becoming pubic companies we before they aunch the IPO process. Typicay, pre-ipo preparations take four to six months, but they can take consideraby onger. Advance preparation is a key success factor that aows for a smooth and efficient execution process and the abiity to take advantage of market windows. Management team A company s management team wi need to expain the business, its strategy and prospects to investors, and demonstrate knowedge of the sector, as we as its chaenges, in order to gain the support and confidence of the market. The directors of a company wi be accountabe to its new and existing sharehoders for the performance of the business when it is a pubic company. Therefore, as a company prepares for its IPO it may need to ensure that its management has sufficient depth and breadth. Business pan For the purposes of an IPO, a company needs a Preparing for an IPO Page 21

21 comprehensive business pan that sets out its products, markets, competitive environment, strategy, capabiities and growth objectives. Companies engaging in successfu IPOs tend to have a ceary defined vision for the future performance of the business that can be articuated crediby, ceary and quantifiaby. Companies that are in mature or shrinking industries, operate within sma markets, or provide a narrow range of products to a sma and highy speciaised customer base may be unsuitabe for an IPO. Financia performance A company shoud expect to show investors a consistent pattern of top- and bottom-ine growth and a sound baance sheet post-ipo. For a company seeking a Premium Listing, its financia statements need to adhere to Internationa Financia Reporting Standards ( IFRS ). Further technica requirements of the financia information required to be incuded in a prospectus are covered in the chapter Accounting requirements and advice through the IPO process on page 43. Growth prospects Before investing in a company, most investors want to fee confident about its future growth prospects. A company shoud deveop a financia mode that quantifies its business pan and expected growth. The sponsor (see page 26) may work cosey with management and externa consutants/experts to deveop this mode and wi conduct due diigence on the assumptions behind the mode and stress-test the projections. Raising funds? The majority of istings take pace with a simutaneous share offering to investors. This can take the form of: raising additiona capita for the business by issuing new shares in a company to new and existing sharehoders (a primary offering) existing sharehoders seing their shares to new or other existing sharehoders, ie no additiona capita is raised for the business (a secondary offering); or a combination of both. If existing sharehoders intend to se in the IPO, it is hepfu to know the ikey quantum eary so that the IPO can be panned accordingy. Use of proceeds If a company is raising new capita, the use of proceeds shoud be ceary articuated and in ine with its strategy. In many cases, the proceeds wi be used to either pay down debt, fund capita investment or to provide working capita for expansion. In determining the quantum of new capita, a company needs to consider its future capita structure and its abiity to pay dividends at an appropriate eve. Financia contros The market expects companies to have proper financia contros in pace. In addition, the UKLA requires the sponsor to provide written confirmation of the adequacy of a company s financia contros. Companies contempating a isting wi therefore need to ensure that they have systems in pace to ensure a fow of accurate, timey information. Board A pubic company needs to satisfy corporate governance requirements. The principes are set out in the UK Corporate Governance Code (the Code ) and a company is required to compy with the Code, or expain why it has not, in its prospectus. It is typicay necessary to appoint new members to the board who are independent and to form new committees (eg audit and remuneration). Identifying suitabe candidates can take a Page 22 Preparing for an IPO

22 significant amount of time. Potentia directors often want to be invoved in the IPO process at an eary stage. The sponsor frequenty assists in the recruitment and assessment of potentia board members for a company seeking a isting. Group reorganisation The reorganisation steps undertaken in preparation for an IPO wi vary, depending on the existing and intended group structure. One of the key steps is determining the jurisdiction of incorporation of the isting entity. At IPO it is essentia to ensure that the group hods a assets, inteectua property and contractua rights necessary to carry on its business operations. Part of the group reorganisation may invove their transfer where they are currenty hed by reated parties outside of the group. Change may be necessary to optimise a group s tax position, or to remove businesses or assets that are not part of the group to be foated. For exampe, company-owned horses, boats and so on are unikey to be appropriate for a quoted company. Determine empoyee and management compensation and incentive pans As part of the IPO process, many companies review the amount of equity owned by their top executives and empoyees. Additiona equity options or other incentives at the IPO may be granted to increase management and empoyee ownership and to aign incentives from the IPO with a company s new investors. Remuneration consutants can advise on the structure of any schemes, as we as trends in the appropriate industry. The recommendations shoud be reviewed by the sponsor and bookrunner(s) to ensure that the awards are in ine with market expectations. Weath management and financia panning For many managers and owners of a business, an IPO is an opportunity to reaise or transfer part of their weath. Eary panning of their persona tax and financia affairs is advisabe to avoid deay or difficuty in the fina stages of an IPO. Controing sharehoders Potentia investors may be infuenced, negativey or positivey, by the presence of a controing sharehoder. A company shoud assess what wi happen with such sharehoders post an IPO, ie whether they wi se down some or a of their hodings, continue to have board representation or maintain veto rights on certain company decisions. In most situations, any specia rights wi be unwound and, where appropriate, a reationship agreement may be entered into as part of the IPO process to avoid potentia future conficts of interest. Reated-party transactions Any interna transactions, compensation arrangements and reationships invoving management or the board that might be appropriate for a private company but improper for a pubic company must be eiminated. A company shoud therefore consider whether any outside affiiations wi be negativey perceived by the market. Investor reations ( IR ) IR is the term used to describe the ongoing activity of companies communicating with the investment community. Whie the communication that pubic companies undertake is a mix of reguatory and vountary activities, IR is essentiay the part of pubic ife that sees companies interacting with existing sharehoders, potentia investors, research anaysts and journaists. Larger companies frequenty create a separate IR function to meet the demands for information and to assist in a communications with the market. Pease refer to the chapter Managing the company s profie on page 69 for more detai on this topic. Preparing for an IPO Page 23

23 IPO timetabe Private execution phase Week Process Execution kick-off meeting Weeky meeting/conference cas Due diigence Long form report Preparation of audited numbers Vauation and capita structure Forecasts finaised Working capita report Vauation discussion Capita structure discussions Agree offer size Documentation Draft prospectus Prospectus fied with UKLA UKLA review prospectus Pubish pathfinder prospectus Pubish fina prospectus Preparation of pacing agreement Auditors comfort etters Marketing and roadshows PR process Anaysts pres n prepared and deivered Research prepared and reviewed Prepare and rehearse roadshow Announce intention to foat Pubish research Pre-marketing Price range set Roadshow Bookbuiding Pricing/aocation Settement and cosing Stabiisation Week Active IPO execution Page 24 Preparing for an IPO

24 Pubic execution phase d a y s Active IPO execution Preparing for an IPO Page 25

25 IPO process Private phase Pubic phase Preparation of the IPO Preiminary vauation Anayst presentation Investor education Bookbuiding Aftermarket Appoint a advisers Kick-off meeting/ weeky meetings Due diigence Prepare prospectus and other ega documents Deveop investment case Corporate housekeeping Set initia vauation range Existing sharehoder views on price, size, structure Preparations at advanced stage Due diigence substantiay compete Anayst briefing Announcement of intention to foat ( AITF ) Pubication of research Target key investors Monitor market Anayse feedback Refine size, vauation Management roadshow One-on-one meetings Anayse demand Admission Stabiisation Research Investor reations Continuing obigations Ensure basic preparedness of company for the IPO Decide to proceed with anayst presentation Decide to proceed with pre-marketing Decide to aunch (size, price range decision) Price, sign pacing agreement and aocate Life as a Pc Key objectives IPO price maximised High-quaity sharehoder base Stabe, rising aftermarket Liquid trading and quaity research coverage The IPO Process The IPO process invoves both a private and pubic phase (see IPO Process chart above). Private phase Seect the sponsor A company seeking a isting is required to appoint a sponsor. The sponsor eads a company s team of professiona advisers and coordinates their roes to ensure a company successfuy competes the isting process. A fu ist of approved sponsors and their contact detais is avaiabe on the Financia Services Authority ( FSA ) website: Often, companies approach the appointment of advisers by hoding beauty parades with a series of sponsors, asking each about their expertise, experience and fees, and getting a feeing for what it woud be ike to work cosey with them over an extended period. Since acting as a sponsor requires a high degree of commitment, the appointment process is often two-way. Hence, the sponsor wi aso want fuy to understand a company s business before agreeing to take on the isting. The sponsor has responsibiities both to the company and to the UKLA. For exampe, the sponsor is required to submit an eigibiity etter to the UKLA setting out how the company satisfies a number of the Listing Rues. The sponsor is aso obiged to consider whether the admission of the equity shares woud be detrimenta to investors interests. Appointment of other professiona advisers In addition to the sponsor, a company needs to assembe a number of other advisers to guide it through the process. This incudes the bookrunner(s), awyers (one firm advising the Page 26 Preparing for an IPO

26 company and another firm to advise the sponsor/bookrunner(s)), accountants, financia pubic reations advisers, remuneration consutants, registrars and financia printers. Experts in vauations or sector consutants may aso be appointed. IPO timetabe See IPO timetabe chart on pages 24 and 25. An IPO can generay be competed within 15 to 20 weeks. The exact timetabe wi vary depending on market conditions, the scope and compexity of the dea and a range of other factors. Kick-off meeting A kick-off meeting is usuay hed in person and invoves discussions to make sure that the working group fuy understands the structure of the transaction, the process, timetabe and a other reevant issues. The sponsor wi usuay provide a detaied organisation book that goes through a these issues in detai. Weeky meetings In order to ensure that the process remains on track, the sponsor is ikey to organise weeky meetings/conference cas. These meetings give an opportunity for a parties to be kept fuy up to date on the process and for any key issues to be raised. Prospectus UKLA process Before a company can be isted, the sponsor must get a company s prospectus approved by the UKLA. Athough the prospectus is a ega document, it is aso a marketing too to hep to se shares to potentia investors. A company s awyers usuay take the primary responsibiity for drafting the prospectus athough the sponsor/bookrunner(s) assist a company in crafting the appropriate marketing story. The drafting of the prospectus takes severa weeks and wi invove a advisers. A number of drafting sessions wi take pace on various sections of the document. From a marketing perspective, the prospectus outines a company s strengths, strategy and market opportunity. The precise areas that must be covered in a prospectus, such as the incusion of risks reating to a company, are covered in the chapter The ega framework for an IPO on page 31. The sponsor is responsibe for submitting drafts of the prospectus to the UKLA. The UKLA is aowed 10 business days after the first submission to respond to the sponsor with a comment sheet. The company and its advisers wi then revise the prospectus so that the sponsor can submit an updated draft with the UKLA for a further review. For the second and subsequent drafts, the UKLA responds via its comment sheet within five business days. As every transaction is unique, it is impossibe to predict exacty how ong this process wi take. However, as a rue, the timeframe is approximatey six to eight weeks from initia submission of the prospectus to the UKLA (approximatey three to four submissions) to preiminary approva ahead of aunching the transaction, often with a Pathfinder prospectus (see page 29). Due diigence The overa purpose of due diigence is to ensure the accuracy, truthfuness and competeness of a company s prospectus, and to understand any issues associated with the company. Whie each professiona adviser performs a different roe in this process, the sponsor/bookrunner(s) wi focus on the diigence of a company s operations, management, financia prospects, historica performance, competitive position and business strategy. The advisers wi aso ook cosey at factors such as a company s suppiers, customers, creditors and anything ese that might have a bearing on the offering or viabiity of a company as a pubic company and on the accuracy and competeness of the prospectus. Preparing for an IPO Page 27

27 Due diigence comprises many interreated processes. Business due diigence is conducted mainy by the sponsor and bookrunner(s) and is designed to verify a company s business strategy and potentia for future growth. As part of the information and fact-gathering process, the sponsor/bookrunner(s) may conduct onsite inspections, particuary for manufacturing and property-intensive businesses. They may aso interview company officias, suppiers and customers to understand fuy every aspect of a company s business and its financia statements. The knowedge obtained wi ater hep the sponsor/bookrunner(s) and management to craft a strong, consistent message that can be used during the marketing process. Financia due diigence is geared toward confirming a company s historica financia resuts and understanding its operationa and financia prospects. Key areas of focus incude: audited and interim financia statements capita structure breakdown of historica financias by business detaied review of budgets meetings with auditors budget versus actua financia statements accounting poicies and auditor management etters use of proceeds financia contro systems working capita requirements debt covenants. The financia due diigence workstreams are covered in more detai in the chapter: Accounting requirements and advice through the IPO process on page 43. Lega due diigence is conducted by the soicitors and is the process of verifying a company s ega records, materia contracts and itigation. Key areas of focus incude: itigation compiance with aws and reguations tite to principa assets corporate structure debt covenants environmenta issues inteectua property. Lega restructuring, documentation and agreements During this stage, a company s management, sponsor and awyers work together to draft the necessary ega documentation and impement any required corporate restructuring. The coective purpose of these documents is to assure investors and reguators that the IPO has been objectivey vetted for gaps, irreguarities, miseading statements and other potentia probems. The documents incude: the pacing agreement (if funds are being raised) comfort etters ega opinions ock-up agreements. Continue to prepare a company to become a pubic company The sponsor/bookrunner(s) wi assist a company on a number of matters critica to its transformation into a pubic entity. These incude: discussion of vauation deveopment of investment case the composition of the board and its committees interna contros prevaiing market conditions. Marketing strategy The bookrunner(s) and sponsor wi set up a comprehensive marketing pan to target specific investors. Page 28 Preparing for an IPO

28 Anayst presentation It is common practice for senior management to meet with the research anaysts empoyed by the bookrunner(s) before the IPO and for such anaysts to pubish pre-dea research on a company before the start of the roadshow. To prepare fuy for the presentation, severa meetings and rehearsas with senior management are usuay required. Materia information must be incuded in the prospectus, but considerabe additiona information wi be provided to the anaysts to ensure a fu understanding of a company s business and sector. Pubic phase The main components of the marketing process are outined beow and expained at greater ength in the chapter: Generating and capturing investor demand during an IPO on page 57. Announcement of Intention to Foat ( AITF ) The first time that a company provides specific confirmation of its IPO pans is in a pubic announcement known as the AITF. At this stage the marketing process begins in earnest, often with pubication of research by anaysts connected to the bookrunner(s). Larger companies are ikey to have a carefuy deveoped media PR campaign to promote knowedge of the business and management to the media. Pathfinder prospectus At this stage in the process, a draft prospectus (aso referred to as a Pathfinder prospectus) is often made avaiabe to prospective investors. This document is an amost fina version of the prospectus. Apart from detais of the precise size of the IPO and the subscription price of the new shares to be offered (which are unikey to be finaised at this stage), it shoud incude a other reevant detais. Investor education Investor education is the process whereby the anayst(s) referred to above market the story to Considerations for overseas companies For incusion in the FTSE UK Index Series, it is important for overseas companies to note that: a company not incorporated in the UK wi be required to pubicy acknowedge adherence to the principes of the UK Corporate Governance Code, pre-emption rights and the UK Takeover Code, as far as is practica; and a company not incorporated in the UK must have a free foat of not ess than 50 per cent. Detais in reation to the FTSE UK Index Series are covered in the chapter: London: a unique investment opportunity on page 87. investors using the research they have written. This takes pace on arger IPOs and is in advance of the management roadshow. Management roadshow presentation The management roadshow is a series of meetings with potentia investors. It typicay incudes a forma presentation by the CEO and CFO outining the company s business operations, financia resuts, performance, markets, products and services. As with the anayst presentation, the roe of the sponsor/bookrunner(s) in this workstream incudes assisting a company in the preparation of the presentation and organising rehearsas. Competion and pricing meeting Foowing the management roadshow and the pricing of the IPO, a competion meeting takes pace where a reevant documents and paperwork are reviewed in their fina form by both the directors and their advisers. The exchange of new shares for funds typicay occurs three business days after pricing. During this three-day period, the shares may trade on a when issued basis, meaning that the bargains are not setted unti the isting becomes effective. Preparing for an IPO Page 29

29 Impact Day This is typicay the day after the competion meeting and is the day on which the avaiabiity of the prospectus is advertised and the isting is officiay announced to the market. UKLA fina approva The prospectus must be submitted in fina form, which wi incude the reevant pricing and size information, to the UKLA for fina approva. The UKLA aso requires any supporting documents, incuding directors service contracts, audited accounts and a reports referred to in the prospectus, to be deivered on the date of approva. The UKLA ony approves the prospectus on the day it is dated and pubished. Appications for isting and trading At east 48 hours before admission, the forma appication for a isting is submitted to the UKLA. At the same time, a forma appication for admission to trading is submitted to the Exchange. Admission This is the point at which a company s shares are admitted to isting and the shares are traded pubicy on the Main Market. The isting is officiay granted by the UKLA in conjunction with admission to trading being granted by the London Stock Exchange. Speciaist companies Specific rues appy to a variety of businesses incuding investment companies and resource companies and certain financia companies. In some cases, expert reports wi be required (eg to report on oi and gas reserves). Occasionay, companies may be abe to IPO when they do not meet the three-year rue on financia statements, such as when they are seeking a Standard Listing. The requirements for isting shoud be discussed in advance with both the sponsor and the London Stock Exchange or the UKLA. Summary When contempating an IPO, a company s management and its owners shoud not underestimate the significant time, resources and panning required in isting a company on the Main Market. There are two distinct stages: pre-ipo preparation and the IPO process itsef. It is imperative for the success of an IPO that a company undertakes sufficient pre-ipo preparation to ensure it is suitabe to become a pubic company. To assist in the panning process, a sponsor, which is usuay an investment bank, shoud be appointed. A sponsor is abe to advise a company through its pre-ipo preparation and wi, during the IPO process, ead a company s team of professiona advisers and coordinate their roes to ensure a smooth isting process. Page 30 Preparing for an IPO

30 Section tite The ega framework for an IPO Simon Witty and David Cotton Freshfieds Bruckhaus Deringer LLP

31 An IPO is just the beginning. In 2009, we heped our cients compete 14 initia pubic offerings (IPOs) gobay, raising in excess of $15bn. We aso competed 58 further issues, raising in excess of $62bn. We re proud of those statistics, but they re ony a part of the story. We cover every kind of mandate and, because we work hard to maintain ong-standing cient reationships, we get to work with cients through the good times and the chaenging. Freshfieds Bruckhaus Deringer currenty acts for over a third of the FTSE 100 and those cients know that, when the going gets reay tough, we are the aw firm they can turn to for business-focused advice on the most compex chaenges. With over 2,500 awyers in 27 offices, we are abe to offer our cients the best ega advice for their business wherever they need it, whatever the jurisdiction and through every stage of deveopment. If you woud ike more information pease contact any of [email protected], [email protected] or [email protected]. Freshfieds Bruckhaus Deringer LLP is proud to be the officia ega services provider to the London 2012 Oympic and Paraympic Games.

32 The ega framework for an IPO This chapter provides an insight into the foowing areas: reguations governing the Main Market and an overview of the reevant ruebooks eigibiity criteria for companies seeking Premium and Standard Listings contents requirements for the prospectus considerations for companies ocated outside the UK continuing obigations. The ega and reguatory basis of the Main Market The Main Market of the London Stock Exchange (the Exchange ) is governed by EU aw, UK Acts of Pariament, reguations drawn up by the Financia Services Authority ( FSA ) and the Exchange s rues. EU aw, through various directives and reguations, provides the minimum standards (appicabe EUwide) that appy to the Main Market. The UK has, where necessary, impemented these directives and reguations through the Financia Services and Markets Act 2000 ( FSMA ) and through the Listing Rues, the Prospectus Rues and the Discosure and Transparency Rues. Among other things, FSMA gives statutory powers in reation to istings and isted companies to the FSA, which aso acts as the UK Listing Authority ( UKLA ). The UKLA is aso the UK s competent authority for the purposes of EU egisation. Aso reevant to interpreting and appying the reevant EU and UK egisation are guidance pubished by the Committee of European Securities Reguators ( CESR ), materias pubished by the FSA/UKLA (eg LIST!) and the UK Corporate Governance Code (formery the Combined Code ), which is pubished by the Financia Reporting Counci. Access to the Main Market is a two-stage process: first it is necessary for the UKLA to admit a company s shares to the officia ist of the FSA (the Officia List ), and then for the Exchange to admit those shares to trading on the Main Market. In order to obtain admission to the Officia List, a company must meet the requirements of the Listing Rues and have pubished, or passported into the UK, an approved prospectus. The requirements of the Listing Rues wi vary according to the type of isting being sought a Premium Listing or a Standard Listing. In order to be admitted to trading on the Main Market, in addition to obtaining admission to the Officia List, a company must compy with the Exchange s own reguations as aid out in its Admission and Discosure Standards ( A&DS ). Eigibiity for joining the Officia List/Main Market For shares to be admitted to the Officia List and to trading on the Main Market, a company and the shares it issues must satisfy the reevant Officia List and the Exchange s eigibiity requirements. A company aso needs to bear in mind, and ensure that it is abe to compy with, the continuing obigations to which it wi be subject foowing isting and admission. These are described on page 39 and foowing. UKLA eigibiity requirements The UKLA eigibiity requirements are found in the Listing Rues. There are requirements that appy to a istings, as we as additiona requirements that appy ony to Premium Listings. One such requirement that appies to companies seeking a Premium Listing is that they must appoint a sponsor, which wi generay be an investment bank, to advise them on the Listing Rues and Prospectus Rues and to give confirmations as to their compiance with those rues and certain other matters to the UKLA. Athough a sponsor is required to provide advice to the company, its primary responsibiities and obigations are owed to the UKLA. The Listing Rues contain provisions as to the independence of the sponsor and The ega framework for an IPO Page 33

33 identifying and managing conficts of interest between its reationship with the company and its roe as sponsor (it is, for exampe, customary for a sponsor aso to be a bookrunner or underwriter in an offering). See the chapter Preparing for an IPO on page 19 for more detai on the roe of the sponsor and the chapter Generating and capturing investor demand during an IPO on page 57 for more information on the roe of the bookrunner(s). Eigibiity requirements that appy to both Standard and Premium Listings Chapter 2 Listing Rues requirements Chapter 2 of the Listing Rues contains basic requirements that, subject to some modifications, appy to istings of a types of securities. The first set of requirements reates to ega matters and these require that the company is duy incorporated, vaidy existing and operating in conformity with its constitution and that its shares compy with the aws of the company s pace of incorporation, are duy authorised and have a necessary statutory and other consents. The shares must aso be admitted to trading on a recognised investment exchange, such as the London Stock Exchange (in practice, the isting and admission to trading wi take pace simutaneousy), be freey transferabe, fuy paid and free from any iens or restrictions on the right of transfer (save for faiure to compy with a statutory notice requiring information about interests in shares). Neither usua seing restrictions imposed as part of an offering nor a contractua ock-up arrangement woud be considered a bar on transferabiity for these purposes. In addition, a the shares of the same cass as the isted shares must be isted and the shares must have a minimum market capitaisation of 700,000. Finay, a prospectus reating to the shares must be approved by the FSA (or by another EEA state competent authority and passported into the UK) and pubished. Free-foat requirement In order to obtain a Premium or Standard Listing, at east 25 per cent of the entire cass of shares must, by the time of their admission to isting, be hed by the pubic in one or more EEA states. The amount of share capita hed by the pubic is aso known as the free-foat. Generay speaking, shares are deemed hed by the pubic uness they are hed by one or more of the foowing: (i) directors of the company or group members; (ii) persons connected with directors of the company or group members; (iii) trustees of any group empoyee share scheme or pension fund; (iv) a person who has the right to nominate a director; and/or (v) persons who individuay or acting in concert have a 5 per cent or greater interest in the share capita. This rue is to ensure that there are sufficient smaer and non company-reated sharehoders for the market in the shares to operate propery that is, for there to be sufficient iquidity in the shares. Given this, the UKLA does sometimes aow a smaer free-foat than 25 per cent for instance, where there are shares hed outside the EEA that woud be capabe of being traded, or where the company s market capitaisation is so arge that a smaer percentage might sti aow for a sufficienty iquid market in the stock. This rue is of particuar interest in an IPO where the existing owners intend to maintain a substantia majority stake foowing the isting, as it wi imit the number of shares they can retain post-ipo, especiay if there is aso a strategic investor with more than 5 per cent. Eigibiity requirements for a Premium Listing The eigibiity requirements for a Premium Listing are found in Chapter 6 of the Listing Rues ( LR6 ). As indicated above, these go beyond the basic requirements of the EU egisation. Page 34 The ega framework for an IPO

34 Audited historica financia information A company seeking a Premium Listing must generay have pubished or fied accounts for at east the ast three financia years, audited without modification (which wi generay mean without quaification), and the most recent must be for a period ended not more than six months prior to the date of the prospectus. This requirement wi often drive the IPO timetabe and wi necessitate the preparation of interim audited accounts where the existing annua accounts are not sufficienty recent. In addition to the above requirements, the auditors must be independent of the company and the company must obtain written confirmation from them that they compy with the reevant accounting and auditing independence guideines. 75 per cent of the business being supported by revenue-earning record, contro of assets and independence At east 75 per cent of the business of a company seeking a Premium Listing must generay be supported by a revenue-earning record covering the period for which accounts are required under LR6 namey, at east three years. In practica terms, this means that a company that has made major acquisitions (amounting to 25 per cent or more of its business) over the financia track record period must incude financia information for these businesses both before and after their acquisition. The form this information wi take wi be determined in accordance with the rues reating to compex financia histories (rues contained, amongst other paces, in Reguation 211/2007, which amended the Prospectus Reguation 809/2004 EC (the EU PD Reguation )). A company must aso have controed the majority of its assets for at east the three-year period for which accounts are required and be carrying on an independent business as its main activity. Where sharehoders continue to own a substantia stake after IPO, it is customary to put in pace a reationship agreement between those sharehoders and the company to assist in demonstrating its operationa independence. The requirements reating to the nature and duration of the company s business activities are intended to enabe investors to make a reasonabe assessment of the future prospects of the company s business. Accordingy, an issuer may not satisfy these provisions if its strategy, business or financia performance in the future is expected to be significanty different from that in its threeyear track record. Working capita A company seeking a Premium Listing is required to satisfy the FSA that it has sufficient working capita for at east the next 12 months. On a practica eve, this is generay satisfied by the working capita statement to this effect incuded in the prospectus and the sponsor s decaration to the FSA. By contrast, an issuer seeking a Standard Listing need not have sufficient working capita for the next 12 months, athough if not it woud need to expain in its prospectus how it intends to procure such capita. To support the working capita statement and, where appicabe, the reated decaration, the company and its accountants wi prepare a working capita report. The sponsor wi review this report and conduct other reated due diigence. Warrants or options to subscribe The tota of a issued warrants and options to subscribe for equity share capita of the company must not exceed 20 per cent of its issued share capita. Minera companies and scientific research companies Minera companies and scientific research companies are subject to additiona eigibiity requirements, athough they are not required to have a three-year, revenue-earning, audited track record. The ega framework for an IPO Page 35

35 London Stock Exchange eigibiity requirements The London Stock Exchange eigibiity requirements are found in the A&DS. The essentia requirement of the company is that it compies with the requirements of the securities reguators by which it is reguated (ie the FSA and any other home state reguator) and any other stock exchange on which it has securities admitted to trading. The A&DS aso impose requirements reating to the trading and settement of the shares: the shares must be capabe of being traded in a fair, ordery and efficient manner and they must be eigibe for eectronic settement. The prospectus A prospectus must be pubished by a company before its securities can be isted and admitted to trading on the Main Market. A prospectus sets out detaied information about a company s business, management and financia information, and there are detaied provisions in the FSA s Prospectus Rues and the EU PD Reguation regarding its content. The prospectus and its contents aso form the base for marketing any offering to potentia investors. Passporting The EU Prospectus Directive introduced the possibiity of using a singe prospectus approved within one EU jurisdiction to enabe companies to offer or ist securities throughout the EU. The requirements to effect the passporting into the UK of a prospectus approved esewhere in the EU are minima: the reevant reguator must provide the FSA with a copy of the prospectus and confirmation of its approva and the summary section of the prospectus (expected to be no more than 2,500 words) must be avaiabe in Engish. Pathfinder or Price Range prospectus By the time a company has competed its IPO it is ikey that it wi have produced a pathfinder prospectus (stricty an advertisement rather than a prospectus) as we as the UKLA-approved prospectus. The pathfinder prospectus is a nearfina draft of the prospectus that, in the context of offers to institutiona investors ony, wi be used as part of the book-buiding and marketing process of the IPO. A few days before the day of admission to both the Officia List and trading on the Main Market, a fina, compete and UKLA-approved prospectus wi be pubished containing the price at which the securities are offered for sae. If the offer is aso being made to non-institutiona investors, a pathfinder prospectus is not normay pubished, and instead a UKLA-approved price range prospectus is used, offering shares to investors within a specified indicative offer price range. A pricing statement woud subsequenty be issued once the offer price is fixed at the end of the book-buiding and marketing period. What must the prospectus contain? The prospectus must contain the information necessary for investors to make an informed assessment of the assets and iabiities, financia position, profits and osses and prospects of the company, as we as the rights attaching to the securities being offered. This information must be presented in a way that is comprehensibe and easy to anayse. These are the overarching requirements of FSMA, but there are aso more detaied content requirements contained in the Prospectus Rues, which aong with FSMA impement the Prospectus Directive and the EU PD Reguation (which wi be shorty amended, athough mainy in the context of secondary offerings rather than IPOs). Additionay, certain of these detaied requirements are further described in guideines and questions and answers pubished by CESR, which wi be taken into account by the FSA when it is determining whether the company has compied with its obigations regarding the prospectus. Further guidance on the appication and interpretation of the EU PD Reguation and Prospectus Rues can be found in the LIST! newsetters pubished by the UKLA from time to time. Page 36 The ega framework for an IPO

36 Summary of prospectus contents Summary This section must briefy (in no more than 2,500 words) convey in non-technica anguage the essentia characteristics of, and the risks associated with, the company and its securities. This wi usuay incude a summary of the company, its business, strategy and prospects aong with a summary of its financia information and the risk factors. Risk factors Business description Operating and financia review Financia information Working capita and no significant change This section must describe the principa risks of reevance to the company and an acquisition of its shares. The former shoud be specific to the company and its industry often a prospectus wi divide the risk factors so as to address these separatey. It wi generay take a considerabe time to draft the risk factors. As part of the approva process, the FSA wi check to ensure that the risk factors do not undermine any of the statements made in the rest of the prospectus, especiay the working capita statement. This section describes and discusses the company s business and operations. It wi generay start with an overview section, foowed by a summary of the group s strengths and strategies. Foowing this, there wi be a description of the principa products or services sod by the group, together with detais of where and how these are produced and sod, incuding information on the group s customers and suppiers. An overview of the industry in which the group operates wi aso be incuded in this section, or incuded as a standaone section. The business description section wi aso typicay incude information on the group s empoyees, research and deveopment, the group s competitors and the ega and reguatory framework in which the group operates. This section is intended to provide investors with the information necessary to enabe them to assess the key drivers of the group s business, of reevance to both past and future performance, and to understand management s perception of these matters. The operating and financia review wi aso incude a description and expanation of the trends in the financia information incuded in the prospectus (incuding by business segment where appropriate) and a description of the group s sources and uses of iquidity and capita resources. This section must incude information about the company s assets and iabiities, financia position and profits and osses for the three most recent financia years (or, uness a Premium Listing, such shorter period as the company has been in operation) as we as any interim resuts pubished. The financia information needs to be audited (subject to certain exceptions) and prepared in accordance with IFRS or an equivaent GAAP (eg US GAAP). As we as the historica financia information, the prospectus must incude a pro forma tabe, iustrating the effect of the IPO (and any significant transactions that are not consoidated into the financia statements) on the baance sheet and income statement. If the company wishes (for marketing reasons) or is obiged (because it has previousy pubished one that remains current) to incude a profit forecast or estimate in its prospectus, that forecast or estimate must be reported on by an auditor and that report must be incuded in the prospectus. The directors must make a working capita statement stating that the company has sufficient working capita for the requirements of its group for the 12 months foowing pubication of the prospectus (or, in the case of a Standard Listing, if not, how it intends to procure sufficient working capita). In addition, the prospectus must incude a statement confirming that there has been no significant change in the financia or trading position of the group since the end of the ast annua or interim financia period (or, if there have been changes, incude detais). Other information about the company dividend poicy materia itigation directors and senior management reated-party transactions major sharehoders, and terms of the share offering and share capita. The ega framework for an IPO Page 37

37 Who is responsibe for the prospectus? The company directors are obiged in the prospectus to state that they accept responsibiity for the information in it and that it is true to the best of their knowedge, having taken reasonabe care to make sure that this is the case. The issuer wi aso be responsibe for the prospectus, as potentiay are certain others (for exampe, providers of any expert reports incuded in the prospectus). Responsibiity for the prospectus carries with it the possibiity of iabiity for the company, its directors and others. Quite apart from these considerations, the accuracy and competeness of the prospectus are of the utmost importance for commercia and reputationa reasons. As a consequence, procedures have deveoped around the preparation of any prospectus, coectivey referred to as due diigence, with this aim in mind. The process depends on the coective efforts of management as we as the banking, ega, accounting and other advisers. The due diigence exercise may aso incude a specific verification exercise in which the steps taken to check materia factua statements in the prospectus are recorded. Timetabe The process, from the start of due diigence to the fina printing of the prospectus prior to UKLA approva, is accordingy a compex one and can take four months or more to compete (see IPO timetabe on pages 24 and 25 in the chapter Preparing for an IPO ). Considerations for overseas companies There are a number of additiona factors that a non-uk company needs to take into account. For exampe, athough non-uk companies can obtain a Premium Listing, FTSE index incusion (one of the main motivations for a Premium Listing) wi not aways be possibe. A non-uk company aso needs to consider which competent authority wi be responsibe for approving its prospectus. In the case of companies incorporated in another EEA state this wi normay be the competent authority in its state of incorporation. Eigibiity requirements Subject to the additiona eigibiity requirement in respect of non-eea companies without a home isting (see beow), the Officia List and London Stock Exchange eigibiity requirements are the same for both UK and non-uk entities. However, non-uk companies may find it more difficut to compy with some of the Officia List eigibiity requirements. Absence of a home isting Where the shares of a non-eea company are not aso isted in that company s country of incorporation or the country in which the majority of its shares are hed, the FSA must be satisfied that the absence of a isting is not due to the need to protect investors. For instance, the company has not been deisted or refused a isting in its home country due to breaches of aw or reguation. Financia information A non-uk company that has not historicay prepared its financia information to IFRS or an equivaent set of standards (eg US GAAP) wi need to restate its historica financia information to IFRS or an equivaent set of standards, which can be a engthy and costy process. This woud appy to a isting anywhere in the EEA. Settement To be eigibe for admission, a company s shares must be capabe of being traded eectronicay. For admission to the Exchange s Main Market, this means that the shares must be capabe of being admitted to CREST, a system operated by Eurocear UK & Ireand Limited ( Eurocear ) to hod and transfer uncertificated securities. Ony shares of a UK or Irish company can be admitted directy to CREST. For other issuers, depositary interests in respect of the underying shares wi need to be created and admitted to CREST. Page 38 The ega framework for an IPO

38 As we as giving rise to an additiona workstream and extra costs, Eurocear imposes certain eigibiity requirements as to the aws of the country of incorporation before it wi admit depositary interests in respect of shares. Not a countries have historicay been abe to meet these requirements (for exampe, Russia). A depositary interest is simiar to a goba depositary receipt, but it has the advantage that the shares themseves are isted rather than receipts, which, among other things, can increase the range of potentia investors and permits a Premium Listing. Home member state In addition to the various obigations that wi appy by virtue of being admitted to trading on a UKreguated market, a company wi be subject to certain ongoing obigations as to periodic discosure of financia and other information, discosure of major sharehodings and treatment of sharehoders under the aw of its home member state (see Continuing obigations beow). The securities reguator in a company s home member state wi aso be the reguator responsibe for approva of prospectuses prepared by that issuer. The identity of a company s home member state is therefore important as it wi affect both an IPO process (and any future prospectuses) and ongoing obigations. If a company is incorporated in the EEA, its home member state wi be its state of incorporation. If it is not incorporated in the EEA, the home member state may be chosen from the state(s) in which the issuer first makes an appication to admit its shares to trading or makes an offer of those shares. For non-eea entities seeking a isting in London, the home member state wi generay be the UK. However, it is not uncommon for non-eea groups to estabish a non-uk EEA-incorporated hoding company (for exampe, in Cyprus, Luxembourg or the Netherands), in which case the issuer s home member state wi be the state of incorporation of that hoding company. An issuer facing this issue shoud consider the ramifications of being subject to two sets of rues and two reguators (incuding having a reguator other than the FSA approve prospectuses). FTSE incusion, Takeover Code, UK Corporate Governance Code and pre-emption rights Ony securities with a Premium Listing are potentiay eigibe for incusion in the FTSE UK indices series (see FTSE s chapter, London: a unique investment opportunity on page 87, for more information on non-uk companies accessing the FTSE UK series of indices). Ongoing obigations A non-uk company shoud aso consider the continuing obigations to which it wi be subject foowing isting and admission to trading. Athough these continuing obigations do not generay differ between UK and non-uk entities, companies without prior experience of being subject to such obigations wi need to ensure that the necessary systems and contros are in pace and that their empoyees have been adequatey trained to compy with them foowing isting. In addition, some of those obigations may require changes to the company s constitution to give sharehoders pre-emption rights and impose a regime consistent with the UK Takeover Code. Continuing obigations A company wi become subject to a number of continuing obigations once its shares have been isted on the Officia List and admitted to trading on the Main Market. Certain obigations appy to a isted companies, whether they have a Standard or Premium Listing, and there are additiona obigations that appy ony to Premium Listed companies. The main obigations are set out beow. Of particuar note are the significant transaction and reated-party transaction rues that appy to issuers with a Premium Listing. These restrict the company s abiity to compete major transactions, or transactions outside the ordinary course of The ega framework for an IPO Page 39

39 business with reated parties, without first pubishing a detaied circuar and obtaining sharehoder approva. This section assumes that the company s home member state is the UK, which wi generay be the case for a London-isted company. If, however, its home member state is another EEA state, not a of these requirements wi appy or appy in fu (for exampe, DTRs 3, 4 and 5). That said, simiar requirements may we be imposed by that other member state as many of these rues are taken from EU egisation. Continuing obigations that appy ony to Premium Listed companies Significant transactions A Premium Listed company is required to cassify certain transactions on the basis of the cass tests, which produce a ratio of the transaction size to certain company indicators (eg market capitaisation) set out in the Listing Rues. Not a transactions need to be cassified, incuding transactions of a revenue nature in the ordinary course of business and issues of securities or transactions to raise finance that do not invove the acquisition or disposa of assets. An eigibe transaction wi be cassified as Cass 3 (ratios a ess than 5 per cent), Cass 2 (any ratio at east 5 per cent, but a ess than 25 per cent), Cass 1 (any ratio at east 25 per cent) or as a reverse takeover (an acquisition where any ratio is at east 100 per cent or that woud resut in a fundamenta change in the board or voting contro). Reated transactions within a 12-month period are aggregated. Entry into a Cass 3 or Cass 2 transaction requires the notification of certain information on the transaction to the market via a Reguatory Information Service ( RIS ) (see beow). The entry into a Cass 1 transaction is a more significant matter, requiring pubication of a Cass 1 Circuar to sharehoders and sharehoder approva (with a simpe majority). A Cass 1 Circuar needs to be approved by the UKLA and wi contain certain information in reation to the proposed transaction and its expected effect on the isted company. Among other things, a Cass 1 Circuar is aso required to incude a working capita statement on the basis that the transaction has gone ahead, a no significant change statement and, if the Cass 1 Circuar reates to an acquisition, financia information on the target. A reverse takeover is subject to the same requirements as a Cass 1 transaction and, in addition, the UKLA wi generay cance the isting of the issuer and require the combined entity to reappy for isting (which wi, among other things, require the combined group to compy with many of the eigibiity requirements of Chapter 6 of the Listing Rues as if it were a new appicant). Reated-party transactions Certain transactions entered into between Premium Listed companies and reated parties, or which benefit a reated party, require pubication of a sharehoder circuar and sharehoder approva by a simpe majority, with the reated party not voting. The sharehoder circuar must be approved by the UKLA and incude a recommendation from an independent adviser (generay an investment bank) that the terms of the transaction are fair and reasonabe as far as sharehoders are concerned. A reated party is a person who is or was within the previous 12 months a substantia sharehoder (broady speaking, a sharehoder hoding at east 10 per cent), a director of the company or another group member, a person exercising significant infuence over the company, or an associate of any of these persons. Certain reated transactions are exempt from the requirement to pubish a circuar and obtain sharehoder approva. These incude transactions Page 40 The ega framework for an IPO

40 of a revenue nature in the ordinary course of business, very sma transactions (beow 0.25 per cent based on the cass tests) and certain transactions in reation to an issue of securities. In addition, for reated-party transactions where the cass test ratios are a beow 5 per cent, a circuar and sharehoder approva are not required, but an independent adviser is required to confirm in writing to the FSA that the terms of the transaction are fair and reasonabe as far as sharehoders are concerned. Sponsor A Premium Listed company is required to appoint a sponsor to advise it and, if appicabe, to give certain confirmations to the FSA for exampe, where the company is to pubish a Cass 1 or reated-party circuar or prospectus. Mode Code A Premium Listed company must require each of its persons discharging manageria responsibiities (PDMRs) to compy with a securities deaing code at east as rigorous as the Mode Code annexed to the Listing Rues. The Mode Code governs when and in what circumstances a PDMR is abe to dea in the company s securities and imposes certain obigations on a PDMR in respect of his or her connected persons. In particuar, the Mode Code restricts PDMRs from trading during cose periods (that is to say, in the weeks before pubication of annua, semi-annua and quartery reports) and during any other periods when the company is in possession of inside information. There are some exceptions to these restrictions, but they are very imited. A simiar restriction appies to the company and members of its group deaing in the company s securities. Unaudited financia information and profit forecasts If a Premium Listed company has pubished unaudited financia information or a profit forecast or estimate, it must reproduce the figures in its next annua report and accounts and, if the actua figures differ from them by 10 per cent or more, provide an expanation of the differences. UK Corporate Governance (the Code ) A Premium Listed company is required to compy with the Code, or expain the reasons for noncompiance in its annua report. The Code is pubished by the Financia Reporting Counci and contains a number of rues governing the composition and operation of the board of directors and board committees of a isted company. Among other things, the Code requires that (except for smaer companies outside the FTSE 350) at east haf the board (excuding the Chairman) is comprised of independent nonexecutive directors. Pre-emption rights and further issues A Premium Listed company is generay required to make issues of new shares on a pre-emptive basis, except where pre-emption rights have been disappied in accordance with the UK Companies Act or equivaent nationa egisation. For non-uk entities where pre-emption rights do not exist as a matter of aw, this requirement wi need to be addressed in the artices of association or equivaent constitutiona document. When offering new shares to investors, a Premium Listed company is, in broad terms, required to ensure that the offer price is at a discount of not more than 10 per cent to the existing market price of those shares, uness a arger discount has been approved by sharehoders, sharehoder preemption rights have been disappied or the offering takes the form of a rights issue. Repurchase of securities Various rues regarding the repurchase of securities appy to Premium Listed companies. These incude a prohibition on repurchasing shares during a period in which PDMRs woud be prohibited from deaing under the Mode Code, The ega framework for an IPO Page 41

41 imits on the price at which shares can be repurchased and a requirement for a tender offer in reation to purchases in excess of 15 per cent of the company s share capita. Continuing obigations that appy to a isted companies Discosure of inside information A company is required to pubish any inside information that directy concerns it on a RIS as soon as possibe. Inside information is information that, if made pubic, woud be ikey to have a significant effect on the price of the shares or reated financia instruments. There is imited abiity to deay discosure of inside information in practice this is normay imited to transactions subject to ongoing negotiation, the discosure of which coud prejudice the outcome of those negotiations. A company wi aso be subject to various other rues on the contro and management of inside information, incuding a requirement to maintain ists of persons who have access to inside information and to provide such ists to the FSA on request. A RIS is a service that disseminates reguatory information, such as company announcements, and must be approved by the FSA. The Exchange operates the Reguatory News Service (RNS), which is a RIS. Discosure of deaings and sharehodings PDMRs and their connected persons are required to notify the company of a transactions in its shares (incuding instruments reating to those shares). In addition, persons who hod voting rights (or rights to voting rights such as convertibes) must notify the company if they reach, exceed or fa beow 3 per cent, or any 1 per cent threshod in excess of 3 per cent, of the company s tota voting rights (for instance, if a sharehoder moved from a 4 per cent hoding to a 5 per cent hoding or vice versa). The company is in turn required to notify a RIS of any notifications made to it under these rues. Periodic reporting A company wi be required to pubish annua and semi-annua reports incuding consoidated financia information for the reevant period, together with an accompanying review of the company s business for that period, within four months and two months respectivey of the end of the reevant financia period. The annua financia information must be audited. The semi-annua financia information need not be audited. As we as a report on the company s business for the period, certain other information is required, incuding information on the risks and uncertainties facing the business. The reports are aso required to incude responsibiity statements from the reevant directors of the issuer, for exampe the Chief Financia Officer ( CFO ). A company is aso required to pubish an interim management statement twice a year, between its annua and semi-annua reports. This is not required to incude any financia information but shoud incude an update on the group s business and financia position in the period. Free foat An issuer is required to ensure that at east 25 per cent of its shares are at a times in pubic hands (see Free foat requirement on page 34 for a description of how this is cacuated). Further issues Further issues of shares of 10 per cent or more of the company s share capita (aggregated on a 12- month roing basis) wi generay require the pubication of an approved prospectus. Page 42 The ega framework for an IPO

42 Accounting requirements Section and advice tite through the IPO process David Wikinson Ernst & Young LLP

43 2010 EYGM Limited. A Rights Reserved. The IPO journey can be a rewarding yet compex one: with obigations and tax structuring as just some of the topics you wi need to get to grips with. At Ernst and Young, we are committed to heping you every step of the way. Our mutidiscipinary, cross-border teams provide a comprehensive ife in the pubic spotight and hep you reaise your fu potentia with investors post-ipo. Think IPO. Think Ernst & Young. ey.com/uk/ipo

44 Accounting requirements and advice through the IPO process Athough the initia pubic offering ( IPO ) event itsef generay asts for between four and six months, the process of transforming a business into a pubic company begins at east a year or two before the IPO, and continues we beyond it. An IPO is a key turning point in the ife of a company. As such, it shoud be seen as a business transformation process rather than simpy a oneoff financia transaction. The IPO is aso an opportunity for a business to simpify its structures, formaise business practices and make improvements that wi prepare it to face the chaenges of operating in the pubic spotight. This chapter summarises the principa financia information requirements for a company seeking a Premium Listing and admission to trading on the London Stock Exchange s (the Exchange ) market for isted securities. The prospectus requirements set out beow appy equay to Standard and Premium Listings, but those eigibiity requirements under the Listing Rues, and the requirement to appoint a sponsor, ony appy to a Premium Listing. Reguatory background The Financia Service Authority s ( FSA ) Prospectus Rues, Listing Rues and Transparency and Discosure Rues (coectivey, the Rues ) estabish a reguatory framework that determines the financia reporting requirements for a isting. In appying the Prospectus Rues, the FSA wi take account of guidance issued by the Committee of European Securities Reguators ( CESR guidance ). Financia information requirements The most significant requirements arise from: Prospectus requirements A company seeking to ist on the Main Market must prepare a prospectus presenting detaied information on management and the underying business. The equity growth story for the business to attract investors must be presented, however, other key information required incudes: operating and financia review current trading and significant changes in the business key investment risks audited financia record unaudited interim financia information* indebtedness, funding requirements and capita structure statement on the adequacy of working capita pro forma financia information* profit forecast.* * ony required in certain circumstances Whie some of these requirements must have an opinion from a reporting accountant/auditor, not a wi ead to discosure of financia information in the prospectus. They wi, however, a need to be based upon financia information. Listing Rues These require a company (subject to certain industry-specific exemptions) to have accounts that have been audited without quaification and: cover at east three years have a fina baance sheet that is not more than six months before the date of the prospectus show a revenue-earning record that supports at east 75 per cent of the company s business. The financia information impications of these requirements shoud be carefuy considered and, where necessary, they shoud be agreed with the FSA at an eary stage in the IPO process. It is particuary important if major acquisitions have occurred during the period covered, as they can significanty impact the work required by both the company and the reporting accountants. Accounting requirements and advice Page 45

45 Sponsor The Rues require that any company seeking a Premium Listing of equity securities must appoint a sponsor (see chapter Preparing for an IPO on page 19). The sponsor wi make an assessment of the company s suitabiity for IPO and the contents of the prospectus. As part of its responsibiities, the sponsor is required to make a decaration to the United Kingdom Listing Authority ( UKLA ) which covers among other things: whether the company has estabished appropriate financia reporting procedures ( FRP ) that the directors of the company are satisfied at the time of the IPO that the company wi be abe to meet its future reporting obigations as a isted company the directors basis for the working capita statement. This statement decares that the company wi have adequate financia resources for its present requirements, covering at east 12 months from the date of the prospectus. Making this assessment wi form an important aspect of the IPO preparation. The sponsor wi usuay require the company to commission the reporting accountant to prepare reports covering both of these matters. The reporting accountant s roe The reporting accountant is instructed to prepare a number of reports. These either: meet specific reguatory requirements; or assist the directors and sponsor in meeting their obigations. As such, much of their work is based on accepted market practice and therefore resuts in reports that are not pubished. The directors bear ega responsibiity for the contents of the prospectus and the sponsor faces considerabe reputationa risk shoud it prove to be deficient. The due diigence process is designed to mitigate these risks and the work carried out by the reporting accountant is therefore extensive. Key reports prepared by the reporting accountant Long form report A private due diigence report on significant aspects of the business its exact scope wi be determined by the company s circumstances (see tabe on pages 47 and 48). FRP report A business shoud be abe to meet its reporting obigations as a pubic company and therefore consideration of FRP is critica in determining its isting suitabiity. The report assesses the suitabiity of the company s reporting procedures, and contros, as a basis for the directors to make judgements on the company s financia position and its prospects. Accountant s report The company s historica financia record contained in the prospectus must be reported on. Whie this can be achieved by audit opinions provided for each set of financia statements incuded, market practice is for an Accountant s report to be issued on the entire financia track record. This forms part of the prospectus and is equivaent to an audit report, but provides greater fexibiity as it does not need to be issued by the same firm that issued a previous audit opinion. Working capita report This is a private report that considers the basis for the working capita statement in the prospectus. This incudes the company s approach to financia forecasting, its projections underpinning the working capita statement, as we as anaysis of the impact of changes in the key assumptions, and the avaiabe banking faciities. Other reports If a company incudes either a profit forecast or pro forma financia information in the prospectus, an Accountant s report on the compiation of information must be incuded in the prospectus. Whie companies rarey choose to incude a profit forecast, owing to the additiona risk, cost and time invoved, pro forma financia information is commony used to iustrate the effect of the IPO, recent transactions or a reorganisation that are not refected in the historica financia information. When a profit forecast is reported on, it is usua for the reporting accountant to prepare a detaied private report that comments on the preparation of the forecast and the risks to its achievement. The reporting accountant aso provides a comfort etter to the directors and sponsor to assist with the verification of other financia information in the prospectus. Page 46 Accounting requirements and advice

46 The foowing sections expain what the various reporting entais and how disruption to the company s business and cost can be minimised through appropriate preparation. Long form report This is an integra component of the IPO process. It is estabished practice in the UK, rather than a ega or reguatory requirement, for the report to be prepared as part of the consideration of the company s suitabiity to be admitted to a pubic market. Whie the report is not made pubicy avaiabe, it wi infuence the contents of the prospectus. The ong form report is often prepared by the same firm that audits the company s accounts, but the work is performed by personne who are not part of the audit team. This is owing to the speciaist nature of the work and the need to provide a more objective and independent view. The tabe beow iustrates the typica contents of a ong form report and some of the issues that it may need to address. These wi be raised with the company and sponsor as the work progresses for consideration and/or timey action, as appropriate. The scope of the report is taiored to the requirements of each IPO and is agreed between the reporting accountant, the company and the sponsor. The report s extensive scope requires management to make a significant commitment of time and resources in order to provide the necessary information and expanations. This coincides with competing demands on company resources arising from other aspects of the IPO, and some of the same information wi aso be required by the other IPO advisers. Cooperation between the various IPO advisers is required to reduce the pressure on the management team. Long form report contents Iustrative scope of work Business overview markets and competition saes strategy, saes organisation customers, contracts and pricing products range, description, deveopment, ife-cyce, revenue and contribution purchasing strategy, purchasing organisation, principa suppiers (and associated purchases) manufacturing strategy, faciities, capacity and utiisation distribution premises Iustrative due diigence issues size of the market, growth potentia and resiience to market conditions suppy constraints, reguatory, economic or technoogica issues opportunities for further expansion key customer and suppier reiance historica deveopment of the business (organic vs acquisition) scaabiity of business impact of reated inter-company transactions and intended reationship post-ipo Organisationa structure, management and personne management committees directors' and senior executives' biographies organisation of personne department and responsibiities anaysis of empoyees (eg part/fu-time, function, remuneration) pensions and other empoyment and post-empoyment benefits, share incentive, share option and profit-sharing schemes suitabiity of current management structures whether management appear quaified and/or experienced to manage a UK-isted business staff shortages in key areas Accounting requirements and advice Page 47

47 Long form report contents (continued) Financia performance UK and overseas taxation Iustrative scope of work historica trading performance, incuding anaysis by business segments and reasons for significant fuctuations anaysis of and commentary on exceptiona items adjusted EBITDA current trading performance baance sheets at each year/period end of significant trends and on-baance sheet exposures off-baance sheet exposures and financing arrangements cash fow performance seasonaity in working capita requirements cash conversion rate status of agreement of tax fiings and payments, detais of any tax audits and open correspondence with the tax authorities impact of the IPO on the taxation position compiance with corporation tax, empoyment tax and saes tax reguations detais of the provision for tax in the accounts Iustrative due diigence issues the historica resuts may be impacted by one-offs/non-recurring items, provisions, acquisitions/disposas, changes in accounting poicies/appications drivers of year-on-year revenue and earnings growth reiance on key products/geographies current trading performance/monthy run-rate may not support short-term projections overstated net assets or understated iabiities (eg off-baance sheet items) which might impact vauation tax compiance position may be substantiay in arrears tax impact of any envisaged pre-ipo restructuring work adequacy of tax baances in audited baance sheet to cover the business s decared taxes, incuding deferred taxes, and any additiona tax iabiities identified by due diigence Accounting poicies and basis of preparation consistency of accounting poicies and procedures appied compiance of poicies with GAAP/aw aignment with industry practice and best practice impact of any proposed changes inconsistent accounting poicies over the period aggressive accounting poicies, not in ine with isted peers significant differences between oca country GAAP and IFRS inappropriate aocation bases used to derive carve-out numbers, separation/standaone costs Information systems significant information systems significant appication and hardware support and maintenance procedures contros over systems deveopment and data fie access recovery and back-up procedures IT personne IT strategy core business appications and reated IT infrastructure may not support current/future business requirements additiona unpanned IT investment may be required governance procedures may not be sufficient for a UK-isted business separation of company from parent may create certain gaps company may require transitiona IT services Page 48 Accounting requirements and advice

48 Long form report preparation tips start panning eary and in particuar: identify information requirements that might not be straightforward, eg GAAP conversions, compex transactions, and reated-party and inter-company transactions check the quaity and consistency of information across a subsidiaries assign a project manager to dea with information requests. It may be appropriate to hire additiona resource estabish an eectronic data room. This can be particuary beneficia when information is being drawn from many sources and ocations and/or different advisers require access to the same information start the due diigence in advance of the other IPO work streams. A draft report can be prepared and then updated for current trading ater in the IPO process. This reduces pressure on the company s resources and provides a usefu basis from which to draft the prospectus. FRP Faiure to make timey discosure of financia and price-sensitive information can damage a company s reputation and resut in fines for both the company and its directors. Significant emphasis is therefore paced on a company s FRP during the IPO process, cuminating in the sponsor s decaration to the FSA that the company has estabished procedures that are fit for purpose. The ack of appropriate FRP can resut in postponement and, in some cases, abandoned fotations. Most companies wi need to improve their FRP, as it takes time to identify changes, and to design and impement revised procedures. The key message is that FRP needs to be addressed eary with, ideay, an initia gap anaysis performed at east 12 months prior to the IPO. This wi be particuary important if the company has made acquisitions that need to be integrated. The reporting accountant wi normay prepare a private report commenting on the FRP and give an opinion as to whether it considers that the procedures provide the directors with a reasonabe basis on which to make judgements concerning the company s financia position and prospects. The focus on prospect management has become increasingy important in recent years. The work performed woud not typicay extend to testing the reevant contros or procedures. However, identifying the key performance indicators ( KPIs ) is critica. Once these are identified, the reporting accountant wi assess whether the procedures are capabe of producing information for the KPIs on a timey and reiabe basis. An exampe scope of work for FRP incudes, but is not imited to, the foowing areas: high-eve financia contros (eg tone from the top, risk identification and management, interna audit function, board and its committees) design of interna contros budgeting and forecasting processes treasury management accounting poicies and procedures management reporting framework financia statement consoidation and reporting procedures IT genera contros and appication contros for production of key financia information. Historica financia information Aside from a few specific exemptions (investment, minera and scientific research-based companies) a company must be abe to present financia information covering at east three years. Accounting requirements and advice Page 49

49 FRP a separation case study The separation of a arge energy business from its parent, and subsequent IPO onto the Main Market, invoved the compex detachment of ega entities, assets, peope, systems and shared/centrayprovided services. As the new entity had not previousy operated as a standaone business, the design and impementation of new FRP was a priority. Ernst & Young identified the FRP gaps through an eary readiness assessment and the foowing actions were undertaken: A comprehensive separation pan was deveoped, which was ed by a dedicated separation manager. The key areas covered were: management and peope the scope of centra services to be provided by the parent shared and separated IT systems contractua agreements confidentiaity considerations An action pan was then deveoped to address the impementation required for new FRP reating to corporate governance, management and statutory reporting, preparation of IFRS management accounts, budgeting and forecasting. Ernst & Young s readiness assessment and the resuting remediation pan enabed the company to avoid deays and unnecessary cost by ensuring its FRP were appropriate in advance of the IPO. The action pan aso highighted the additiona expertise that the company woud need to hire in order to impement the new FRP procedures successfuy, particuary with regard to Internationa Financia Reporting Standards ( IFRS ). However, there are some additiona, potentiay onerous, requirements that are considered beow. Reporting The financia information must be reported on, either by means of an audit report or, more typicay, an Accountant s report. The opinion in each of these reports is essentiay the same, but an Accountant s report may require additiona work. Whichever form of report is used, it shoud be unquaified. Any audits must have been performed in accordance with auditing standards accepted in an EU member state or equivaent. Age of historica financia information The financia information for Premium Listings must be drawn up to date no more than six months before the prospectus date. This coud mean that fu, audited financia statements are required to an interim date, with comparative information, athough the atter can be unaudited. Interim information shoud be prepared and audited eary in the IPO panning process, as faiure to do so can cause a deay and incur additiona costs. If a company wishes to offer shares in the US to quaified investors under Rue 144A of the US Securities Act and the atest audited financia information is more than 135 days od, the auditors Page 50 Accounting requirements and advice

50 Achieving successfu financia reporting The reguators do not want any surprises and want to know that companies can meet their reporting requirements in a timey fashion. Listed companies must be abe to respond quicky and effectivey to the rigorous information demands of a isting on the Main Market. Companies shoud: conduct an eary gap anaysis of FRP aow time to resove gaps in key contros and financia information gathering embed poicies and procedures into the business, incuding the effect of IFRS ensure that FRP are scaabe, to support both existing processes and future growth pans. may need to review more recent, unpubished financia information so that they can issue the auditor s comfort etter, required by the underwriters to the offering. Financia track record and transactions A minimum of 75 per cent of the company s business must be supported by a revenue-earning track record for the three-year period. The impications are that, even with this track record, a company may sti not be eigibe for isting, if, for exampe, its core activity has changed fundamentay during the three-year period or the eve of operations has increased exponentiay. In such cases, management shoud discuss the matter with the FSA to determine whether the company wi be eigibe for isting at the present time. If the company has made a significant acquisition in the three years eading up to the IPO, it may mean that its existing financia information does not reach the 75 per cent threshod. To reach this threshod, additiona pre-acquisition financia information for acquired companies wi have to be presented separatey. This inevitaby adds to the work of the finance team and the reporting accountants, particuary when the financia information in question has not previousy been audited or was prepared using different accounting poicies from those of the company. Accounting poicies At east the ast two years of the financia information must be prepared using the accounting poicies that wi be used in the first set of audited accounts post-isting. For EU-registered companies preparing consoidated accounts, this wi mean accounts prepared under IFRS as adopted by the EU. Non-EU registered companies have greater fexibiity, as they can aso use certain other approved GAAPs. Companies that do not aready prepare accounts under IFRS shoud give advance consideration to the conversion. This can be very time-consuming and coud impact the IPO story if the trading track record changes significanty when ooked at through a different accounting ens. Adopting IFRS wi necessitate a change in interna reporting and may require new or different interna contros that wi aso impact the FRP workstream. Working capita statement The prospectus wi incude a working capita statement that considers both interna and externa financia resources avaiabe to the issuer in order to meet its iabiities as they fa due. This statement cannot be quaified, or stated to be subject to assumptions, athough the Listing Rues provide potentia concessions for certain reguated companies. Accounting requirements and advice Page 51

51 The directors therefore need to be satisfied that the company has sufficient working capita to finance its business pan and aso sufficient margin or headroom to cover a reasonabe worst-case scenario. Projections To prepare a working capita statement, the company wi make unpubished financia projections and identify the key assumptions. The projections take the form of an internay consistent cash fow, profit and oss and baance sheet, on a monthy basis. Whie the statement ony covers 12 months after the proposed date of isting, the projections typicay extend to at east 18 months. To prepare the projections, the company needs to: perform an anaysis of its existing business consider the strategy and pans of the business, the reated impementation risks and resutant uncertainties identify assumptions that address the uncertainties, checking against externa evidence incude capita expenditure and other resource requirements of the business identify the financing faciities avaiabe and required perform sensitivity anaysis to identify the impact of changes in key assumptions. IFRS conversion a case study The compexities 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 foat. When asked after the successfu IPO what he woud have done differenty, the company s CFO stated that he woud have started much earier on the preparation of the IFRS historica financia information. His first chaenge reated to IFRS conversion. Issues arising incuded: accounting for hedges and other financia instruments and, in particuar, issues around demonstrating the effectiveness of hedge instruments for accounting purposes and vauations fair vaue accounting and vauations for the intangibe assets arising on the acquisitions made during the three years incuded in the track record segmenta reporting requirements deferred taxation changes. The second chaenge reated to the overseas acquisition. The requirement in the Listing Rues for 75 per cent of the business to be supported by a historic revenue-earning record, meant that separate historic financia information had to be incuded for the overseas acquisition. At the IPO date, this made up more than one-third of the group s business. The acquisition had not previousy been subject to a fu audit and its accounts were not prepared under IFRS. As a resut, significant ead time was required by Ernst & Young to compete this process for the pre-acquisition period. In addition to preparing the historica financia information under IFRS, the team had to buid the new accounting poicies into the ongoing management reporting and forecasting processes. This aso took significant time and effort to compete, but was essentia for the company to operate on the same metrics used by market participants. Page 52 Accounting requirements and advice

52 Finance faciities In making a working capita statement, the company may ony incude faciities to which it has secured access at the time of making the statement. This means that committed bank faciities (for the period they are committed) and the proceeds of an offering (if they are either fuy underwritten, or, in the case of a pacing, firmy paced) can be taken into account when making the statement. The company shoud aso consider projected compiance with any oan covenants (incuding under the sensitivity anaysis, uness there are mitigating actions) and the borrowing imits in its Artices of Association. Working capita report The reporting accountant wi then prepare a private report* commenting on the: preparation of the projections assumptions accuracy of the previous forecasting avaiabiity of financing restrictions on cash movements within the group sensitivity anaysis the directors basis for making the working capita statement. * There are additiona requirements in pace for minera companies that have not been producing on a commercia scae for the previous three years. Tax considerations Structure hoding company ocation persona hoding structure 50 per cent tax rate, capita vs income roover/cash out of existing debt and equity structure, incuding share options tax cearances and transaction taxes (eg stamp duty) Foat process avaiabiity of tax information and in-house tax resources project management and coordination of tax structure, tax discosure for ong form, short form, working capita report, funds fows etc ikey UK GAAP to IFRS adjustments Tax status Post-foat ensure a tax fiings and payments are up to date ook to resove any open items with the reevant tax authorities review the approach taken to any other areas of tax uncertainty tax assets (eg unprovided deferred tax assets) tax resource requirements post-cose tax fiings and payments ongoing tax compiance, panning and reporting securing tax upsides securing tax assets management of structure and optimising tax profie Accounting requirements and advice Page 53

53 Tax structuring a case study Ernst & Young carried out a tax readiness review for a arge private mining group in order to identify potentia tax issues (and opportunities) in preparation for its isting on the Main Market. The determination of the tax residence of the parent company was identified as a key issue. Key management individuas were personay tax resident in a number of jurisdictions, so the structure was assessed in detai to ascertain what was practica for the group, recognising impementation issues. The most practicabe soution was a bespoke tax structure that aigned with the company s commercia strategy. If this issue had not been identified we in advance of the panned IPO, the potentia and significant tax consequences woud have, at best, resuted in an additiona tax charge; at worst, a deay to the IPO process. In order to ensure that the structure was managed in a way expected of a company with a Premium Listing on the Exchange, new procedures were needed for corporate governance, the physica ocation of key management activities and the commercia structure of the entity to be isted. As the design, impementation and management of tax residence were demanding matters, there was a risk that they woud occupy significant management time. However, the process went smoothy because the issues had been identified and acted upon eary. Consequenty, much of the impementation of the tax structuring work had been competed in advance of the IPO and management were not tied up in deaing with these matters during the key IPO execution phase. Tax structuring Companies seeking admission to the Main Market shoud consider their tax structure prior to isting, and in particuar the ocation of key management. A structure shoud be impemented that cosey aigns with the commercia and operationa management structure of the group to be isted, so it can be effectivey managed in the future. It is essentia that management understands the effect of the decisions taken about the IPO on future tax rates and the tax position of existing investors. Faiure to prepare eary may constrain the fexibiity of management s decision-making coser to the IPO event and may aso create additiona burdens on management s time during the chaenging ater phases of preparation. A range of potentia tax impications shoud be considered in order to determine the future optima structure. These are highighted in the tabe on page 53. Overseas companies Overseas companies thinking of isting in London wi need to be aware of the impications of becoming UK tax-resident and how appropriate structuring and good governance can preserve non-resident status. A UK isting does not automaticay pace the business within the UK tax net if it comes through an overseas hoding company. Overseas companies with a free foat of ess than 50 per cent are not eigibe for incusion in the FTSE UK index series (see chapter London: a unique investment opportunity ). Companies in this position therefore tend to use a UK-incorporated company as the isting vehice. However, a successfu chaenge by the UK tax authorities on the parent company s tax residence can resut in profits of overseas subsidiaries being Page 54 Accounting requirements and advice

54 brought into the UK tax net under existing or future controed foreign company rues. The UK tax authorities increasingy ook at a group s transfer pricing poicies as a further way of bringing additiona tax income into the UK. Persona tax factors and empoyee incentives UK tax rates are, at the time of writing, high and carefu structuring of remuneration and sharehodings is crucia to protect empoyees tax position and avoid incurring higher company costs (eg tax and socia security). Appropriate tax structuring though can resut in a more effective and motivationa reward package. Becoming a isted company aso provides opportunities, through shares, to incentivise a much wider group of empoyees. A range of possibe pans are avaiabe for executives and a empoyees, some with specific tax breaks approved by HM Revenue & Customs. The impications of an IPO on empoyee remuneration and incentives are summarised in the tabe opposite. Ongoing obigations post-ipo Once the IPO has been competed and the company has been admitted to the Main Market, a isted company wi be subject to a number of reporting obigations. These incude: Report and accounts audited annua report and accounts must be pubished within four months of the year-end and incude corporate governance discosures unaudited figures must be prepared for the haf-year within two months of the haf-year end interim management statements during each of the first and second haves of the year. Impications of an IPO on empoyee remuneration and incentives Pay structures in pubic companies differ significanty to those in private companies and come under a great dea more scrutiny from non-executive directors, externa reguators and investor bodies. Companies panning for an IPO shoud consider: the quantum of pay, bonuses and structure of any share incentive schemes. Saary benchmarking is required to ensure these are in ine with comparabe isted businesses and market practice ensure institutions are comfortabe with eve of diution of pre- and post-ipo equity incentives, usuay requiring sharehoder approva on admission eary indication and communication to investors of any ikey charge going through the income statement appropriate performance targets post-ipo ensure as far as possibe that remuneration and incentives are deivered in the most tax-efficient manner whist being aware of the attitudes of investors in this regard ock-in arrangements are ikey to appy to management sharehoders, in order to hep retain key management, which is key to the vaue of the business from an investor perspective the remuneration committee wi set pay design and eves for executives current management sharehodings investments and options wi be impacted by any restructuring of the group pre-isting and tax advice shoud be revisited as part of the isting process. Accounting requirements and advice Page 55

55 Discosure of price-sensitive information the company must make a prompt announcement in connection with any price-sensitive information. Transaction and document discosure many types of transactions have to be discosed to the market and some require sharehoder approva. Acquisitions and disposas post-ipo Transactions by Premium Listed companies are subject to cass tests that compare the size of the potentia target to the isted company s existing business, based on a number of financia measures. A proposed transaction that exceeds the 25 per cent cass test woud be conditiona upon sharehoder approva. Additionay, if the 100 per cent threshod is breached, the company enarged by the acquired entity woud need to reappy for isting. The cass tests are based on: gross assets profit before tax gross capita consideration: market capitaisation. These requirements coud introduce an eement of uncertainty into a transaction, potentiay affecting the company s competitiveness in an auction process. Additiona costs are added with these requirements, incuding the need to provide a circuar to sharehoders to enabe them to reach a decision. The company woud need to appoint a sponsor to provide decarations to the FSA concerning the transaction and reports wi aso be required from a reporting accountant. A sharehoder circuar, and approva, is aso required for transactions with reated parties that exceed 5 per cent of any of the cass tests. A business transformation process As this chapter shows, the work of the reporting accountant is extensive. It has to be performed at a detaied eve to satisfy the reguatory requirements and to provide the directors of the company and the sponsor with the comfort they need. Providing a the information mandated by reporting requirements presents an onerous task to management. The burden wi be particuary heavy on the finance team, who wi aready be subject to competing demands from other parties invoved in the isting process. The reporting accountant can assist with many aspects where hep is required, but are precuded from some for independence reasons, so management shoud consider empoying additiona temporary resources. The key message that shoud come through from this chapter is the need to start this process eary. The earier that management starts to identify the gaps in their company s IPO readiness, the sooner they can address the tasks required to fi them. Those companies that start to behave ike a pubic company before they ist, wi find their new environment post-ipo very much easier to navigate. For these reasons, it is essentia to view an IPO as part of a business transformation process, rather than seeing it as a standaone transaction. Think and operate ike a isted company pre-ipo. Eary preparation is everything. Page 56 Accounting requirements and advice

56 Generating and capturing investor demand during an IPO Christopher Smith and Aex Boch UBS Investment Bank

57 Market-eading capabiities and the extra mie. Your IPO marks the beginning of a new chapter for your business. With UBS, you have one of the most experienced, highy-regarded teams in Europe working with you every step of the way, providing detaied anaysis, sound judgement and guidance to ensure that the process meets your objectives and is smooth and successfu. We are chosen as trusted advisers by hundreds of companies from around the word and our market-eading equities franchise deivers exceptiona access to high quaity investors. You can be confident that we put the fu strength and depth of our resources to work for you. Start your journey with us. Visit ubs.com/investmentbank Best Pan-European Equity House Thomson Reuters Exte Contact us John Wooand [email protected] Christopher Smith [email protected] UBS A rights reserved.

58 Generating and capturing investor demand during an IPO From a capita markets perspective, there are three main objectives of an initia pubic offering ( IPO ): to raise sufficient proceeds for the company and/or for the seing sharehoders to optimise the price at which shares are sod (this is important both for seing sharehoders and to minimise the diution impact of new money being raised for the company) to provide the company with a strong sharehoder base for its future deveopment. The objectives of the IPO In this chapter, we expore the process used to maximise investor interest and demand for an IPO on the Main Market, as this is critica in raising adequate funds for the company and the overa success of the transaction. There can sometimes be a confict between maximising the price at which the shares are offered and optimising the sharehoder base for the company s future. Whist the idea resut woud be an IPO which is priced highy with a very strong, ong-term investor base, there is sometimes a degree of trade-off. To inform that debate, companies shoud buid-up an understanding of the characteristics of different potentia sharehoders as the make-up of the register post-ipo is critica to the after-market and the company s abiity to access the equity market in the future. Beow is a ist of some of the key investor quaities one shoud ook for when estabishing a strong sharehoder base through an IPO: a strong understanding of the company s equity story and its positioning it is important that a company s sharehoders shoud thoroughy grasp its investment case. Focusing the marketing process on investors who are thought eaders and highy experienced wi make this a more ikey outcome the abiity to maintain a sharehoding over the ong term investors with a ong-term investment horizon wi be ess infuenced by short-term trading considerations and are more ikey to hep the company achieve its future ambitions the abiity to invest further in the aftermarket the IPO shoud not be seen as the end of the investment process and certain sharehoders wi ook to increase their hodings in the company after the IPO. Such investors end important support to the stock in the after-market the abiity to act quicky and participate in future equity raisings and/or se-downs the company may have requirements to raise additiona equity at some point after the IPO (eg in connection with an acquisition) or there may be further se-downs by existing sharehoders. These transactions are ikey to be best faciitated if the company s argest sharehoders are abe to react quicky and are ikey to be supportive. The overa goa of the IPO shoud therefore be to achieve transaction success whist maximising the quaity of the share register with which the company begins ife as a pubic company on the Main Market. Appointing a syndicate to manage the offering In addition to the sponsor, who is responsibe for advising the issuer on a market and reguatory issues and for representing to the FSA that the issuer has met its responsibiities, a bank/broker or number of such institutions wi be appointed to market the offering to investors. It is typica for the sponsor to have a dua-roe and aso perform this function, but this need not necessariy be the case. For certain IPOs, it may be appropriate to have a singe bank or broker performing the marketing roe, but for arger transactions it is common to see a number of banks or brokers appointed. Such banks or brokers are often caed bookrunners because they are responsibe for running the order book of demand which is buit 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) Average number of bookrunners < 50m 50m - 100m 100m - 300m 300m - 500m 500m - 1,000m > 1,000m Size of IPO The two important questions reating to this topic which face any company considering an IPO are: (i) (ii) how many bookrunners shoud be appointed to hande the offering, and which are the right bookrunners for the IPO? Whist increasing the number of bookrunners invoved in the IPO wi increase the syndicate s potentia marketing reach with investors, there is ikey to be an optima syndicate size for a given dea. Beyond this, the additiona marketing reach of an extra bookrunner wi be outweighed by the additiona compexities of invoving another bank or broker in the process. The chart above iustrates the average number of bookrunners in a syndicate (for IPOs on the London Stock Exchange (the Exchange ) of different sizes since 2000). It may hep companies to decide on the optimum number of bookrunners required. In order to seect the right bookrunners for the IPO, many companies and their sharehoders wi invite a number of potentia candidates to a forma beauty parade (so that they can hear the views of each and make an informed decision on the back of that information). This process has become more common in recent years and is we advised for any company considering an IPO. In certain circumstances, an independent adviser may be hired to assist in the process of seecting bookrunners for the offering. Some of the criteria that can be used to assess the candidates are isted beow, but this shoud not Page 60 Generating and capturing investor demand

60 be considered prescriptive and each company wi ook for different quaities in its IPO bookrunners: quaity of project team and commitment reevant credentias and distribution capabiities quaity of research anayst and market credibiity industry knowedge, understanding of the issuer and its equity story abiity to support the issuer in the aftermarket views on vauation and positioning proposed eve of fees company s reationship/rapport with the adviser. The investor universe for a UK IPO The bookrunners wi be abe to advise the issuer on the specific characteristics of individua investors but an understanding of the target investor community and its different constituents wi assist the management team to prepare itsef propery for the marketing process. We set out beow genera comments on the main investor groups for a UK IPO athough in practice the ines between the ong-ony and hedge fund investors is burred. Many ong-ony investors have in-house hedge funds and many hedge funds run ong-ony funds and have ong investment horizons and rigorous, research-based investment processes. UK ong-ony institutions The term ong-ony is used to refer to investors that ony take ong positions in securities. A ong position is one which generates a return to the investor if the share price increases. Long-ony investors are typicay traditiona institutions that are seeking to generate a return on their investments over a reativey onger time horizon than certain other market participants. Such investors incude pension funds, insurance companies, investment trusts and mutua funds. They incude investment advisers who manage assets using ong-ony strategies on behaf of both institutiona and retai cients. UK ong-ony investors manage equity assets representing approximatey per cent of the tota UK market and are therefore of paramount importance to any company seeking to raise equity capita in the UK. Many of these investors wi ony have a mandate to invest in UK equities. In most IPOs on the Exchange, UK ong-ony investors are the singe biggest provider of demand. Internationa investors There is often a grey area between what might be considered a UK investor and an internationa investor. A number of goba investment institutions wi have offices in London, some of which may ony invest in the UK, making the distinction even ess cear. However one treats internationa investors with offices in London, there is aso a separate cass of investors that ony operate out of offices overseas. The most important regions for UK IPOs have tended to be the US and Europe and it is common for companies to market their offerings in both regions (this is something that needs to be reviewed by the ega advisers as it impacts the due diigence exercise and the offering documentation). Many of those non-uk investors that are interested in UK equities have a mandate to invest ony outside of their domestic region and, in certain cases, they may be running funds that soey invest in the UK or Europe. These types of fund managers are often as we-versed in UK equities as domestic, ong-ony institutions and they form an important poo of additiona demand for IPOs on the London Stock Exchange. Sector speciaists Whie most investors wi be interested in companies in a variety of industries, some investors are sector speciaists that wi ony invest in certain sectors. This speciaism can sometimes Generating and capturing investor demand Page 61

61 be at an institutiona eve, but is more common at a fund eve. So, for exampe, within some of the argest asset managers, there may be certain funds dedicated expicity to investing in mining companies. Other sectors which end themseves to speciaist funds incude rea estate, financias and technoogy. For companies in these sectors considering an IPO, it is critica to tap into this additiona poo of demand and in-depth understanding during the marketing process. Hedge funds Hedge funds are investment vehices which expicity pursue absoute returns on their investments. Whie ong-ony investors target outperformance reative to their benchmark indices, hedge funds target positive returns to their investors, irrespective of the wider market backdrop. Such funds are abe to empoy strategies that aow them to generate positive returns when security prices are faing. The term hedge fund has come to incorporate any absoute return fund appying non-traditiona portfoio management techniques (incuding shorting, everaging, arbitrage, the use of derivatives and so on). These funds have become increasingy significant in the market pace. Whist historicay there has been scepticism about their motivations among some corporates, it is important to note that a number of these funds are extremey ong-term in their focus. Indeed, many of the most sophisticated asset managers in the investor community are now empoyed in such institutions. Furthermore, the distinction between ong-ony institutions and hedge funds is getting increasingy ess cear, as many investment advisers now manage funds which empoy both types of strategy. Lasty, these types of investors can provide a significant amount of demand and iquidity in an IPO and wi aways form some component of the fina book of demand. The marketing process The marketing of an IPO can be divided into a number of stages, not a of which are equay pubic in their nature. The process described in this section is a common one, but sight modifications to it wi be made in some instances. Syndicate anayst research and the process to pubication Outside of the IPO process, investment banks empoy research anaysts to monitor the performance of different companies that they cover in a certain sector and to make investment recommendations to their investor cients on those stocks. In most IPOs, the bookrunners research anaysts wi write detaied research notes on the company in order to educate investors before the company s management markets the transaction. The company s management team typicay presents to the syndicate anaysts eary on in the preparatory process. This ensures that they have sufficient background information and understanding of the company and its prospects to write a research note. This is an important part of the preparatory process for the IPO. Ensuring that the anaysts propery understand the company s business mode and prospects is critica to ensuring that the investors have a good grasp of this before meeting management. Whist investors carry out their own detaied anaysis ahead of making an investment decision, the work, forecasts and views of the syndicate anaysts wi be important in informing investors opinions. As such, it is essentia for the company s equity story to be effectivey conveyed to the syndicate anaysts in this presentation. The anaysts wi have a period of one to two months to write their research note. During that time, they wi be in reguar diaogue with representatives of the company (incuding the CFO) to have their questions on the business Page 62 Generating and capturing investor demand

62 addressed. Draft research notes wi be submitted to the company and the awyers for a review of their factua accuracy. The research note wi need to be competed by the time the company issues its Announcement of Intention to Foat as at that stage the anaysts wi begin a process of investor education, which is described further beow. Initia meetings with potentia investors ( piot fishing ) This exercise is one part of the marketing process which certainy does vary from dea to dea. The purpose of carrying out piot fishing meetings with investors is to introduce the company to them before the transaction is pubicy aunched so as to obtain feedback on how the market wi assess and vaue the company. Such meetings aso hep to buid reations with potentia key investors eary on. However, they are not aways carried out and may not be required if the company has a simpe business mode with known, isted peers and imited vauation outturns. To the extent that such meetings are hed, they woud be organised by the bookrunners and imited to a very sma number of investors so as to maintain the transaction s confidentiaity. Announcing the intention to foat The announcement of the intention to foat is the forma start of the pubic marketing exercise. The content of this announcement shoud be carefuy considered because it is ikey to incude a summary of the company s investment case and information on the offering, potentiay incuding its size (though that may sti be undetermined at this stage). It is usua for a number of meetings to be hed with the media on the day the announcement is reeased. This ensures the most positive media reaction to the company and the IPO. On the same day, the bookrunners (and any other banks in the syndicate which have written research) wi pubish their notes on the company. This day marks the beginning of what is usuay a two-week process of investor education. Investor education Investor education is the process through which the market is educated about the company and its investment case. This is carried out by the research anaysts of the various syndicate banks, together with their equity saes forces. Equity saespeope are individuas at an investment bank who are responsibe for discussing investment ideas with the bank s investor cients. They everage the work of the research department in these cient conversations. In the IPO process, it wi be common for the equity saespeope to book a series of investor meetings in different regions.these provide the research anaysts with an opportunity to educate their institutiona cients about the company. Feedback from the meetings wi be coated by the anayst, the saesperson responsibe for that cient and by the equity capita markets teams. The feedback is used to refine the company s thinking on and presentation of the investment case in its subsequent meetings. This is aso the point in the marketing process when meaningfu conversations about vauation begin to be hed with investors. Utimatey, the feedback from this exercise needs to be used to set a price range for the shares that wi be offered in the IPO. Management roadshow The fina stage in the marketing process is aso the most important. During this stage the management team (typicay the CEO and CFO) wi meet with a significant number of investors (usuay over a twoweek period) to expain the business, the investment case and the rationae for the IPO. Depending on the size of the transaction and the ega restrictions around the offering, this roadshow wi take pace in a number of regions. For arger IPOs, it is common for the management team to hod meetings in the UK, Europe and the US. In Generating and capturing investor demand Page 63

63 certain instances there wi be more than one team of presenters attending these investor meetings. Amost a investors wi want to have spent some time with management before committing any meaningfu amount of capita. These meetings are therefore fundamenta to the entire process. The anaysts wi have educated the market on the company and the investment case, but it wi utimatey be the management of the company that must se its equity story to the investors. This is crucia for encouraging them to participate in the offering at an attractive vauation for the company. Pricing the offer Participating in an IPO is an investment decision. Investors first need to estabish whether they beieve in the investment case before deciding how much they are prepared to pay to buy the shares being offered. Since there wi be no pubic market vaue for the business to inform them of the right price, their chaenge is to estabish what that pubic market vaue shoud be. The existing sharehoders wi be ooking to maximise the vauation of the business, either to minimise their diution or to maximise the proceeds of any shares they se (or both). Having said that, existing sharehoders and the company itsef wi know that it is aso important to estabish a strong (but not excessive) share price performance in the after-market. There are therefore a number of dynamics which impact the pricing process and managing these is one of the key roes of the bookrunners on the IPO. The process of pricing an IPO invoves a number of stages discussed in detai beow. Syndicate anayst research vauation range The research reports written by the syndicate anaysts wi typicay each incude a vauation range. These ranges wi be the market s first pubic attempt at putting a vaue on the company s equity. The methodoogy used to vaue the company wi vary between companies, sectors and even anaysts, but there are a number of common methodoogies which are often appied. In many cases, these methodoogies wi be simiar to those used by the anaysts to vaue the company s isted peers. Exampes of the techniques used incude appying the mutipes at which the isted peers trade (or potentiay a premium or discount to those mutipes depending on the company s investment case); using a discounted cash fow anaysis, or using a vauation of the group s individua businesses to arrive at a combined sumof-the-parts vauation. Throughout the process of investor education, the bookrunners anaysts and saespeope wi discuss the vauation range contained in the research note with investors and this wi aow the bookrunners to assess the market s reaction to that vauation. Investors, at this stage, wi sti not have met management and some may sti be famiiarising themseves with the business mode, so these initia discussions shoud be interpreted accordingy. In many cases, there wi be scope for the investor s vauation to increase from this point. Setting the price range At the end of the investor education exercise, the bookrunners, the company and its existing sharehoders wi discuss the feedback from the investors meetings and agree a price range within which the offering wi be marketed. In certain cases (especiay fund offerings), the IPO wi be at a fixed price, but for most corporates a price range wi be used. The price range is used to generate a competitive auction for the shares to ensure that pricing is maximised, subject to having a stabe aftermarket. There are different strategies for setting a price range, but the textbook approach is to set the bottom of the range where there is broad buyin from the investor community. This aows the bookrunners to generate sufficient demand to get Page 64 Generating and capturing investor demand

64 the book covered (ie have demand for a the shares being offered) quicky. From this point on, competitive tension between buyers can be estabished to increase the price. If there is no hook at the bottom of the range, there is a risk of insufficient momentum, which potentiay means that the book might not be covered. Typicay, the price range is set before the management begin their roadshow, but in certain circumstances it may be appropriate to deay the setting of the range by a few days. This both reduces the period of market risk and can aow for a higher and tighter price range, if eary feedback from the management meetings is highy positive. Buiding the book of demand Once the price range has been set, the bookrunners begin taking orders from investors. This process aows the bookrunners to buid a book of demand, showing how much demand there is for the shares being offered at different prices. The system is eectronic and pooed between the bookrunners to give the company and each bookrunner a view of the combined demand generated. This process of bookbuiding asts for the fu duration of the management roadshow. Orders can come in various styes some investors may put a price imit on their order (ie a cap on the amount they are wiing to pay such that they have no demand above that price), others may give an unimited order and some wi give stepped orders throughout the price range (ie giving precise amounts of demand at different prices). Setting the offer price and aocating the shares At the end of the bookbuiding process and management roadshow, the time wi come to set the price of the shares in the offering. A meeting to agree that price wi be hed with the bookrunners, the company and certain of the existing sharehoders. Sometimes this wi be a short discussion in the idea scenario, the book wi be many times covered by high-quaity investors at the top of the range. However, there is often a baance to be sought between price and quaity of investors. The debate wi be about where to set the IPO price so that proceeds to seers are maximised and/or diution minimised, consistent with providing the company with a strong sharehoder register and stabe aftermarket performance. Having agreed on the price, the bookrunners and the company wi then agree on the aocation of the shares and these aocations wi be confirmed to the investors the foowing morning, before the shares begin trading. The after-market Typica trading patterns post IPO It is common after an IPO to see some turnover in the shares in the first few days. Certain investors may be ooking to buy more stock whist others who have participated may trim their exposure. The average voume of shares traded in the first day post the IPO is 23 per cent of the shares offered in the transaction (based on IPOs on the London Stock Exchange over the ast five years). This number increases to 34 per cent for the first week post-ipo. Over time, trading wi sette down and come more into ine with the typica eves seen esewhere in the secondary market. Stabiisation Because there is a heightened sensitivity to the share price performance immediatey post-ipo, reguators internationay permit one of the bookrunners to support the share price in the after-market ( stabiisation ) through buying shares in the open market. In the UK, such stabiisation is ony permitted for a period of 30 days and the bookrunner seected to carry out this activity is ony aowed to buy stock in the market if the shares are trading beow the issue price in the IPO, and ony for the express purpose of supporting the share price. Generating and capturing investor demand Page 65

65 To aow the stabiisation process to occur, the bookrunners initiay over-aot shares in the IPO (up to a maximum of 15 per cent of the tota number of ordinary shares which comprise the base offer in the UK). The proceeds from this overaotment may then be used to buy back up to that number of over-aotted shares if stabiisation is required. By way of exampe, if the offer has been set at 100 shares, the bookrunners may actuay se, say, 115 shares to investors. They woud borrow 15 shares from an existing sharehoder to deiver to new investors at the time of the IPO. If the share price drops beow the IPO issue price, the stabiisation bookrunner may eect to buy up to 15 shares and return these shares to the origina owner. If the shares trade above the IPO issue price, no stabiisation wi be carried out and the proceeds of the sae of the over-aotted shares wi be paid to the origina owner. The ongoing roe of the corporate broker The IPO is the beginning of the company s ife as a isted entity. A critica component of that ife is managing the company s reations with the market with research anaysts, investors, the London Stock Exchange, the reguators, the media and so on. Whist the company s corporate broker wi be responsibe for advising the company on reguatory aspects, the broker wi aso be an important voice for the company and wi act as the company s eyes and ears in the market. The corporate broker s research anayst wi disseminate the company s equity story widey to maximise the investor foowing and understanding of the story in the market. The saespeope wi ensure the message is disseminated to a generaist audience as we as to the sector speciaists who wi aso be the focus of the research anayst. The corporate broking professionas at the firm wi advise the company on a aspects of the company s interaction with the market, incuding the deveopment of key messages and how they are best communicated to the market. Their roe incudes capita markets and corporate transactions advice and strategic non-transaction advice such as diaogue on the company s investment case, being a sounding board on key strategic issues (strategy, capita structure and dividend poicy) and providing support around key investor events. The corporate broker wi aso provide its cients with reevant market inteigence such as share price movements, trading strategies, key market themes and macroeconomic events. In addition, a corporate broker wi carry out investor targeting exercises, organise investor meetings and coate feedback from investors. It is usua that the banks or brokers seected for this roe wi be some or a of those that acted as bookrunners in the IPO. In many ways, they shoud be the firms that best understand the company s investment case and are therefore best-paced to present that to the rest of the market on an ongoing basis. In order to perform the roe we, the corporate broker must be thought of as a trusted adviser by the company and this is the reationship that is best forged from the outset of the IPO process. Other IPO considerations Retai offerings In some instances, the company or its existing sharehoders may wish to make the offering avaiabe to the genera pubic, or to a subset of it the company s customers, for instance. These offers were a common feature of government privatisations. In most cases, the pubic wi participate on the same terms as the institutiona investors. Sometimes a discount or other reward is given to encourage pubic participation. Retai demand can be meaningfu in IPOs of certain types of companies. It is most appicabe where the company has a strong brand presence and eve of customer oyaty. A retai offer can be Page 66 Generating and capturing investor demand

66 made as an offering to the pubic, through pubic appication forms (which has certain technica impications on the timetabe and documentation), or as an intermediaries offering which is made avaiabe to cients of private cient brokers ony. Empoyee offerings These are simiar to the above, but are ony made avaiabe to the company s empoyees. They are reativey simpe to execute and faciitate increased empoyee ownership of the business often a positive for the company and its staff. If this is being considered, it is important to ensure that the appropriate ega steps have been taken where the empoyee base is internationa as this can constitute an offering into other jurisdictions (giving rise to reguatory impications). Additiona considerations for internationa issuers The Exchange is a popuar isting venue amongst internationa issuers. Being incorporated outside the UK is typicay not an issue from a marketing perspective. It may, however, encourage the bookrunners to adjust the regions in which the investor education and management roadshow are carried out to refect potentia investment interest from the company s home country. Aside from this, and certain technica considerations around ensuring that the company is eigibe for FTSE index incusion, there are imited differences to the marketing process on an IPO of a UK incorporated company and an internationa issuer on the Exchange. Summary The Exchange provides an exceent patform for marketing any IPO. Optimising the marketing exercise is critica to the IPO's success and wi utimatey impact the vauation achieved for the company and its sharehoders. This exercise needs to be carefuy designed by the bookrunners to achieve the objectives of raising sufficient proceeds for the company or its sharehoders, optimising the price at which shares are issued and estabishing a strong share register for the company's future. The key areas to focus on, as discussed in detai in this chapter, are as foows: ensuring the right bookrunners are appointed to market the offering positioning the investment case in a way which effectivey demonstrates the attractions to equity investors meeting enough and the right type of investors on the management roadshow; and setting the price range to generate momentum and a successfu bookbuiding exercise. Getting these critica points right is the key to achieving a successfu isting on the Main Market of the Exchange. Generating and capturing investor demand Page 67

67 Managing the company s profie Andy Berry Fishburn Hedges

68 !!!!!

69 Managing the company s profie For companies ooking to join the Main Market and begin the fotation process, corporate communications can be an important and vauabe too. An ongoing PR programme is fundamenta to estabishing and maintaining a company s profie and is a key component to ensuring a successfu fotation. Joining the Main Market offers considerabe benefits to companies. Gaining access to capita to fund business growth and an enhanced internationa profie are key advantages. So, too, are offering a new currency for acquisitions and the staff motivation that a isting encourages. But in order to reaise the fu potentia of these benefits, the positioning of your business is important. Investors are seective and wi ook to invest in those companies with a strong and we-estabished corporate reputation. As a company you wi need to be transparent, committed to buiding ong-term vaue for both customers and sharehoders and become an active member of and contributor to the communities to which you beong. Reputation adds vaue So, does reputation have vaue for a company? Absoutey. Reputation is intrinsicay vauabe and can set companies apart from their competitors. That might mean the difference between a high and modest vauation, or in tougher times between a successfu market debut and a faied issue. It shoud aso be recognised that, foowing the goba financia crisis, the word is markedy different. In the UK, for exampe, an aready cynica media industry is now ony too ready to voice strong opinions about companies that stand out for the wrong reasons. There is aso a growing view in many quarters that companies do not just exist to create vaue for sharehoders: they must aso demonstrate that they serve the interests of a wider group of stakehoders, which incudes empoyees, anaysts, potentia investors, the media and the community in which the company operates. In this chapter we expain why good communications are instrumenta in achieving a successfu IPO and how a we-constructed PR campaign can add vaue to your proposition through buiding and maintaining reputation. This runs from the preparation stages of defining your objectives and understanding your audiences, through to executing an effective strategy within the confines of the IPO timetabe. We aso ook at ife beyond the IPO and how communications, done we, can hep you maintain the vauation your company deserves. Your communications objectives Set your objectives eary on It is critica that communications objectives are set from the start of the IPO process. Of course, it is important to be fexibe, but you wi need a cear pan to foow, and it is vita that your communications objectives dovetai with your overa strategy. At the core of this is the need to: buid a strong, credibe story introduce management to stakehoders and expain why the company is a must have investment opportunity define key overa objectives maximise advantages and minimise risks preparation is paramount buid vaue in advance to attract the investors you want set ong-term expectations a successfu IPO is the starting point, not the finishing ine be ready to communicate in a cear, effective and transparent manner. And don t forget Checkist for a successfu IPO work towards the good times, but prepare for the worst you must have a crisis communications pan. Managing the company s profie Page 71

70 buid the reationships that matter ensure you have a fan-cub ready to support you position the IPO as a stage in the company s deveopment, not as an end in itsef. Be prepared As part of ensuring that the IPO runs smoothy, it is necessary to prepare for unexpected events that have the potentia to impact negativey on the process. You shoud have a crisis pan in pace to dea with any issues that arise, whether concerning the IPO itsef or from an operationa perspective. Audiences and stakehoders: who are you taking to? Understand your audiences In order to achieve your objectives, it is important to identify who your different audiences are, as we as understanding their needs, objectives and cruciay how they interact with each other. The IPO wi be one of your company s most newsworthy events, and this news wi be of interest to a wide range of stakehoders incuding media, investors, anaysts, empoyees, trade unions, trade associations, customers, partners, reguators, government and a variety of opinion formers. These stakehoders form a compex matrix, informing each other and shaping the response to your IPO. The structure of this network means that pubic market transactions can face a much higher eve of scrutiny now than in the past few years, and you need to be prepared for this. Whie communication across a stakehoder groups must be consistent, it is aso important to address the interests of individua audiences. For exampe, a stakehoders wi want assurance of the company s ong-term growth potentia, but potentia investors wi need convincing that they can make a return on their money, and empoyees wi want to know that their jobs are secure. Anticipating and appreciating the needs and interests of each group wi aow you to run your communications strategy smoothy. A strong pubic reations campaign is centra to any fotation, particuary in an environment where many estabished norms are changing. It is important to understand the evoving media andscape and consider how different forms of media can hep you communicate with your stakehoders. Traditiona print media has gone digita with specific onine coverage, podcasts and vodcasts; digita-ony pubications have sprung up; and socia media and user-generated content have expoded. In addition, we now have citizen journaism, where anyone with a mobie phone can report on a story and share their views with a wide audience. (see Identifying your audience chart on the next page). Coordinating the communications strategy In the past, PR was often seen as an added extra, boted on towards the end of the IPO process shorty before the officia go ive date. This inevitaby meant that externa communications were secondary to the rest of the IPO activity. But the increased scrutiny of quoted companies brought about by the financia crisis means that this is at best i advised, and at worst potentiay damaging to the entire IPO process. Start your PR eary For this reason, PR considerations shoud be worked into the overa strategic pan right from the beginning of the IPO process. Indeed, it is better to think of PR around the IPO as part of your overa communications strategy and not as a one-off project just as the IPO itsef shoud be seen as an integra part of your company s ongterm business strategy. This hoistic view wi best be abe to address the different but interconnecting interests of your various audiences, so achieving the overa aim of buiding ong-term vaue by estabishing your company as a superior investment opportunity. Page 72 Managing the company s profie

71 Identifying your audience Media City editors and commentators Financia trade media UK and internationa business correspondents Anaysts Financia Stakehoders Potentia investors (institutiona, retai, high net worth) Sector correspondents Industry bodies Newswire journaists Communications no onger operates in sios: expect your story to be part of a discussion Reguators Regiona news and business writers Government Trade media Unions Externa Infuencers Staff Competitors Customers Business partners Corporate Infuencers Identify your story To this end, your PR agency shoud work cosey with you and your other advisers from eary on in the process to identify and deveop your corporate story. This wi ensure that a reguatory guideines are foowed and, if you are working on a dua isting, that the needs of each regime are identified and respected. Once the right story has been deveoped, it wi be incuded in IPO marketing materias, reguatory documents and press reeases. Make the most of it Having the right communications story in pace as eary as possibe wi aow you to make the most of the opportunities thrown up by the IPO process. Typicay, this fas into three phases: the corporate or pre-offer phase where the objective is to raise awareness and understanding of the company as a potentia investment opportunity the offer phase where the emphasis is on the detais of the offer, the timetabe and the subscription period the post-offer phase capitaising on the success of the fotation and buiding on the ong-term, strategic goas of the company. Preparation, preparation, preparation Your communications strategy shoud be coordinated around these phases. Focusing on PR Managing the company s profie Page 73

72 during the pre-offer phase means that you can start to raise the profie of the business prior to the ive IPO work. The aim of this is to begin the vaue-buiding process eary, raising awareness of your company and thus aying a good foundation for the ater fundraising activities. Once you enter the offer phase, communications activity wi take pace around the most important events typicay occurring in the IPO timetabe: announcement of the intention to foat announcement of the pricing range announcement of the fina pricing announcement of first-day deaings. A reguar stream of positive announcements and updates wi hep maintain momentum and keep the investment opportunity in front of your audience. Announcement of intention to foat This wi be the first time that you wi be decaring your pans pubicy. Typicay, your financia PR agency wi work with you and your other advisers to choose the best time to go ive with the story and decide which tactics to use in order to achieve maximum profie. The press reease that is issued at this time wi refect the corporate story aready identified, and wi describe the company and its main attributes, set out the anticipated timetabe for the IPO and incude quotations from the company s management. If other supporting materia (such as an anayst s note) is aso avaiabe, this can be packaged up with the press reease to provide positive accompanying commentary. Photography can aso be used a good picture can enhance the attraction of the story. A in a, the intention to foat announcement is a chance to start the fundraising process in a positive, high-profie fashion crucia when trying to compete for investment. Getting the story right This is crucia as it wi run through the entire IPO process, inking up the work you do with potentia investors, press, anaysts and your own empoyees. The story wi need to answer these questions, and potentiay others: What aspects make your company stand out? Why is your company the best recipient of investors money? Why are you right to come to a pubic market? How wi you use the money you raise? How you wi ensure ong-term success? You wi need to be abe to answer a these questions and deiver your messages in a short, succinct and memorabe way. Pricing range With the issue of the pathfinder prospectus, a further press reease can be used to announce the pricing range of the IPO. Media expectations here need to be handed carefuy to ensure that the IPO wi be perceived as a success. This is particuary important in the UK, as the media wi often ook for bad news and want to highight IPOs being priced towards the bottom of their range. Announcement of fina price Once the marketing period is competed, the fina IPO price can be announced. Again, care needs to be taken here to ensure that this is positioned appropriatey. First-day deaings An announcement can aso be issued to mark the first day of deaings on the stock market. This is a Page 74 Managing the company s profie

73 The communications timetabe Vaue Pre-offer Offer Post-offer Intention to foat First-day deaings Corporate profie buiding Preparation Connected anayst research Pathfinder Institutiona roadshow Pricing range Pricing Over-subscription High-quaity investor base Optimum vauation Heathy after-market Strong investor rating Perception of success Raised corporate profie Awareness of the company and IPO Understanding and high regard Endorsement of equity story and offer terms Time good opportunity for management to brief externa research anaysts on the story, as we as aerting market commentators to the stock on its market debut. Whie these are typicay the fundamenta stages in the IPO timetabe, your PR agency and advisers wi work to identify any other suitabe opportunities to support the marketing process, if appropriate. These coud incude profies of senior management and news of appointments or contract wins. Interna communications: don t forget your staff In their annua reports and accounts statement, it has become commonpace for chairmen of isted companies to acknowedge that the company s most vauabe assets are its staff and to thank them for their efforts over the year. However, it is ess common for companies to remember this when panning their IPO. A too often, communication with staff is something of an afterthought, coming ate in the process and, as a consequence, faiing either to counter the fears staff may have or to hep obtain maximum vaue from the fotation. Keep your staff informed When considering a fotation, one of the first interna communications steps is to decide when and how to advise staff of the decision to ist. This wi aways be something of a baancing act: weighing up the desire for confidentiaity with the need to ensure that staff are appropriatey informed, and see the isting as a wecome and exciting event for themseves and for their company. It is important to recognise that, in most industries, few members of staff wi be famiiar with the process of a company joining the market. They may aso harbour fears that the isting wi prove to Managing the company s profie Page 75

74 Create momentum make the most of set-piece moments The communications strategy shoud fow from the objectives which have been set out at the start. They shoud dovetai together in order to make a robust, distinctive, credibe case about your company s quaities and ensure a successfu fotation. Effective co-ordination of communications enabes the reease of information to take pace in a controed and strategic manner. This wi reinforce the perception that the fotation is being professionay managed by the company and its advisers. It is essentia that the fow of communications shoud buid momentum and keep the story intact, maintaining the focus on the business and the investment case. Cear, consistent communication with a stakehoders wi not ony hep your company navigate through potentia pitfas, but wi buid and protect its reputation and brand in subsequent years. Throughout the duration of the campaign, it is essentia that the timing and sequence of messages are carefuy managed and the momentum of the campaign maintained. Without carefu preparation and guidance, it is a too easy to create miseading perceptions or expectations, which wi adversey affect the outcome of the fotation. Communication of key information must be cear, comprehensivey prepared and consistent with the agreed timetabe. be a catayst for additiona change within the business something that may threaten their job security. Hopefuy, interna communications procedures within the company are aready compiant with best practice, with meaningfu diaogue with staff estabished as the norm rather than the exception. If that is not the case, pan we in advance and work with your PR advisers to audit and upgrade your interna communications as soon as possibe. Make sure they understand the process You can probaby afford to te staff about the potentia isting rather earier than you might imagine. Te them what it means for the company and vitay what it means for them. If you pan to introduce incentive programmes for staff at, or prior to the IPO, inform them, but make sure that you communicate ceary, avoiding financia jargon. Staff aso need to understand what they can and cannot say to their contacts most ikey your customers. There is itte point in setting out on a campaign of customer communications if the customers day-today contact points your staff are uninformed and uncertain of what the isting means. None of this is to suggest that your staff shoud or coud become officia spokespeope for your company at this important time. Rather it is to recognise that they need, at the very east, to be aware of the issue and to whom any questions shoud be referred. Engage and communicate The increasing use of socia media wi have a significant infuence on the way that you shoud communicate with your staff. You can be sure that once informed of the isting, staff wi discuss this among themseves onine, and equay sure that, as a resut, this debate wi be visibe to the outside word. So any evidence of disquiet among staff wi be ony too cear to potentia investors and others. Engage and communicate with staff, understand their concerns, address their questions and ensure that achieving the isting becomes a joint objective something to which they can a contribute. Page 76 Managing the company s profie

75 When the IPO has happened and you are quoted on the Main Market, you must continue to communicate openy. Make sure your members of staff are a aware of their responsibiities in connection with the handing of materia or pricesensitive information. Remember them when you are communicating company resuts or corporate deveopments, such as major contracts or joint ventures. There can be few things more demotivating for staff than finding out about news affecting their company and their working ives from the newspapers or socia media outets. Interna communications done we wi add significant vaue to your IPO and your communications with staff coud, over time, prove to be the most vauabe of a. Post-fotation: ongoing financia PR strategy After many months of preparation and much anticipation of a successfu outcome, you have finay made it trading in your company s shares has started, hopefuy at a premium to the offer price. You have become a member of one of the word s most excusive cubs. It is unikey to mean, however, that now is the time to reax. Keep up the good work The reguatory rues are cear on what is required from isted companies in terms of discosure and communications and the mindset which shoud be adopted throughout the IPO marketing process is no ess meaningfu once a company is on market. In order to achieve and retain an optimum vauation for your shares, ony those companies with the highest reputation for transparency wi succeed. Put simpy, increasing cynicism from media and investors aike means that merey compying with the minimum eves of discosure required is not ikey to be enough. Investors and the media are ony too ready to judge companies, not just on the accuracy and competeness of discosure, but on their whoe approach to communicating with the market. Any sense that the market is being informed of anything ess than the fu story wi be punished by a ower vauation than might otherwise be achievabe. There is, of course, a baance to be struck here. Investor and anayst appetite for information on isted companies is potentiay imitess. You must decide what information is most reevant, most hepfu and which vitay wi not be damaging to your business if it were in the hands of competitors. There is an increasing and wecome trend for information given to investors in corporate presentations to be made avaiabe more widey, often via a dedicated Investor Reations section on the company s website. Making information avaiabe in this way imits the scope for accusations of seective briefing of institutiona investors in advance of the dissemination of information to the wider market. Make discosure work for you In the eary meetings with your new investors, and in the information that is reeased more widey at the same time, you wi set the benchmark for what investors can expect from you on an ongoing basis. Bare compiance with the rues wi be noticed and may we be marked down. In contrast, fusome discosure in a stye that indicates the vaue you pace on stakehoders understanding of your business and the roe it pays in its various communities, wi stand you in good stead. Remember, too, that the market may we be suspicious of those companies that start with admiraby high eves of discosure but backtrack over time. Take advantage of the communications opportunities Having set the tone and content for eary communications, what are the opportunities for teing your story? We, the good news is that the financia caendar offers penty of chances to Managing the company s profie Page 77

76 Typica financia caendar JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC Key dates Interim Management Statement (31 March fu-year end) Trading update Fu-year resuts announced AGM Interim Management Statement Trading update (30 Sept haf-year end) Haf-year resuts announced Comms review of the year and ook ahead to next year Resuts Pre-cose meetings with anaysts Deveoping messaging Drafting statements Agreeing media strategy Drafting Q&As Rehearsas Anayst feedback Organising media interviews Organising anayst briefing Pre-cose meetings with anaysts Deveoping messaging Drafting statements Agreeing media strategy Drafting Q&As Rehearsas Anayst feedback Organising media interview s Organising anayst brie fi ng Media engagement Monthy meetings with key media Corporate and persona profi e opportunities Positive share price movement Promoting anayst research Byined artices Feature opportunities Proactive/reactive commentary Site visits Anayst engagement Introduction to new anaysts Site visits One-to-one briefings Individua visits to broking houses to addr ess saes teams Events Conferences Roundtabes/seminars Annua drinks event Corporate hospitaity JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC update the market throughout the year (see chart above). There are of course the annua and six-month resuts announcements, when fu discosure is made of the financia resuts for the period. These aso offer the opportunity to provide an update on current trading and the outook for your business. In addition, you can update the market in Interim Management Statements twice a year and again at your Annua Genera Meeting. Keep up the diaogue Foowing the forma announcement of your resuts, anaysts wi expect a presentation from the company, expanding on the information in the press reease and offering an opportunity for questions around your strategy and detais of deivery. These presentations and the diaogue that they generate are pivota in deveoping reationships with the anayst community and ensuring that those anaysts understand your company and the markets in which you operate sufficienty we to provide reaistic estimates of your expected financia performance. But whie investors, anaysts and the media wi want reguar communication, beware of issuing too many press reeases. You wi want the market to isten cosey to what you have to say; that is far more difficut if they become used to a frequent stream of argey inconsequentia announcements Page 78 Managing the company s profie

77 about your atest customer win. Consut cosey with both brokers and financia PR advisers on this to ensure you get the baance right. You shoud aso think carefuy about your approach to socia media and how to manage messaging in the digita age. News traves fast and can cross from customers to investors, and from anaysts to financia journaists, in seconds. The power of the internet means that these conversations are increasingy conducted in pubic, via socia media channes. Invest in PR and reap the rewards Most of a, the media demands transparency and ready access to the senior management of your company. You shoud expect to commit your own time to buiding reationships with important journaists and anaysts. By heping them to understand your business and the chaenges it faces, you are far more ikey to get a fair hearing when things are tough or to get the coverage that you want on a busy news day. Taking communications seriousy from the beginning of the IPO process, right through to your ife as a isted company, wi add vaue to your business and pay dividends. Done correcty, it wi aow you to take advantage of a the benefits of the raised profie that a isting on the Main Market can bring. Managing the company s profie Page 79

78 Section tite The roe of the registrar in an IPO Pau Etheridge and Phi Roberts Capita Registrars

79 Shaped to fit your business Make the right choice for your IPO and share registration services To find out why so many companies choose Capita Registrars to hande their IPO, pease contact Pau Etheridge on +44 (0) or emai aregistrars.com More companies choose Capita than any other registrar. So far in 2010 we have managed more IPOs* than any of our competitors. No one offers a better combination of vaue, service and reiabiity. We work in partnership with our cients to ensure e they are totay satisfied throughout the project and beyond, deivering innovation, fexibiity and a wide range of services. es. Fu range of receiving eiving agent and corporate action services Speciaist support from an experienced team of company secretaries Extensive investor reations capabiity Market eading empoyee share pan expertise And the strength and reiabiity of a FTSE parent company Fifty six appointments ts in the first nine months of 2010, are proof that we offer fe the IPO service that issuers are ooking for. rars.com *In the UK, Ireand and Channe Isands. Source: Eurocear UK and Ireand. Figures correct as at 09 Sept Capita Registrars Limited, Registered office: The Registry, 34 Beckenham Road, BR3 4TU. Registered in Engand No

80 The roe of the registrar in an IPO For companies considering an IPO, what a share registrar actuay does might be something of a mystery. Simpy put, the roe of the registrar is to update and maintain the officia register of members (or sharehoders) of the company whist reconciing the tota number of shares authorised and issued by the company on a daiy basis. But putting this apparenty simpe objective into practice requires a great dea of carefu panning and speciaised work and this is where a good registrar wi prove its worth many times over. Eary invovement The compex and painstaking work that registrars need to compete ahead of an IPO cannot be carried out overnight, or as part of a ast-minute rush. So whether you approach the registrar directy or through your advisers be they a aw firm, investment bank or another adviser you shoud eave a minimum of four weeks between invoving the registrar and the proposed date of the fotation. Be aware that more compicated cases may require an additiona four to six weeks on top of that. For this reason, it is aways advisabe to get your registrar invoved as eary as possibe in the IPO process. Because the reationship with your registrar is a ong-term one and does not end with the successfu fotation of your company, you shoud ook for a registrar that has strong capabiities in both project management (a dedicated impementation manager to oversee your isting pans is strongy advised) and reationship management, which can be of enormous vaue in meeting future goas throughout your ife as a isted company. Accuracy is aso paramount. Your registrar is ooking after an integra part of your business on your behaf, so you need to be confident that soid panning and attention to detai is present within its organisation. Engagement period As soon as it is brought into the IPO process, the registrar shoud begin by finding out as much about your company as it can so that it can best advise you on the correct course of action. The first and initiay most important question is to evauate the structure of the company coming to market. From a registrar s point of view these can typicay be divided into three categories: UK-incorporated entities, offshore companies, usuay estabished in the Channe Isands, Ise of Man or Ireand; or internationa companies, incorporated overseas. As we wi discuss ater, the third of these options requires a very different approach to the first two and, as a resut, a onger ead time shoud be taken into account. But the engagement period does not begin and end with your choice of ocation. The type of offer you are wanting to bring to the market is aso crucia. You may opt for an IPO targeting institutiona investors, but it is possibe to aunch to a mix of institutiona and retai investors. Aternativey, you may ony be interested in an introduction to the market that does not invove raising any capita. The answers to these initia questions wi dictate the core registration services your registrar provides on your behaf. As with any major project, a good understanding between a the parties is vita if your goas are to be met successfuy. The registrar wi want to know a ot of detai about your business your growth strategy, your sector profie and your goas, both short term and further ahead. It wi aso want to get an insight into your company ethos and vaues so that it can better advise you. For exampe, if your firm has a strong onine presence or a brand commitment to protecting The roe of the registrar in an IPO Page 83

81 the environment, the registrar may we suggest running an onine IPO. This kind of information is best exchanged in an eary project meeting with you and a your advisers present. This initia period of discussion is very vauabe as the accuracy and carity of the information provided at this stage wi greaty assist the registrar both in meeting your needs going forward and in avoiding potentia pitfas ater in the impementation phase. Based on your responses, your registrar shoud be abe to assign an appropriate reationship manager with reevant sector knowedge and experience. Supporting your company secretary This is aso an exceent time to consider, in discussion with your advisers, the impact the fotation wi have on your company secretariat. A good registrar wi consider itsef to be an extension of your company secretary s office, but even with its assistance, you wi find that the company secretary s roe expands hugey in the period before, during and especiay after the IPO. That is why it is advisabe to ook for a provider that can offer vaue-added support for company secretaries in the form of pre- and post-ipo heath checks. These wi rigorousy examine your artices of association and even the structure of your secretariat team to ensure that you are ready to dea with the increased scrutiny and governance that comes with being a isted company. This kind of company secretaria advice is particuary vauabe for rapidy growing companies that may not have had experience of the kind of requirements invoved in running a pubic company. It aso appies to internationa companies that may not be famiiar with the requirements of a London isting and the eve of governance that is necessary. Other eary considerations This is aso a good time to tak about share pans and other share-based empoyee incentives. The registrar wi take into account your future pans for such schemes at the IPO stage, even if the share pans are not going to be put in pace unti ater. This wi hep smooth the process when the pans actuay commence. Moving to a successfu impementation Foowing the engagement period and now armed with a compete picture of your business and its future goas, your registrar wi work, where appicabe, with your other advisers, to estabish the mechanics of effectivey transferring the sharehodings of the seing sharehoders typicay the founders of a company or private equity investors to the buying institutions (or retai sharehoders, if appicabe) at the IPO. The registrar wi make sure a the documentation is in pace if new shares are being issued and on the day of the foat it wi ensure an effective deivery of shares. When acting as a receiving agent to a pubic offer, your registrar wi hep write and comment on the prospectus and appication forms to be issued and provide despatching or onine services. Once the offer opens the registrar wi provide banking faciities, and keep you and your advisers up to date with the number of appicants and the vaue or amount of stock appied for. In addition there are various technica and operationa aspects of bringing a company to market. These are described in more detai beow. CREST set-up Operated by Eurocear UK & Ireand Ltd, CREST is the eectronic settement system for the UK and Ireand. Your registrar wi guide you through the process of setting this up and ensuring that a Eurocear requirements have been compied Page 84 The roe of the registrar in an IPO

82 with so that the shares can be eectronicay setted from Day One. Share certificates In a word of eectronic trading of shares it might seem od-fashioned to have to arrange for paper share certificates to be produced. However, it remains an essentia part of the IPO process. Your registrar wi create, proof and print share certificates as required. Artices of Association Your registrar wi undertake a carefu review of your company s Artices of Association, especiay with a view to identifying any transfer restrictions that might appear and the possibe effect they might have on the IPO. Due diigence Like a your professiona advisers, your registrar is required to carry out due diigence. Eectronic communications Increasingy, companies coming to the market are opting to use eectronic communications. As we as saving on the costs associated with printing and postage, this is considered to be the greener option. E-comms aso covers estabishing an onine porta that wi give you convenient access to consoidated register information via the web, as we as the abiity to generate management information. Investor reations strategies As part of the vaue-added services that it offers, a registrar wi typicay provide investor reations services. It wi then be abe to work with you to deveop appropriate IR strategies, particuary in reation to fund manager and beneficia ownership information, combined with peer group and sector comparisons. If you aready have an IR provider, the registrar wi work aongside them to assist you. Cosing the dea Throughout the progress of the IPO, your registrar shoud be keeping you up to date with weeky progress meetings or conference cas to ensure that everyone is aware of key miestones and what remains to be done. As the IPO heads towards isting and admission of the securities to the Main Market, the registrar ensures that everything is up and running for the first day of trading. Ahead of that date, the registrar wi need to have taken on the existing register of sharehoders incorporating any capita reorganisation required on the register. The registrar wi aso make sure that any deadines issued by CREST Eurocear are understood, and adhered to, by everyone invoved in the dea. Once the IPO is compete and shares have begun to be traded and setted, the registrar wi update the register to keep a record of the ega owner of the shares. After the IPO After the dust has setted and your company has been successfuy brought to market, the registrar s function does not stop indeed you shoud aim to form a ong-term reationship with your registrar. As we as being abe to assist you with your growth strategy by managing the operationa aspects of key corporate tasks, such as takeovers, your registrar shoud aso keep you abreast of industry matters through reguar news updates and meetings. The compiance requirements can be one of the biggest chaenges for a company post-ipo, and your registrar s reationship manager shoud be abe to hep you to meet some aspects of these obigations. This wi invove assisting with reguar review meetings, reporting accounts, annua genera meetings and dividends. The roe of the registrar in an IPO Page 85

83 As we as reying on your registrar for advice and support, you shoud aso ask it to put you in touch with other cients who are in the same position as you now find yoursef. These peer networks can be an exceent source of practica advice from other firms that have aready faced and overcome simiar chaenges, and a good registrar shoud be more than happy to use the strength and diversity of its cient base to hep you. In summary, whie you may not have worked with a share registrar before the point at which you consider an IPO, you wi find it an invauabe adviser and ay as your isted company grows. Depositary interests: a speciaist soution for overseas companies Shares of internationa companies cannot aways be setted in CREST. As a resut, some internationa companies choose to issue Depositary Interests ( DI ). What is a DI? The DI is a method that aows overseas companies issuing shares to benefit from the competitive advantages of being eectronicay traded on one of the word s eading equity exchanges, such as the London Stock Exchange. This is achieved by a subsidiary of your registrar (authorised by the Financia Services Authority) acting as custodian and depository. That body wi then hod a the shares reated to the DI for the shares that are isted in London. The instrument that is actuay traded through CREST is a security in its own right, known as a DI iteray an interest in the depository sharehoding. The Internationa Security Identification Number ( ISIN ) of the share is identica to that of the DI, so there is no requirement to ist the DI separatey from the share. Why is a DI important? The advantage of a DI is that it ooks, fees and behaves ike a share. In addition, it gives you fu transparency so that, for exampe, when it comes to investor reations, ooking at a DI register is exacty ike ooking at a share register. Your registrar wi need to set up the necessary ega framework ahead of the IPO. That requires consideraby more documentation and time than in the case of a UK or offshore company (which can be covered by a straightforward registrars agreement because the reevant processes are a UK standard practice). In the case of a DI, the additiona requirements can incude a trust deed and depositary agreement, as we as a registrars agreement if appropriate. Furthermore, Eurocear requires various ega opinions, such as a UK tax opinion and two ega opinions from the country in which the company is incorporated for exampe the Netherands, the British Virgin Isands or another jurisdiction. There are further considerations around compying with oca aws about where the share register (if one is aowed) can be kept, aong with other compiance and discosure requirements. There are aso icences, takeover provisions and threshod imits to take into account. These considerations vary from jurisdiction to jurisdiction, so the registrar must undertake a good dea of preparatory work both in London and the chosen country. In essence then, the DI is an aternative soution for overseas entities, but one that requires an enormous amount of carefu impementation on the part of the registrar to get right. So whie it is a proven method around 250 internationa companies have DIs in London it is advisabe to choose a registrar that has ong experience of bringing DIs to market and, particuary, deveoping new and existing jurisdictions. Whie the timeine for an IPO wi usuay be set by the ead adviser, it is aways the case, as we noted earier, that the sooner you can get the registrar invoved the better. And this is especiay the case for DIs. Page 86 The roe of the registrar in an IPO

84 London: a unique investment Section opportunity tite FTSE Group

85 London: a unique investment opportunity Given London s vibrant and varied trading history, it is not surprising that many UK companies isted on the London Stock Exchange are themseves geographicay diverse with a broad range of business interests. In recent years, this dynamic has been refected in the origin of profits and the ocations of operations for companies isted on the Main Market. What this means for London as a financia centre is a dramaticay different offering from most other markets, which primariy feature domestic securities and provide a snapshot of the oca economy. The UK s headine tradabe index the FTSE 100 Index (the FTSE 100 ) is a prime exampe of the diverse nature of the companies isted on the Main Market. Most of its constituents operations are not imited to the UK, with companies, incuding GaxoSmithKine and Vodafone, instead having a corporate structure which reaches across the gobe. Athough the FTSE 100 is often thought of as a yardstick for the UK economy, its purpose is actuay to capture the returns of the argest 100 companies domicied in the UK. This index has fufied this purpose since its inception in 1984, providing a goba measure that spans far beyond the UK economy. Setting standards As companies in the UK continue to expand and adapt their business modes against a goba backdrop, the UK stock market is set to grow and diversify further, creating a unique opportunity for London. The foowing section covers some of the key eements that underpin the UK market and set it apart from other financia centres across the gobe. A diversified investment andscape Situated in the midde of the word day, the UK market enjoys unique exposure during its trading hours to investors around the word. As a gobay recognised index provider, FTSE s UK Index Series is by no means confined to domestic investment, being widey foowed by both retai and institutiona investors. This ensures that no singe group of investors dominates the share registers of UK isted companies. The combination of this goba economic exposure and attraction of goba funds ensures that the UK is ess exposed to specific conditions pertaining to any one economy. In recent years, such factors have ed to a weath of companies showing an interest in Premium Listings to quaify for the FTSE UK Index Series, particuary the top two tradabe indices the FTSE 100 Index and FTSE 250 Index. Inspiring investor confidence As a financia market, London imposes some of the highest standards in the word for governance and investor protection. This inspires confidence in investors foowing the UK market and its major indices. Governance comes in the form of isting rues, company aw and market practice, a of which are designed to protect sharehoder interests and aow them to hod management to account. This incudes rues such as pre-emption rights, which offer sharehoders any new issue of shares before being offered to non-sharehoders. The purpose of this rue is to ensure that sharehoders are abe to prevent their stake from being diuted by new issuance. Simiary, factors such as strict discosure, which are incuded in company aw and the UK s Listing Rues, are important, as they aow investors to assess companies in an accurate and timey manner. This focus on transparency remains the key to buiding trust amongst investors, which in turn eads to strong market activity, creating a more iquid market. Page 88 London: A unique investment opportunity

86 FTSE indices Juy Juy Index Leve Rebased (31 Juy 2000 =100) Ju-00 Ju-01 Ju-02 Ju-03 Ju-04 Ju-05 Ju-06 Ju-07 Ju-08 Ju-09 FTSE 100 Index FTSE 250 Index FTSE A-Share Index Source: FTSE Group data as at 30 Juy 2010 A indices in the series are market capitaisation-weighted and currenty priced off trading on the London Stock Exchange. Ensuring iquidity As an award-winning index provider, FTSE creates market-eading indices using robust data and methodoogies, keeping tradabiity front of mind through the use of tough iquidity and market capitaisation screening. By doing so, FTSE ensures that its indices are highy suitabe for the creation of financia products such as Exchange Traded Funds ( ETFs ), derivatives and structured products. The avaiabiity and proiferation of these products has not ony increased opportunities for investors to Committed to market quaity Throughout the years, and on the advice of investors, FTSE has taken governance very seriousy. Indeed, aongside the Financia Services Authority ( FSA ), FTSE has ed the debate on improving market quaity through its stringent requirements to incude securities with Premium Listings (previousy known as Primary Listings), as we as its treatment of non-uk companies. These pubicy avaiabe rues are set out in the index series ground rues. They are reviewed reguary, together with market consutation, to ensure the FTSE UK Index Series remains robust and in ine with investors requirements..access the UK market, but has aso provided a further catayst for the increase in iquidity within the market. The FTSE UK Index Series has been one of the most sought-after indices upon which products such as ETFs are buit. The year 2000 saw the first ETF isted on the Exchange and based on the FTSE 100 Index. Many have foowed since then. There are now over 350 ETFs admitted to the Main Market from major goba providers incuding i- shares, Lyxor and db-x trackers, with 58.4 biion in Assets under Management. The engagement process Companies incorporated in the UK ooking to be incuded in the FTSE UK Index Series, and in particuar the FTSE 100 Index, need to compy with the requirements of a Premium Listing, which go beyond the minimum standards set out by EU egisation. For companies domicied overseas which aspire to be constituents of the FTSE UK Index Series, the process works a itte differenty and invoves a programme of engagement with FTSE, through the company s chosen corporate broker. FTSE is committed to working cosey with a company to London: A unique investment opportunity Page 89

87 assess it against the reevant requirements. This process is normay undertaken we before the pubication of the prospectus, giving the company enough time to understand the steps it may need to take to ensure its eigibiity for incusion in the index series. The requirements these companies must meet incude a weath of reporting requirements, compiance with the UK Corporate Governance Code and the City Code for Takeovers and Mergers. By meeting these criteria, companies show their abiity to adhere to good practice across severa eements of business incuding: board structure, accountabiity and reations with sharehoders. In order to be incuded in an index in the FTSE UK series, companies without a UK incorporation must be incorporated in a deveoped market or other domicie approved by FTSE, as we as having a minimum 50 per cent free foat. Though the requirements for a Premium Listing are the toughest in Europe, the benefits of entering the iquid and internationaised UK market, as we as achieving FTSE 100 status, often far outweigh as we as justify these, especiay amongst more ambitious companies. The FTSE UK Index Series The FTSE UK Index Series has been designed to represent the performance of UK-domicied companies with a Premium Listing on the Exchange s Main Market. Investors are provided with a comprehensive and compementary set of indices that measure the performance of a range of capita and industry segments within the UK equity market. In addition to the standard UK series detaied beow, FTSE has aso aunched a range of investment strategy versions, such as the FTSE 100 and FTSE 250 Short and Leveraged indices. These enhanced indices are created with FTSE s quantitative expertise and provide investors with new passive strategies and risk management opportunities. The FTSE UK Index Series FTSE 100 Index The FTSE 100 Index is one of the word s most recognised indices and accounts for 7.8 per cent of the word s equity market capitaisation. It represents the performance of the 100 argest UK-domicied bue chip companies which meet FTSE s size and iquidity screening. The Index represents approximatey 85.2 per cent of the UK s market and is currenty used as the basis for a weath of financia products avaiabe on the Exchange and gobay. FTSE 250 Index The FTSE 250 Index is comprised of mid-sized companies. This index is designed to measure the performance of the mid-cap capita and industry segments of the UK market which fa just beow the FTSE 100 Index in both size and iquidity. The FTSE 250 Index represents approximatey 12.5 per cent of the UK market capitaisation. FTSE Sma Cap The FTSE SmaCap consists of companies outside of the FTSE 350 Index and represents approximatey 2 per cent of the UK market capitaisation. FTSE A-Share Index The FTSE A-Share Index represents the performance of a eigibe companies isted on the Exchange s Main Market. It is considered to be the best performance measure of the overa London equity market, with the vast majority of UK-focused money invested in funds which are benchmarked to it. The FTSE A-Share Index is the aggregation of the FTSE 100, FTSE 250 and FTSE Sma Cap Indices and currenty covers 630 constituents with a combined vaue of neary 1.6 triion approximatey 99 per cent of the UK s market capitaisation. Page 90 London: A unique investment opportunity

88 Preparing to ist depositary receipts Raj S.Panasar and Stephen Gasper Ceary Gottieb Steen & Hamiton LLP

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90 Preparing to ist depositary receipts Depositary receipts ( DRs ) are negotiabe instruments issued by a depositary bank that essentiay repackages shares in another company. DRs are securities in their own right and can be isted and traded on the capita markets. DRs are typicay isted by companies incorporated outside the EU, frequenty from emerging markets such as Russia and India. For such companies, a isting of DRs on an internationa exchange such as the London Stock Exchange can provide access to a significanty wider poo of internationa professiona investors than a isting of shares on a company s domestic exchange. Advantages of isting depositary receipts Companies issue DRs principay to raise capita. DRs provide a particuary effective means for non- EU issuers to raise capita because of their appea to internationa professiona investors: they offer a means to invest in non-eu issuers whie avoiding some of the inconveniences often associated with direct investments in the underying shares, particuary as regards settement. Structure of a depositary receipt isting The depositary mechanism Setting up the requisite mechanics for a DR isting requires cose coordination between the issuer, its advisers (principay its ega counse and underwriters) and its chosen depositary bank (see Estabishing a depositary receipt programme chapter on page 105). Structure of a typica DR isting A typica DR isting wi adopt the foowing structure: issuer s shares (either newy-issued shares, existing shares currenty in the hands of a sharehoder, or both) are deposited with the custodian bank of the issuer s depositary depositary becomes ega tite hoder of shares and is entered into issuer s share register depositary issues to investors DRs representing a certain number of issuer s shares depositary hods the underying shares on bare trust for the hoders of the DRs depositary wi exercise its rights as a sharehoder incuding voting rights and rights to unpaid dividends in accordance with investors wishes, subject to the terms and conditions of the DRs investors are free to se DRs in the secondary market, or, aternativey, to instruct the depositary to cance the DRs and deiver the underying shares instead, subject to the terms and conditions of the DRs and reevant securities aws. Listing of depositary receipts There are two distinct aspects to the process of isting DRs in London, which occur simutaneousy with each other: The deposit agreement The deposit agreement sets out the ega rights and obigations of the depositary and the issuer. More importanty, the deposit agreement detais the rights of the DR hoders, set out in the terms and conditions of the depositary receipts, which are typicay annexed to the deposit agreement and reproduced in the isting prospectus. Admission to the Officia List (the Officia List ) of the United Kingdom Listing Authority ( UKLA ), the United Kingdom reguator for the purpose of securities istings. DRs wi be admitted to the Standard segment of the Officia List Premium Listings are ony avaiabe to issuers of shares (the Premium and Standard Listing taxonomy is discussed in fu in the UKLA s chapter on page 14) Preparing to ist depositary receipts Page 93

91 Admission to trading on the London Stock Exchange s Main Market (the Main Market ) or the London Stock Exchange s Professiona Securities Market (the PSM ). The admission of DRs to the Officia List and to trading on the Main Market wi usuay (though not aways) be conducted in conjunction with an offering of DRs to investors, to create the requisite pubic foat of 25 per cent of the DRs. If a isting of DRs represents the first time an issuer has offered securities to investors, it wi be commony referred to as the issuer s initia pubic offering ( IPO ). Bock istings It is common for a DR issuer to request admission to the Officia List of a greater number of DRs than it intends to have admitted to trading on the Main Market at the time of its IPO. This is sometimes known as a bock isting. A bock isting of DRs enabes an issuer to have additiona DRs admitted to trading on the Main Market, up to the aggregate size of the bock isting, without having to pubish a new prospectus or submit new appications to the UKLA or the London Stock Exchange. For an issuer panning to issue DRs on an incrementa basis or who cannot contro secondary deposits into the DR faciity, a bock isting is important. US considerations US securities aw is reevant to any isting of DRs. The US Securities Act 1933 (the Securities Act ) requires any issuer that proposes to offer securities anywhere in the word to undertake a engthy US Securities and Exchange Commission ( SEC ) registration process, uness an exemption is avaiabe. For issuers that do not intend to market DRs to investors in the US, an exemption from the SEC registration requirement is typicay avaiabe under Reguation S of the Securities Act ( Reg S ). Such a transaction woud be referred to as a Reg S ony dea. The main requirements of Reguation S are that (i) the offer or sae of DRs is made outside of the US in an offshore transaction; and (ii) no marketing of the DRs takes pace in the US (referred to as directed seing efforts ). For issuers that intend to market DRs to investors in the US (to access demand from US institutiona investors), the US portion of the transaction is typicay framed within the scope of Rue 144A of the US Securities Act, which provides an exemption for resaes of securities to sophisticated institutiona investors, known as quaified institutiona buyers ( QIBs ). Such a transaction, which woud aso need to rey on Reguation S in respect of saes to investors outside of the US, woud be referred to as a Reg S/144A dea. Exampe of a bock isting issuer appies for up to 100 DRs to be admitted to the Officia List but imits the IPO to 25 DRs (ie ony 25 of the DRs wi be admitted to trading on the Main Market) issuer is permitted to have up to 75 additiona DRs admitted to trading on the Main Market at any time foowing the IPO and in as many increments as it wishes (provided the initia isting on the Officia List is maintained) no requirement to appy to the UKLA or London Stock Exchange for subsequent DRs admitted to trading (up to the upper imit of the bock isting) no requirement for a new prospectus for subsequent DRs admitted to trading (up to the upper imit of the bock isting) to enabe the UKLA to monitor the status of a bock isting, the issuer is required to submit a form on a six-monthy basis stating how many of its DRs are admitted to trading. Page 94 Preparing to ist depositary receipts

92 Whether the DR isting is a Reg S ony, or a Reg S/144A dea, great care must be taken to ensure that the conditions of the reevant exemptions are met; sanctions for breach of US securities egisation can be severe and concerns about compiance with the Securities Act can impede the abiity of ega counse to deiver the requisite opinions to underwriters, which can resut in significant deays in the IPO process. Hence the importance of compying with the pubicity guideines drafted for the issuer and the parties working with the issuer on its IPO. Assessing suitabiity and eigibiity for isting depositary receipts Eigibiity criteria Issuers seeking admission of DRs to the Officia List in connection with a Main Market isting must satisfy both the genera eigibiity requirements that appy to a appicants to the Officia List and the specific eigibiity requirements that appy to issuers of DRs (set out in Chapters 2 and 18 of the Financia Service Authority s ( FSA ) Listing Rues, respectivey): issuer must be duy incorporated and operating in accordance with its constitution DRs must (i) conform to the aw of the issuer s pace of incorporation; (ii) be duy authorised according to the requirements of the issuer s constitution; and (iii) have any necessary statutory or other consents DRs must be admitted to trading on the Main Market DRs must be (i) freey transferabe; and (ii) fuy paid-up and free from a iens and from any restriction on the right to transfer DRs, once isted, must be expected to achieve an aggregate market vaue of at east 700,000 appication must reate to the entire cass of the reevant DRs (ie the appication must cover a DRs in issue or to be issued at the time of admission to the Officia List) at east 25 per cent of the DRs for which appication is made must be in pubic hands (ie part of a pubic foat, not hed by major sharehoders or persons connected with the issuer) at the time of admission to the Officia List and for the duration of the isting. In certain imited circumstances the UKLA wi agree to ower the 25 per cent threshod issuer must pubish a prospectus approved by the UKLA. This requirement works in conjunction with the FSA s Prospectus Rues, which set out the circumstances in which an issuer must pubish a prospectus. Note that the issuer s abiity to meet the discosure requirements for a prospectus in particuar, in reation to financia statements effectivey operates as an additiona criterion for eigibiity. As noted above, issuers of DRs are not required to satisfy some of the more demanding eigibiity criteria that appy to an issuer conducting a Premium Listing of equity shares. For exampe, a DR issuer is not required to produce a three-year financia track record that reates to at east 75 per cent of its business, nor is a DR issuer required to pubish audited accounts no oder than six months from the date of the prospectus, or satisfy the UKLA that it has sufficient working capita avaiabe for at east the next 12 months. The prospectus does, however, need to contain a materia information, so financia statement requirements sti need serious consideration, particuary where the issuer has made significant acquisitions or disposas. Eigibiity etter To demonstrate compiance with the UKLA s eigibiity requirements, the issuer must submit to the UKLA an eigibiity etter no ater than on the date of the first fiing of the prospectus (see exampe transaction timetabe on pages 96 and 97). In addition, athough not required by the rues, continues on page 98 Preparing to ist depositary receipts Page 95

93 Exampe transaction timetabe for isting DRs Stage Timeine Action Panning Document drafting 24 weeks prior to pricing (referred to as T) (date on which price of DRs is agreed, underwriting agreement is signed and conditiona deaing in DRs commences) issuer and underwriters to pan strategy and structure of isting underwriters and ega advisers commence due diigence assess issuer s eigibiity for isting prepare and submit UKLA pre-eigibiity etter (if appropriate) prepare and submit UKLA eigibiity etter (no ater than on date of first submission of draft prospectus) T - 16 weeks begin drafting prospectus conduct diigence meetings and drafting sessions when draft prospectus is substantiay compete, submit to UKLA with annotations (directing the UKLA as to how the issuer has compied with its specific discosure obigations) with: o cover etter (drafted and signed by issuer s ega counse) o prospectus discosure checkist (not signed) o appication for prospectus to be approved by the UKLA (Form A) (signed by issuer) o UKLA isting and document vetting fees UKLA requires 10 fu working days for review of first submission and 5 fu working days for subsequent reviews work towards cearing UKLA comments on draft prospectus; make further submissions of the prospectus by fiing: o comparison document showing amendments to prospectus since previousy submitted version o updated prospectus discosure checkist o competed document response sheet (demonstrating how UKLA comments have been resoved) T-8 weeks begin negotiating underwriting agreement ( UA ) Marketing T- 2-6 weeks obtain no further comments cearance on prospectus from UKLA arrange date for UKLA approva of the prospectus ( stamp off ) ensure anciary UKLA isting documents are submitted at east 20 business days prior to desired date for stamp off (10 business days for issuers with securities aready admitted to the Officia List): o issuer contact detais form o prospectus pubication form o issuer board resoution authorising isting iaison with London Stock Exchange: o submit draft appication for admission of securities to trading (Form 1 ), draft prospectus and other documentation requested by London Stock Exchange o underwriters to discuss conditiona deaings (if required) with London Stock Exchange print preiminary prospectus (with a information finaised save for price) marketing/roadshow Page 96 Preparing to ist depositary receipts

94 Exampe transaction timetabe for isting DRs (continued) Pricing T issuer and underwriters to agree price issue press reease to announce price finaise and sign UA DRs aocated to investors / conditiona deaing (if required) begins obtain UKLA stamp off on prospectus by submitting: o two cean copies of fina prospectus dated with the date of approva o comparison document showing any changes to prospectus since previous UKLA review o competed prospectus discosure checkist (signed by issuer, dated date of approva) print and pubish fina prospectus arrange isting hearing with UKLA (for no sooner than 48 hours foowing prospectus stamp off) by submitting: o appication form for isting hearing o appication for admission to the Officia List (signed by issuer) o stamped fina prospectus o issuer board resoution confirming number of DRs to be issued arrange for London Stock Exchange to consider appication for admission of DRs to trading (at east two business days before unconditiona trading in DRs is requested to begin, if appicabe) by submitting: o competed Form 1 o copy of fina prospectus o front cover of prospectus with UKLA stamp o London Stock Exchange fees to be paid foowing admission to trading Cosing T+2 DRs deivered to investors, payment transferred to issuer ( settement and deivery ) Listing admission hearings: o UKLA considers the appication for admission of the DRs to the Officia List o London Stock Exchange considers appication for admission to trading of the DRs to trading on the Main Market Admission T+3 DRs are admitted to isting and trading from 8:00am (when London stock Exchange pubishes its deaing notice) settement of trades with investors unconditiona deaing in DRs begins announce admission of DRs via Reguatory Information Service (RIS) / press reease Not a DR transaction timetabes incude a period of Conditiona Deaing (aso known as When Issued Deaing (WID)). Issuers shoud assess whether a period of WID deaing is required in conjunction with their advisers. WID is a period of conditiona deaing with deferred settement ahead of fu admission. Trades during the WID period, are conditiona on the security being isted and can ony sette once trading has become unconditiona. Where the security does not ist, a transactions effected during the period of WID are void. WID is made avaiabe by the Exchange on request and at its discretion. WID wi normay ast for a period of three business days. Preparing to ist depositary receipts Page 97

95 it may be prudent to submit a pre-eigibiity etter to address any particuar issues unique to the issuer, for exampe, issues reated to the financia discosure the issuer pans to present in the prospectus. Since DR issuers are not required to appoint a sponsor, the issuer s ega counse wi typicay iaise with the UKLA on the issuer s behaf, initiay to estabish its eigibiity for isting and utimatey to achieve the admission of its DRs to the Officia List. Admission timetabe The timetabe for a DR isting wi differ from dea to dea and wi depend on each company s individua circumstances. For iustrative purposes, the tabe on pages 96 and 97 presents an exampe transaction timetabe for an IPO of DRs on the Main Market, based on a tota transaction ength of 24 weeks. meetings with key sharehoders review of materia documents reating to the issuer and its group (usuay the issuer wi create a physica or eectronic data room for this purpose) site visits to view the issuer s principa assets and operations prospectus drafting sessions, at which further questions are put to the issuer s senior management in the context of the actua text of the draft prospectus preparation of speciaist reports, such as minera experts or property vauation reports, or a report of financia reporting procedures representations and warranties from the company and seing sharehoders deivery of comfort etters from the accountants deivery of ega opinions from counse. The prospectus Requirement for a prospectus In connection with an appication for DRs to be admitted to trading on the Main Market an issuer must pubish a UKLA-approved prospectus. The preparation of the prospectus requires a significant effort on the part of the issuer and its advisory team and is one of the principa determinants of the dea timetabe. Due diigence Due diigence is typicay undertaken by the underwriters and, particuary if the dea invoves a pacement in the US, both the issuer s and underwriter s ega counse. Due diigence heps protect the issuer, its directors, and the underwriters from iabiity and reputationa damage. The due diigence process might incude: meetings with senior management and other key personne Genera content of the prospectus The overriding discosure obigation The principa purpose of a prospectus is to provide potentia investors with the information necessary to make an informed assessment of the issuer and the rights attaching to the DRs. In other words, the prospectus must contain a information that coud be reevant to an investor s investment decision this is the overriding discosure obigation. It suppements the equivaent overriding discosure obigation under US rues if the transaction incudes a pacement in the US. Detaied discosure requirements In addition to satisfying the overriding discosure obigation, the prospectus must meet a number of detaied contents requirements, which are set out in Annex X to the FSA s Prospectus Rues. The detaied discosure requirements that appy to prospectuses for DR istings differ in certain respects from those that appy to prospectuses Page 98 Preparing to ist depositary receipts

96 for share istings. For exampe, unike in a prospectus reating to a share isting (either a Premium or a Standard Listing), there is no requirement for a DR prospectus to incude a working capita statement (to the effect that the issuer and its group has sufficient working capita avaiabe for its requirements for the 12 months foowing the date of the prospectus), and the requirements reating to financia discosure can be more demanding in the context of a share prospectus, particuary where the issuer has a compex financia history. Despite these differences, the discosure in a DR prospectus is ikey to ook very much ike that in a share prospectus, argey because of the overriding discosure obigation to ensure that it contains a materia information (an obigation which appies equay to shares and DRs). This is particuary the case in DR deas that wi be marketed to US investors Reg S/144A deas where the document is ikey to be drafted with a keen eye on the stringent discosure requirements in the US. Financia discosure The issuer s consoidated financia statements and the accompanying anaysis set out in the operating and financia review section of the prospectus are critica to an investor s investment decision. Under Annex X, a DR prospectus must incude: audited financia statements prepared in accordance with Internationa Financia Reporting Standards ( IFRS ), covering the atest three financia years, or such shorter period that the issuer has been in operation. Non-EU issuers that do not prepare IFRS financias wi be spared the requirement to restate their financias into IFRS if they have been prepared in accordance with generay accepted accounting standards ( GAAP ) that are considered to be equivaent to IFRS (as of the date of pubication the GAAP of Canada, China, India, Japan, South Korea and the US are considered equivaent for this purpose) interim financia statements (which may be unaudited) covering at east the first six months of the year if the ast audited annua financia statements wi be oder than nine months from the date on which the prospectus wi be approved. In certain cases, however, it is not sufficient for an issuer to imit the financia discosure in the prospectus to the Annex X requirements. The issuer aso must meet the overriding obigation to discose a materia information, which in certain circumstances wi demand the discosure of additiona financia information, above and beyond that required under Annex X. For exampe, it is not uncommon for an issuer to have been incorporated as a new hoding company for the isting. Such an issuer might not have any financia history of its own. In such circumstances, investors woud reasonaby expect to see the financia history of the underying business in order to make an informed investment decision. Aternativey, the issuer might have recenty purchased, or agreed to purchase, another arge business. The discosure wi ikey need to dea with that new business, perhaps through pro forma and/or separate financia statements reated to that business depending on its materiaity and other information that can be provided about that business. To ensure that an issuer in circumstances such as these meets the overriding discosure obigation, one typicay cross-refers to the rues that appy to share istings. An issuer of shares whose financia statements do not provide investors with a fu picture of the underying business is deemed to have a compex financia history. Such an issuer is required to discose (i) the financia statements of another entity (for Preparing to ist depositary receipts Page 99

97 exampe, the entity that operates the issuer s underying business); and/or (ii) pro forma financia statements that demonstrate the impact of a recent or anticipated transaction (such as the acquisition or sae of a arge business) on the issuer s financia statements. Whie the compex financia history regime for share issuers does not appy to DR issuers, it is not uncommon for DR issuers to ook at it by anaogy to hep satisfy the overriding discosure obigation in particuar, by incuding the financia statements of an entity other than the issuer. The issuer and its ega counse woud usuay address issues reating to the financia statement package with the UKLA by means of a pre-eigibiity etter and agree an approach at an eary stage in the transaction. Drafting stye the prospectus shoud be drafted in a manner that is comprehensibe and easy to anayse it shoud avoid buish rhetoric and marketing speak in favour of neutra anguage, baanced and compete descriptions, and factua statements that can be substantiated discussion of the issuer s prospects requires particuar care forward-ooking statements wi to some extent be necessary (for exampe, to describe the issuer s strategy or materia capita expenditure pans). These statements shoud be drafted carefuy to avoid unnecessary exposure to iabiity (ie if the anticipated event or outcome does not occur) drafting shoud try to ensure that the issuer s beiefs and expectations are not construed as statements of fact and, for materia matters, might be accompanied by discussions of the factors that coud cause actua outcomes to differ from those envisaged profit forecasts statements that coud be taken to suggest, for exampe, that the issuer wi generate a particuar income in the future shoud generay be avoided. Responsibiity and iabiity A DR issuer is required to make a statement in its isting prospectus to the effect that it takes responsibiity for the contents of the prospectus. In addition, third-party experts who have prepared information or reports for use in the prospectus (such as reporting accountants and minera experts) are required to accept responsibiity for the contents of their reports. Unike in a share isting, there is no requirement for the issuer s directors to take express persona responsibiity for the prospectus. Any party that takes responsibiity for a prospectus wi be iabe under the Financia Services and Markets Act 2000 ( FSMA ) to pay compensation to any person who acquires DRs and suffers a oss as a resut of any untrue or miseading statement, or a materia omission, in the prospectus. Depending on the circumstances, investors may be abe to bring a caim under a different head of iabiity (for exampe, under the common aw either for negigent misstatement, or fase or miseading pre-contractua misstatement) against the issuer and potentiay others; however, the FSMA offers investors a cear, purpose-buit route to recovery. In practice, steps wi be taken to hep guard against the issuer s (and its directors ) potentia iabiity through the due diigence carried out by it and its advisory team prior to, and in connection with, the drafting of the prospectus prior to its pubication. Advising the issuer after isting Continuing obigations regime An issuer with DRs trading on the Main Market is required to compy with a range of continuing obigations. The majority of these requirements are set out under the FSA s Discosure and Transparency Rues. The key theme in this context is discosure. Discosure of pertinent information to Page 100 Preparing to ist depositary receipts

98 the market aows investors to make informed investment decisions. This, in turn, promotes investor confidence and faciitates the proper functioning and deveopment of the market. For many issuers, particuary those conducting an IPO, the practice of discosing materia information to the market is ikey to represent a significant divergence from previous practice. It is therefore crucia that the issuer is propery advised of exacty what it wi be required to do once its DRs are isted. This advice must be deivered at a sufficienty eary stage in the isting process to enabe the issuer to introduce procedures to ensure that it is abe to compy with its continuing obigations immediatey after isting. One of the very first steps a DR issuer needs to take, in advance of isting, is to appoint a Reguated Information Service ( RIS ), such as the London Stock Exchange s Reguatory News Service. The issuer is required to make its discosures to the market via its appointed RIS. Discosure obigations In overview, a DR issuer admitted to trading on the Main Market is required to discose to the market via its appointed RIS: information that coud affect the price of the DRs ( inside information ) as soon as possibe after it arises periodic financia reports DR issuers are required to pubish an annua financia report, no ater than four months after the reevant year end (six months for issues of DRs admitted to the PSM). In addition, DR issuers customariy pubish haf-yeary reports. Discosure of inside information As soon as an issuer submits its appication for its DRs to be admitted to trading on the Main Market or the PSM, it is required to notify its appointed RIS as soon as possibe of any inside information which directy concerns it, save in a narrow set of circumstances in which the rues entite it to deay discosure. In the context of DRs, inside information is information that: is precise has not been made pubic reates (directy or indirecty) to the issuer or the DRs woud be ikey to have a significant effect on the price of the DRs if made pubic (ie is price sensitive ). The issuer must consider each set of circumstances on its own merits and reach a judgement as to whether it is in possession of inside information and, therefore, whether an announcement is required (or, aternativey, whether there are grounds to justify deaying an announcement). Very often, the key consideration is whether the information in question is price sensitive. The requirement to discose inside information is aso discussed in the chapter The ega framework for an IPO on page 31. Periodic financia reporting In addition to the requirement to discose inside information on an ad hoc basis, a DR issuer on the Main Market must pubish its annua financia report as soon as possibe after it has been approved and, at the atest, four months after the end of the financia period to which it reates (six months for issuers on the PSM). In summary, the annua report must contain: audited consoidated IFRS financia statements management report, incuding a corporate governance statement (discosing the corporate governance code to which the issuer is subject; the extent of its compiance with such code; and a Preparing to ist depositary receipts Page 101

99 description of the issuer s interna contro and risk management arrangements in reation to its financia reporting process) responsibiity statement, attesting to the accuracy of the information in the report. Unike issuers of isted shares, DR issuers are not required to produce haf-yeary reports or interim management statements. However, it is common for DR issuers to pubish haf-yeary reports as a resut of market expectation and best practice. Discosure of transactions by persons discharging manageria responsibiities The requirement to pubish detais of transactions in the issuer s shares carried out by persons discharging manageria responsibiities ( PDMRs ) and their connected persons does not appy to DR issuers. However, the UKLA has at east informay stated that compiance with the PDMR regime by DR issuers woud be best practice. Reguation of market behaviour In addition to the continuing obigations discosure regime described above, DR issuers, by virtue of having securities admitted to trading on the Main Market, must refrain from certain behaviour broady referred to as market abuse that coud prejudice investors and jeopardise the efficient operation of the market. Both civi and crimina market abuse regimes appy to issuers with DRs isted on the London Stock Exchange, as we as to their directors and other officers. Continuing obigations that do not appy to issuers of depositary receipts As noted earier, DR issuers are not subject to the fu demands of the continuing obigations regime that appies to issuers of shares (particuary those with a Premium Listing of shares). PDMRs Some DR issuers compy with the PDMR regime on a vountary basis as a matter of best practice. A PDMR is a director or a senior executive of the issuer who: 1. has reguar access to inside information reating, directy or indirecty, to the issuer; and 2. has power to make manageria decisions affecting the issuer s future deveopment and business prospects. If the regime were vountariy foowed to the etter, PDMRs and their connected persons woud notify the issuer in writing of the occurrence of a transactions conducted on their own account in the issuer s securities, within four business days of the day on which the reevant transaction occurred. The notification woud incude: name of the PDMR or, where appicabe, the connected person name of the issuer reason for requirement to notify description of the reevant security nature of the transaction (for exampe, an acquisition or disposa) date and pace of the transaction price and voume of the transaction. The issuer woud then notify the above information to an RIS as soon as possibe (and, in any event, by the end of the business day foowing receipt of the information by the issuer). Page 102 Preparing to ist depositary receipts

100 Discosure In terms of discosures to the market, DR issuers are not required to pubish: haf-yeary financia reports or interim management statements detais of acquisitions or disposas of major sharehodings detais of transactions in the issuer s securities carried out by PDMRs and their connected persons. However, as noted above, many DR issuers make some or a of the above discosures on a vountary basis as a matter of best practice. Corporate governance DR issuers are not required by the rues to foow the expansive corporate governance regime with which issuers of Premium Listed equity shares must compy, incuding: Listing Principes UK Code on Corporate Governance Mode Code (whie the Mode Code does not appy 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 panning to conduct such trades) requirement to obtain sharehoder approva for reated-party transactions requirement to prepare circuars and obtain sharehoder approva for major transactions. An issuer might nevertheess give serious consideration to compying with certain of these corporate governance rues to assist with the marketing of its DR isting and if it has ambitions to progress to a Premium Listing of equity shares, to accimatise to the more demanding regime it woud be required to foow as a Premium Listed issuer. Preparing to ist depositary receipts Page 103

101 Estabishing a depositary receipt programme Aex H.Hickson and Peter Russe J.P. Morgan

102 Capita without borders When companies need to access investors beyond their borders, they turn to the recognized eader in Depositary Receipts. At J.P. Morgan, we commit the entire resources of our firm to your success - that means focused advisory up front, aggressive support in the aftermarket, and the strength of our research and goba reputation throughout. J.P. Morgan manages some of the word s most widey hed DR programs. Our DR professionas use their market knowedge and strong dea execution capabiities to structure innovative, we-invested, iquid and cost-effective DR programs for issuers. Since we created the word s first depositary receipt program over 80 years ago, there is no question about our eadership or commitment to our cients. Best Depositary Receipts Bank The Asset, Tripe A Transaction Banking Awards 2009 Best Depositary Receipts Program emeafinance, Achievement Awards 2009 To earn more about our depositary receipt services, pease contact: Asia EMEA WHEM Kenneth Tse at , [email protected] Aex Hickson at , [email protected] Joseph Dooey at , [email protected] The 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 business in the U.K. JPMorgan is a marketing name for Wordwide Securities Services businesses of JPMorgan Chase & Co. and its subsidiaries wordwide JPMorgan Chase & Co. A rights reserved.

103 Estabishing a depositary receipt programme Goba Depositary Receipts (GDRs) have risen to prominence in recent years, becoming the favoured instrument used by companies from emerging markets, such as Russia and India, to raise capita on western stock exchanges: companies from more than 70 countries have depositary receipt programmes providing them with new investors outside their home markets more than 1,500 issuers have a sponsored depositary receipt programme more than 350 GDR programmes are isted on stock exchanges, of which 190 are isted on the London Stock Exchange (the Exchange ). For investors, GDRs faciitate investment in these foreign issuers whie imiting many of the compexities and costs associated with crossborder investments, such as the settement and custody of shares and foreign exchange transactions. GDRs can carry many attributes of an issuer s oca shares; they can provide simiar economic rights (incuding the right to receive dividends), and if stipuated in an issuer s deposit agreement, voting rights in the issuer. For both issuers and investors, there are many more measurabe benefits to estabishing a GDR programme and isting on an internationa exchange. Structuring the GDR programme GDRs have proven to be very fexibe. When using GDRs to access Western capita markets, issuers interested in attracting internationa investors have severa options: Pubic offering and isting In a pubic offering, GDRs are offered to institutiona investors and isted on an internationa stock exchange outside the issuer s home market. The offering wi be underwritten by an investment bank. A pubic offering is generay used by companies seeking to raise substantia amounts of Benefits of GDRs Benefits to an issuer: offers a fexibe mechanism for capita raising and a currency for mergers and acquisitions diversifies the sharehoder base, with potentiay greater iquidity for the underying shares enhances visibiity among internationa investors, consumers and commercia customers enabes price parity with goba peers through the provision of internationay recognised information may increase research coverage outside the home market. Benefits to an investor: GDRs aso offer tangibe benefits to investors seeking to diversify their portfoios gobay: easier to purchase and to hod than an issuer s underying ordinary shares trade easiy and convenienty in US doars and sette through estabished cearing houses eiminate unfamiiar custody arrangements imit risks associated with imited transparency or instabiity resuting from changing reguatory procedures in emerging markets option to acquire the underying shares directy upon canceation. capita and increase their profie in the market in which the offering wi be conducted. A GDR offering can be aimed at European investors in a singe tranche under Reguation S ( Reg S ) which exempts offerings conducted outside of the US from Securities and Exchange Commission ( SEC ) registration and reporting, or in two tranches: Reg S to non-us investors and to US institutiona investors via Rue 144A (see beow). A isting on an Estabishing a depositary receipt programme Page 107

104 internationa exchange provides transparent trading outside the usua market hours. GDRs wi typicay be offered to investors in the exchange s region. For exampe, a isting on an exchange in Europe woud be aimed at attracting a substantia portion of European investors. Rue 144A tranche To access a broader poo of iquidity, GDR issuers can incude a US institutiona eement through a restricted private pacement of DRs, which is exempt from US securities aw registration and reporting. Institutiona investors egay abe to participate in Rue 144A offerings are known as Quaified Institutiona Buyers ( QIBs ). Listing Issuers can ist their GDRs without raising capita known as an introduction. By isting, issuers wi have access to a wider group of institutiona investors as we as increasing their visibiity and name recognition. From a documentation and discosure perspective, there is generay itte difference between an introduction and a capita raising, other than the description of the sae of shares that woud be incuded in an offering prospectus. Whie isting aone does not raise capita, it does enabe companies to enter a market and get to know the participants without incurring the expense and requirements of a capita raising. At the same time, an introduction shoud ony be considered together with initiatives aimed at raising secondary market iquidity. Pacing (private pacement) A pacing is usuay a more seective process whereby GDRs are offered to a sma number of seected institutions. Whie this route gives the issuer more contro over the distribution, it can restrict the sharehoder base and naturay imit iquidity. In the secondary market, such privateypaced GDRs woud be trading Over-The-Counter ( OTC ). Unike in the US, where OTC patforms are reguated, GDR OTC trading in London takes pace outside a dedicated patform and therefore provides itte visibiity to the issuer. Creating GDRs A GDR is issued and administered by a depositary bank on behaf of the (underying) corporate issuer. Depositary receipts can be created or canceed depending on suppy and demand, with brokers either bringing additiona ordinary shares to the depositary to create more GDRs, or withdrawing ordinary shares to cance from the GDR faciity. GDRs are created when the shares of a foreign issuer either those currenty trading in its oca market or newy-issued shares in connection with an offering of securities are deposited with a depositary s custodian in the issuer s home market. The depositary then issues GDRs representing those shares. At any time thereafter, an investor can se these GDRs in the secondary market (eg the Exchange s Internationa Order Book), or deiver the GDRs to the sponsoring depositary bank for canceation in order to receive the underying ordinary shares for settement or sae in the foreign issuer s oca market. Typicay, GDR programmes are governed by a Deposit Agreement agreed to by the issuer and the depositary bank, which, among other things, outines the terms and conditions of the GDR programme. Setting the GDR-to-share ratio The initia price of a GDR primariy depends on the ratio between the number of GDRs and the underying shares ( GDR ratio ). This ratio can vary widey; one GDR may represent an ownership interest in many shares of corporate stock or represent ony fractiona shares, depending on whether the GDR is priced higher or ower than the underying ordinary shares. There is no particuar rue for setting the ratio, with the ease of cacuation and reevance of the GDR price to the internationa norm for share prices Page 108 Estabishing a depositary receipt programme

105 being primary considerations. Most GDRs are priced comparaby to shares of peer companies trading on the same exchanges. Whie many successfu programmes are estabished with a ratio of 1:1, many issuers with ow home market prices have GDR-to-share ratios of 1:5, 1:10, or even 1:1000 etc. Companies deciding on a GDR price and the corresponding ratio shoud consider that: iquidity is enhanced when there is a significant number of GDRs eigibe for trading; investors are more ikey to buy GDRs that are perceived to be iquid and fairy priced whie the fundamentas may be the same, an investor typicay prefers to buy 100 shares of a US$20 stock instead of 10 shares of a US$200 stock. The GDR ratio initiay seected may affect the transaction costs that investors wi pay. For instance, since fees for issuance (and canceation) are assessed in cents per GDR, a GDR that is priced too ow can add incrementa transaction costs for investors (see chart Issuance and Canceation of GDRs on page 113 for a description of the issuance and canceation process). A ratio is estabished at the outset, but can be changed at any time by the issuer subsequenty if the GDR price moves too far outside market parameters. Most of the factors driving GDR prices are the same as those affecting the underying shares: company fundamentas and track record, reative vauations and anaysts recommendations and, of course, market conditions. The internationa status of the company is aso a key factor. Investors buying GDRs pay in doars but are investing in an asset that moves in ine with a foreign currency and foreign market. The ratio is simpy part of the structure surrounding the investment that makes it easier to manage. The deposit agreement As a first step toward estabishing a GDR programme, the foreign issuer and its chosen depositary bank jointy sign a deposit agreement. This contract detais the ega reationship and obigations of the depositary bank and the issuer, describes the services the depositary and issuer wi provide, and sets out the rights of GDR hoders and the fees they must pay the depositary bank. Whie some terms are standard, deposit agreement provisions may vary from programme to programme, depending on the ega requirements of the foreign issuer s home market and the objectives of the issuer. The deposit agreement incudes provisions reating to the foowing: deposit of the issuer s shares execution and deivery of the GDRs issuance of additiona shares by the issuer in compiance with appicabe securities aws transfer and surrender of the GDRs setting of record dates by the depositary bank voting of the foreign issuer s underying shares (ie the shares evidenced by the GDRs) obigations and rights of the depositary bank and hoders of the GDRs distribution by the depositary bank of cash dividends, stock dividends, rights to acquire additiona shares of the issuer and other distributions made by the issuer circumstances in which reports and proxies are to be made avaiabe to GDR hoders tax obigations of depositary receipt hoders fees and expenses to be incurred by the issuer, the depositary bank and GDR hoders pre-reease of GDRs protections for the depositary bank and the issuer (ie imitations on iabiities). Estabishing a depositary receipt programme Page 109

106 Admission to isting on the London Stock Exchange There are two London Stock Exchange markets which admit GDRs to trading: the Main Market the Professiona Securities Market ( PSM ). When appying to the Exchange for admission, the company specifies the market on which it woud ike its GDRs to trade. Main Market Most GDR issuers choose to ist on the Main Market. GDRs traded on the Main Market are obiged to foow the rues for EU-reguated markets, which are enshrined in the FSA s Prospectus Rues, Listing Rues and Discosure and Transparency Rues. As in the case of any other issuer, the FSA requires fu discosure of a major risk factors in the prospectuses of GDR issuers. GDR issuers are aso required to compy with the London Stock Exchange s Admission & Discosure Standards. For fu detais of the prospectus contents requirements see Preparing to ist depositary receipts chapter on page 91. Listing requirements for entry incude: (i) (ii) (iii) (iv) a prospectus prepared in accordance with the Prospectus Directive, incuding IFRS accounting (this appies to both a capita raising or isting by introduction) three years of trading history (or such shorter period for which the issuer has been in operation) a minimum GDR market capitaisation of 700,000; and a minimum of 25 per cent of foated DRs in pubic hands. By isting on the Main Market the company is agreeing to abide by the reevant continuing obigations. These incude: pubishing an annua financia report, within four months of its fisca year-end. The annua financia report must incude audited financia statements, a management report and responsibiity statements and must remain pubicy avaiabe for at east five years pubication of inside or price-sensitive information via a Reguated Information Service ( RIS ). By keeping the market informed in a timey manner through press reeases and other announcements, the issuer aows a investors on a its markets to trade in a knowedgeabe manner and on an equa footing. Further, if the issuer beieves information has been eaked regarding a confidentia or price-sensitive corporate matter, it is required to communicate with the market to remove uncertainty regarding the stock. It shoud aso be noted that American Depositary Receipts ( ADRs ) can aso be isted on the Exchange. For exampe, severa Russian ADRs have been isted by way of an introduction on the London Stock Exchange. The Professiona Securities Market The Professiona Securities Market is operated by the Exchange within the scope of its status as a Recognised Investment Exchange. The PSM is ony accessibe by whoesae investors and, as such, the FSA is abe to exercise fexibiity in the appication of European directives. Issuers wishing to ist on the PSM must meet the foowing criteria: (ii) (iii) (iv) atest three years of audited accounts (or such shorter period for which the issuer has been operating) minimum GDR market capitaisation of 700,000; and nationa GAAP may be used in the preparation of the prospectus. Page 110 Estabishing a depositary receipt programme

107 Fexibiity with respect to accounting requirements may be a cost saving for many companies as reconciing to IFRS, or providing additiona discosure as required by the Prospectus Directive, coud be very expensive. However, issuers may need to provide a description of the key differences between their oca accounting standards and IFRS. Issuers choosing the PSM wi have their isting particuars approved by the UK Listing Authority (the UKLA, a division of the FSA). Athough IFRS does not appy, discosure obigations for isted companies do appy to companies represented on the PSM. Issuers admitted to trading on the PSM must meet certain continuing obigations, incuding: discosing price-sensitive information and trading matters to the market as soon as possibe pubishing an annua report and financia accounts within six months of the year-end; and preparing and maintaining a ist of persons considered insiders. Notabe exampes of ceebrated GDR istings on the Exchange incude Tata Stee s US$500m capita raising in Juy 2009 on the PSM and Rosneft s US$10.6bn offering on the Main Market in Juy Trading in GDRs GDRs, on both the Exchange s EU-reguated Main Market and the PSM, are traded on separate segments of the Exchange s Internationa Order Book ( IOB ). The IOB trading matches and executes incoming eectronic orders in DRs from over 46 countries ranging from Centra and Eastern Europe, Asia and the Midde East. Centra Counterparty ( CCP ) is provided for over 70 of the most iquid DRs mitigating counterparty risk and ensuring both preand post-trade anonymity. Firms wishing to advertise their presence on the book can choose to identify themseves by using Named Orders. An optiona netting service is avaiabe on the IOB, provided by LCH.Cearnet, which enabes firms to net same-day, same-security trades at the CCP eve for trades in ceared securities. Trades in DRs executed on the Exchange s Ceared IOB service sette within Eurocear. GDRs (incuding those that are constituents of the Main Market and the PSM) can be traded in parae on aternative patforms quotation patforms of other exchanges as we as mutiatera trading faciities (MTFs) such as Turquoise. Parties invoved in estabishing a GDR programme Estabishing a GDR programme requires cose coordination between the issuer, its chosen depositary bank and each firm s ega advisers. When raising capita, the issuer aso reies on accountants, investment bankers and investor reations firms. The tabe Key roes and responsibiities of parties to a GDR programme on page 112 summarises the roes and responsibiities of each programme partner. GDR certificate GDR certificates are typicay not issued to investors hoding GDRs or those hoding 144A DRs. A master certificate is issued either directy to a securities depositary, such as the Depositary Trust Company, or to a Common Depositary which wi hod the master certificate on behaf of settement systems such as Eurocear and Cearstream, investors and the depositary bank. As GDRs are issued and canceed, the number of GDRs represented by the master GDR is adjusted up and down accordingy. Eurocear and Cearstream are the two centra depositaries in Europe, through which the trading and settement of GDRs is documented eectronicay. These two entities work under the Estabishing a depositary receipt programme Page 111

108 Key roes and responsibiities of parties to a GDR programme Depositary bank provides advice/perspective on type of programme, exchange or market on which to ist or quote advises on ratio of depositary shares to ordinary shares appoints custodian coordinates with a parties to compete programme impementation steps on schedue coordinates with ega counse on Deposit Agreement and securities aw matters announces GDR programme to market (brokers, traders, media, institutiona investors via news reeases and internet) works with issuer to maintain active GDR programme coordinates with issuer to announce and process corporate actions such as dividends and sharehoders meetings Custodian receives oca shares in issuer s home country confirms deposit of underying shares hods shares in custody for the account of depositary in the home market Issuer provides depositary and custodian with notices of dividends, rights offerings and annua and specia sharehoder meetings interacts with isting authority and responds to a questions IR/PR targeted programme adheres to stock exchange reguations and accepted corporate governance standards, incuding reporting and transparency Lega adviser (for the depositary and for the issuer) reviews draft deposit agreement received from depositary bank submits requisite documents to oca reguatory authorities and exchanges manages compiance with securities aws, rues and reguations and perfects any securities aw exemptions provides corporate action support, as appropriate Accountant prepares company s accounts for insertion into prospectus reviews prospectus and interacts with authorities annua audit and prepares accounts in accordance with accepted standards such as IFRS Investor reations adviser deveops ong-term pan to raise awareness of issuer s programme in the markets in which GDRs wi trade deveops communications pan and information materias for aunch activities (roadshow and presentations to investors, meetings with financia media) coordinates with issuer s advertising and pubic reations teams on specific programme pans to support and deveop company image Investment banks/underwriters advise on size, pricing, marketing of offering, type of programme and seection of exchange or market, and ratio of DRs to ordinary shares act as pacement agent or underwriter in offering conduct roadshows with management/introduce issuer to institutiona and other investors ines up deaers and co-underwriters cover issuer through research reports/promote DRs to investors advise on roadshows, investor meetings, investors to target Page 112 Estabishing a depositary receipt programme

109 Issuance and canceation of GDRs Issuances 1. Investor cas broker with an order to buy 100 GDRs in an issuer. 2. Broker can fi order by either buying GDRs on the internationa exchange on which they trade, or purchasing ordinary shares in the oca market and having them converted into GDRs. 3. If the broker chooses to buy in the oca market, they wi conduct their trade via a oca broker. The broker wi then notify the depositary bank to expect the deivery of shares at the oca custodian. 4.The custodian notifies the depositary bank when the shares are credited to its account and instructs it to deiver the GDRs to an account specified by the broker. Canceations 1. Investor cas broker with an order to se 100 GDRs in an issuer. At settement (usuay T+3), the investor wi deiver the GDRs to the broker. 2. Broker competes the se order by either seing GDRs on the internationa exchange on which they trade, or converting the GDRs to ordinary shares and seing such underying shares in the oca market. 3. If the broker ses in the oca market, they wi conduct their trade via a oca broker. If the broker converts the GDRs to ordinary shares, the broker wi deiver the GDRs to the depositary bank for canceation and provide the necessary deivery instructions for the ordinary shares. 4. The depositary bank instructs custodian to deiver oca shares to account provided by broker, subject to seer s payment of GDR canceation fees and any other appicabe charges. 5.The depositary bank deivers GDRs to the investor s broker, subject to the buyer s payment of GDR issuance fees. 5. Custodian deivers shares as instructed. 6. Broker deivers GDRs to investor. 6. Loca broker receives shares. rues of cient confidentiaity and non-discosure and consequenty neither the issuer nor the depositary is abe to obtain and confirm information regarding the identity of beneficia hoders of GDRs. Speciaist vendors may assist with sharehoder identification using proprietary databases of custodian accounts and reguatory methods of engagement with institutiona investors. Corporate actions and dividends With respect to corporate actions, the depositary bank acts as a bridge between the issuer and GDR hoders outside its home market. To the extent possibe, the depositary provides GDR hoders with benefits comparabe to those received by the issuer s domestic sharehoders. If dividends are to be paid on the underying securities, the depositary bank provides for dividends to be converted and net proceeds, after deduction of any taxes and fees, to be paid out in the currency of the GDR, (typicay US doars). The GDR investor carries the foreign currency risk, as the amount of the dividend wi be affected by any movement of the US doar against the investor s home market currency. When the dividend record date and payment date for the domestic shares have been estabished by the issuer, the dates are given immediatey to the depositary so that it can: set the record and payment dates for the GDR based on the agreed-upon caendar and market requirements, and then communicate these dates to the markets. For exampe, the Exchange expects at east three business days notice of any record date. This aows it to notify the market and propery announce the ex-date announce preiminary (estimated) dividend payment amounts based upon the exchange rate between the issuer s domestic currency and US doars on the date of the announcement arrange for the dividend, received from the issuer directy or via the depositary s custodian, to be converted from the domestic currency into US doars. The fina rate per GDR wi be announced once the dividend has been converted and the actua rate per GDR has been cacuated distribute to GDR hoders the dividend, net of any required tax withhoding and/or any fees. Estabishing a depositary receipt programme Page 113

110 Where possibe the depositary bank wi aso faciitate dividend tax recaim or reief at source to aow GDR investors to benefit from favourabe tax rates under doube taxation treaties. For more compex corporate actions, such as rights issues and corporate restructurings, the depositary is typicay made a party to the transaction so that it can work with the issuer and its advisers to devise the appropriate structure and distribution channe for the GDR investors. Sharehoder meetings The deposit agreement outines the issuer s responsibiities, if any, to GDR hoders with respect to sharehoder meetings. For good corporate governance purposes, issuers typicay give their GDR hoders the right to vote at the sharehoder meeting. The issuer s depositary bank provides guidance as to the timing and mechanics for distributing information and voting cards to GDR investors. The issuer provides the depositary bank with the necessary information as far in advance as possibe of a sharehoder s meeting. Six to eight weeks notice is optima. This timeframe enabes the depositary bank to prepare the voting instruction card, distribute it through the cearing systems to the GDR hoders, receive voting instructions from them and arrange to have the underying shares voted at the meeting in accordance with those instructions. The depositary bank aso assists the issuer with preparation and review of the documentation required to compy with genera GDR market practices. This incudes coordination with the oca custodian and reguators to prepare authorisations and documentation to compy with oca market reguations and procedures for GDRs. directy using proxy soicitation vendors to discuss any questions they have regarding the resoutions and to encourage them to submit their vote. Investor reations ( IR ) As a company transitions to a pubicy-isted entity, it must provide the investment community with increased transparency into the organisation, compy with reguations and communicate goas, market opportunities and growth strategies. In practice, this requires the issuer to deveop its readiness for IR in the pre-ipo phase and sustain cear and consistent communications after the GDRs begin trading. Driving sufficient demand for a company s GDRs, over time, requires a comprehensive IR strategy aimed at continuay raising the company s visibiity among GDR investors and effectivey communicating its investment story. It is important that the depositary bank is we paced to provide IR advisory services in support of the issuer s GDR programme. A depositary bank can hep enabe the issuer to make the best first impression in the capita markets, immediatey begin buiding trust with GDR investors and set the stage for optima vauation over the ong term. The services provided by a depositary bank s IR advisory team incude: IR strategy and caendar assistance in the deveopment and execution of an IR action pan aimed at achieving specific goas investor targeting, with a focus on GDRspecific investors (anaysis to identify investors for roadshows) best practice advice on investor communications, incuding performance guidance and discosure interna IR reporting procedures. Some issuers are keen to get a high eve of participation from their overseas hoders. In this case, issuers may contact their GDR investors Page 114 Estabishing a depositary receipt programme

111 Sampe timetabe for estabishing a GDR programme Issuer UKLA LSE Broker Sponsor Depo A L IR weeks before admission Estabish/organise transaction team Detaied timetabe and responsibiities agreed 6-12 weeks before admission Draft preiminary offering circuar (Note: depositary bank provides description of GDRs for offering circuar) Initia review of pricing issues Begin panning US and European roadshow and ongoing investor reations: create communications materias and target institutiona investors Seect GDR/ordinary share ratio 3-6 weeks before roadshow Due diigence on prospectus Roadshow meetings Formay submit and agree a documents with UKLA Print pathfinder prospectus for Reguation S component if required Negotiate Deposit Agreement Transate Deposit Agreement, if appicabe Specific to Russia-incorporated issuers: Prepare appications to FSFM and FAS, if appicabe Appy and receive FSFM approva for GDR programme estabishment and FAS cearances 1 week before admission A documents competed and approved by UKLA Pricing and aocation meeting Register prospectus Admission week Forma appication for London Stock Exchange isting and admission to trading Appy for PORTAL system eigibiity (for Rue 144A programme in the US) Arrange Eurocear, Cearstream and DTC eigibiity for book-entry settement and deivery Cosing: execute Deposit Agreement; pacement agent deivers cash proceeds to issuer; depositary bank s custodian receives underying shares; depositary deivers GDRs to ead pacement agent through DTC, Cearstream and/or Eurocear Where permitted, send announcement of programme to broker community Post-Cosing 40 days after the ast cosing of the Reguation S-ony issuance, the issuer and depositary bank may fie a Form F-6 with SEC to estabish a Leve I ADR programme Timeframes are indicative. Reguator s invovement and issuer s programme specifics may vary and can materiay affect timing. The UKLA s isting rues require that the minimum amount of time between the initita submission of documents and approva is 20 working days. Key to parties invoved: UKLA = UK Listing Authority, I = Issuer, Depo = Depositary Bank, A = Accountant, L = Lega adviser; IR=Investor reations. Other parties, specific to Russian-incorporated issuers: FSFM = Federa Service for Financia Markets, FAS: Federa Antimonopoy Service.

112 Usefu contacts London Stock Exchange UK companies: + 44 (0) Internationa companies: + 44 (0) Capita Registrars Pau Etheridge, Head of Corporate Advisory Emai: [email protected] Phone: +44 (0) Phi Roberts, Deputy Head of Corporate Advisory Emai: [email protected] Phone: +44 (0) Ceary Gottieb Steen & Hamiton LLP Raj S. Panasar, Partner Emai: [email protected] Phone: +44 (0) Stephen Gasper, Associate Emai: [email protected] Phone: +44 (0) Ernst & Young LLP David Wikinson UK IPO Partner Emai: [email protected] Phone: +44 (0) Guy Carr UK IPO Director Emai: [email protected] Phone: +44 (0) Fishburn Hedges Andy Berry, Director Emai: [email protected] Phone: +44 (0) Freshfieds Bruckhaus Deringer LLP Simon Witty, Partner Emai: [email protected] Phone: +44 (0) David Cotton, Senior Associate Emai: [email protected] Phone: +44 (0) J.P. Morgan Depositary Receipts Group Aex H. Hickson, Regiona Head EMEA Emai: [email protected] Phone: + 44 (0) Peter Russe, Investor Reations Advisory Services Emai: [email protected] Phone: + 44 (0) UBS UBS Investment Banking John Wooand, Managing Director Emai: [email protected] Phone: +44 (0) David Sea, Director Emai: [email protected] Phone: +44 (0) UBS Equity Capita Markets Christopher Smith, Managing Director Emai: [email protected] Phone: +44 (0) Aex Boch, Associate Director Emai: [email protected] Phone: +44 (0) Usefu contacts Page 116

113 QUOTED Whatever your company s size or sector, we can put you at the heart of one of the word s most sophisticated financia communities. The Main Market is home to approximatey 1,400 companies from over 60 countries, incuding some of the word s most successfu and dynamic organisations. So far this year 20.8 biion has been raised on the London Stock Exchange, of which 17.9 biion has been raised on the Main Market. Here at the London Stock Exchange we hep companies to access the deepest poo of internationa capita. Premium Listed companies on the Main Market meet the highest isting standards heping to raise their corporate profie and increase their exposure to investors. Learn more about the Main Market and why eading companies choose to ist on the London Stock Exchange Copyright November 2010 London Stock Exchange pc London Stock Exchange, the coat of arms device and AIM are registered trademarks of the London Stock Exchange pc. London Stock Exchange statistics as at end September 2010