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general guide for CIS companies at London Stock Exchange
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Listing in London: CIS Practice
Published by White Page Ltd in association with the London Stock Exchange, with contributions from:
CLYDE&CO
Listing in London: CIS Practice
© 2010 White Page Ltd
Copyright in individual chapters rests with the co-publishers No photo-
copying copyright licences do not apply
his handbook is written as a general guide only t should not be relied
upon as a substitute or speci ic legal, accounting or inancial advice
Pro essional advice should always be sought be ore taking any action
based on the in ormation provided Every e ort has been made to
ensure that the in ormation in this handbook is correct at the time o
publication he views expressed in the articles contained in this hand-
book are those o the authors
London Stock Exchange and the coat o arms device are registered
trademarks o London Stock Exchange plc he publishers and authors
stress that this publication does not purport to provide investment
advice, nor do they bear the responsibility or any errors or omissions
contained herein
Listing in London: CIS Practice
is published by
White Page Ltd, 17 Bolton Street, London W1J 8BH,
United Kingdom
Phone + 44 20 7408 0268
ax + 44 20 7408 0168
Email mail@whitepage co uk
Web www whitepage co uk
irst published 2010
SBN 0-9552069-8-7
Editor: Nigel Page
Design: Rick Marsland
Production: Adrian Preston
Publisher: Nigel Page
Printing and binding: 1010 Printing nternational Ltd
Contents
4 Listing in London: CIS Practice The London Stock Exchange
14 Role of the investment bank in a Main Market listing Nomura International plc
34 Role of the law firm in a Main Market listingAshurst
44 Role of the accountant in a Main Market listing PricewaterhouseCoopers LLP
58 Role of the financial PR/IR company in a Main Market listing and AIM flotationCitigate Dewe Rogerson
68 Role of the nominated adviser in an AIM flotationGrant Thornton UK LLP
84 Role of the law firm in an AIM flotationClyde & Co
98 The Professional Securities Market explainedAshurst
Listing in London: CIS Practice
Since Gazprom became the first company from
Russia to list its depositary receipts (DRs) on the
London Stock Exchange in 1996, many other CIS
companies have joined our markets. On 22nd April
2008, Magnit, one of the largest food retail chains
in Russia, became the 100th company from the
region to list its global depositary receipts (GDRs)
on the Main Market.
At the time of writing, there are 105 companies
from the CIS countries on the markets of the
4 L i s t i n g i n L o n d o n : C I S P r a c t i c e
An introduction: Companies from Russia and theCIS on the Main Market and AIMBy Jon Edwards, Senior Manager and Maria Aleksandrova, BusinessDevelopment Executive, Russia & CIS, Equity Primary Markets, the LondonStock ExchangeThe London Stock Exchange is committed to supporting the aspirations ofCIS and the international companies seeking access to capital, liquidityand profile on our markets.
London Stock Exchange with the trading volumes
in CIS securities on the Exchange’s IOB platform
alone accounting for about US$477 billion in 2008
(91% of all trades on IOB).
In 2007, there were 269 IPOs at the Exchange
with a total sum of raised capital of more than
US$52 billion. CIS companies were a major
contributor to this total, raising more than US$19
billion in 24 IPOs in 2007.
The Main Market of the London Stock Exchange
2005 2006 2007
2,000
4,000
6,000
8,000
10,000
3,086
7,197
9,880
Graph 1. Money Raised by CIS companies on the Main Market of the London Stock Exchange, £m
5L i s t i n g i n L o n d o n : C I S P r a c t i c e
is the Exchange’s flagship international market for
established companies across all sectors.
Currently there are 57 companies from Russia and
the CIS on the Main Market of the London Stock
Exchange. Among these companies there are
some which have listed shares (such as
Kazakhmys, ENRC and Ferrexpo), and others
which have listed depositary receipts.
FTSE 100 and primary listingsKazakhmys and ENRC are two companies with
assets in the CIS that are currently in the FTSE
100. Both Kazakhmys and ENRC established PLC
structures and conducted primary listings of their
shares on the London Stock Exchange. Becoming
a constituent of the FTSE UK Index Series helps
to build greater liquidity for Main Market
companies by providing investors with clear and
independent benchmarking of stocks, sectors and
the market as a whole. It also creates the basis
for portfolio trading by both active and passive
investors. Institutional investors offering retail
funds, which explicitly benchmark the FTSE 100,
FTSE 250, FTSE SmallCap and FTSE All-Share
indices, account for almost £50 billion of
investment - over 60% of which are held in tracker
funds that are obliged to purchase exposure to
the constituents of those indices.
IOBMost of the Main Market companies from the CIS
have come to market by listing GDRs under
Chapter 18 of the Listing Rules and admitting
them to trading on the London Stock Exchange’s
International Order Book (IOB). As this market is
intended for professional investors, not all the
provisions applying to their primary listed peers
attach to DR issuers. A comparison checklist of
share and DR listing and continuing obligations
requirements is available in Russian and English
on the London Stock Exchange’s corporate
website.
2530
36
4964
50
80
51207
83375
63
477
46
49% 42%56%
61%
71%
86%
91%
100
200
300
400
500
600
Total IOB Trading Value ($b
n)
CIS Trading Value ($bn)Other countries IOB Trading Value ($bn)
Graph 2: IOB: Seven years of growth
2002 2003 2004 2005 2006 2007 2008
The IOB, originally conceived along the lines of the
SETS platform for UK securities, has developed
into one of the most liquid trading platforms for
international securities in the world. CIS securities
on the IOB have been among the most actively
traded and accounted for over 91% of dollar
volume traded in 2008 on the IOB (US$477
billion).
One of the key drivers behind the liquidity of
Russian and other CIS GDRs on the IOB is the
active participation of the 10 London Stock
Exchange member brokers whose parent
organisations were founded in Russia. Together
these brokers (listed below) accounted for US$57
billion in trades in 2008:
• Alfa Capital Holdings (Cyprus) Ltd
• AS KIT Finance Europe
• Metropol (UK) Ltd
• Otkritie Securities Ltd
• Renaissance Capital Ltd
• Troika Dialog (UK) Ltd
• Unicredit Aton International Ltd
• URALSIB Securities Ltd
• VTB Bank Europe Ltd
• Broker Credit Service.
EDX In December 2006, the London Stock Exchange’s
EDX group launched its Russian derivatives
service. Since launch, there has been
£40,613,522,060 (US$50 billion) in notional value
6 L i s t i n g i n L o n d o n : C I S P r a c t i c e
traded on EDX Russian derivatives. Futures and
options contracts on GDRs of Gazprom, Lukoil
and Rosneft are among the most liquid of the EDX
Russian derivatives. The EDX Russian derivatives
service is another example of the services the
London Stock Exchange has developed to
promote a liquid market in GDR trading.
Table 1. Top five most active contracts based onnotional value
No Company Notional value (in US$)
1 Gazprom 28,210,533,173
2 Lukoil 11,427,455,460
3 Rosneft 7,660,582,353
4 Norilsk Nickel 4,865,117,066
5 Surgutneftegaz 2,398,028,737
CCP IOBOne of the most important developments on the
IOB is the introduction of the Central
Counterparty Clearing (CCP) service for the
International Order Book (IOB). This service was
launched at the end of the first quarter 2009.
Recent market events have highlighted the value
of central clearing services in helping to mitigate
counterparty risk, increase market efficiency and
in turn provide participants with a greater level of
confidence in their transactions. The introduction
of a CCP model, initially to the 50 most liquid
securities by value that trade on the IOB, will
deliver appreciable benefits to both issuers and
7L i s t i n g i n L o n d o n : C I S P r a c t i c e
investors. Market participants will gain full
counterparty risk protection, enjoy post-trade
anonymity and experience improvements in
straight-through processing. Firms will also have
access to an optional netting facility to reduce
transaction management costs and financial
exposure at the settlement level.
AIMSmall and mid-cap companies from the CIS have
also found a home on AIM, the London Stock
Exchange’s growth market, where there are
currently 48 companies with assets and
operations across the CIS (see
www.londonstockexchange.com/rus). The CIS
companies quoted on AIM have come to market
to access the deep pool of funds available for
fast-growth companies, from a variety of different
sectors. Companies from the CIS region have
been able to raise considerable amounts of
growth capital at IPO (£1.7 billion cumulatively)
and in further financing rounds (£2.1 billion
cumulatively). It is the ability to raise further capital
for growth companies to continue to develop their
businesses that really sets AIM apart from other
growth markets. Businesses from all over the
world are attracted to AIM because it enables
them to raise relatively small amounts of capital,
from knowledgeable, predominantly institutional
investors.
AIM – investing in a diversified base ofcompaniesInvestors who buy shares in companies quoted on
AIM are participating in the world's leading stock
market for smaller growing companies. AIM
companies come from 26 different countries and
range across 39 industry sectors and 90 sub-
sectors, providing all types of investors with a
vast range of choice in investing in businesses to
2005 2006 2007
424446
Graph 3. Money raised by CIS AIM companies at IPO, £m
656
0
700
100
200
300
400
500
600
suit their investment profile. In 2006 and 2007,
AIM companies raised a combined £31 billion from
investors (see Table 2), many of whom were large
institutional fund managers such as BlackRock,
Invesco, Fidelity International, Prudential Group,
AVIVA, Artemis Investment Management and QVT
Financial.
Investors also benefit from the FTSE AIM Index
Series. This series – part of FTSE’s global range
8 L i s t i n g i n L o n d o n : C I S P r a c t i c e
of world-class market indices – provides investors
with greater transparency, and helps them identify
AIM companies based on their inclusion in the
FTSE AIM Index Series or the FTSE AIM All-Share
Supersector Indices.
The diversity of AIM’s constituents, demonstrated
by the 39 sectors represented, is supported by
the in-depth and broad experience of the UK’s
financial advisory community who really
2005 2006 2007
118
646
Graph 4: Further money raised by CIS companies, £m
542
Year IPOs (£m) Further issues (£m) Total money raised (£m)
2003 1,095 1,000 2,095
2004 2,776 1,880 4,656
2005 6,461 2,481 8,942
2006 9,944 5,734 15,678
2007 6,581 9,603 16,206
2008 1,108 3,204 4,312
Total 27,965 23,902 51,890
* Data for the above table is taken from the statistics section of the Exchange’s website.
Table 2: Total investment made- 2003 -2008
0
700
100
200
300
400
500
600
9L i s t i n g i n L o n d o n : C I S P r a c t i c e
SECTOR No. of companies Market cap. (£m) % of AIM market cap.
1999 – Software on topSoftware & Computer Services 37 3,973 30%
Speciality & Other Finance 27 2,114 16%
Support Services 43 1,175 9%
Leisure & Hotels 28 978 7%
Media & Entertainment 32 816 6%
Health 9 479 4%
Restaurants, Pubs & Breweries 16 414 3%
Real Estate 22 413 3%
Oil & Gas 13 350 3%
Engineering & Machinery 6 335 3%
2002 – Balanced sector growthSupport Services 74 1,191 12%
Real Estate 27 1,074 10%
Leisure & Hotels 73 1,044 10%
Mining 41 1,005 10%
Speciality & Other Finance 82 953 9%
Oil & Gas 23 621 6%
Software & Computer Services 74 609 6%
Pharmaceuticals & Biotechnology 19 563 5%
Media & Entertainment 75 539 5%
Food Producers & Processors 8 295 3%
2004 – Resources lead the marketOil & Gas 46 5,645 18%
Mining 90 4,928 16%
Speciality & Other Finance 143 2,780 9%
Leisure & Hotels 62 2,504 8%
Support Services 99 2,484 8%
Software & Computer Services 110 2,137 7%
Pharmaceuticals & Biotechnology 38 1,490 5%
Media & Entertainment 84 1,459 5%
General Retailers 22 995 3%
Real Estate 33 840 3%
2006 – Real Estate joins Resources at the topMining 180 14,428 16%
Oil & Gas Producers 98 10,280 11%
Real Estate 86 9,545 11%
General Financial 185 9,461 10%
Support Services 135 5,371 6%
Travel & Leisure 89 4,222 5%
Software & Computer Services 153 4,037 4%
Media 121 4,013 4%
Equity Investment Instruments 56 3,924 4%
Industrial Metals 9 3,385 4%
Table 3: Top 10 companies by market capitalisation on AIM by sector
understand the needs of smaller growth
companies. AIM is supported by a wide
community of expert advisers, ranging from
Nominated Advisers (Nomads) and brokers to
accountants, lawyers and PR/IR firms.
The sectoral diversity on AIM remains one of the
market’s core strengths and has helped AIM avoid
reliance on one particular industry, even when
another sector goes through a relative period of
slow growth. In Table 3, several distinct periods
are highlighted to show how AIM has developed
over the years, where certain sectors experienced
a significant increase in investor interest. With the
exception of 1999 during the ‘dot.com’ boom, no
one sector has accounted for more than 20% of
AIM’s total market capitalisation. Since 2004,
sectors such as natural resources, financial
services and real estate have all experienced peak
periods of growth while leaving the market
relatively balanced and diverse. Owing to the large
number of advisers and sector specialists working
with the AIM market, AIM has always been able to
serve as a platform to attract companies from new
sectors and new investment opportunities.
AIM introductionsWhile, on average, CIS companies have raised
£35 million at IPO, several have come to market
raising small amounts of capital. Teleset, the
telecommunications operator from Tartarstan,
admitted its shares to AIM without raising initial
capital. Once on market, it then raised US$14.987
million, the major investors being Templeton Asset
Management Limited, the Black Sea Trade
1 0 L i s t i n g i n L o n d o n : C I S P r a c t i c e
Development Bank and Deutsche Bank. A further
US$9.8 million was raised the following year in a
pro rata offer to existing shareholders. Companies
such as Teleset, which have chosen to undertake
an introduction of shares to market, are looking to
gain access to a platform where they will trade
alongside peer companies of a similar size and
profile. Once on AIM, these companies have an
opportunity to demonstrate their strengths and
position themselves for future fund-raisings by
ensuring that they adhere to disclosure best
practices.
AIM regulation & the role of NomadsEach company applying to AIM must appoint a
Nomad to guide it through the admission process
and its subsequent life as a publicly-quoted
company. Firms that wish to seek approval to act
as Nomads must satisfy strict criteria set by the
London Stock Exchange. To be granted
authorisation they must demonstrate that they
have the relevant experience to assess whether a
company is appropriate to be admitted to AIM and
that they can support the company once admitted
to the market. By ensuring that AIM companies
are properly regulated, investors benefit from
increased certainty and security. Over the last five
years, the number of AIM Nomads working with
international companies has grown significantly.
Their continued work with the companies that they
act for has helped to raise the level of
understanding in the UK of the risks and
opportunities in overseas markets.
The unique solid principles-based regulatory
1 1L i s t i n g i n L o n d o n : C I S P r a c t i c e
system, combined with the Exchange’s robust and
sophisticated trading platforms, provides both
private and institutional investors with the
confidence that AIM is a secure market that
enables them to participate in these companies’
success and support the companies of tomorrow.
Funds on AIM and SFMHedge funds and private equity are an increasingly
important asset class to which pension funds and
other institutional investors want access, in order
to diversify their overall portfolios and improve
their returns. Through both the Main Market and
AIM, the London Stock Exchange was already
offering investors and issuers a choice of routes
to market, according to the types of investors that
issuers wish to target and the risk premiums
sought by investors. All of the real estate and
development companies listed in Table 4 are
examples of fund structures that are quoted on
AIM.
In 2007, the London Stock Exchange further
enhanced the range of available options,
introducing the Specialist Fund Market (SFM), a
separate, clearly-labelled market for alternative
assets such as single-strategy hedge funds and
private equity vehicles. It enables the London
markets to continue to meet what is a strong
demand among issuers and investors for a
regulated market quotation suitable for these
more complex entities, while remaining clearly
delineated as a professional market.
The Specialist Fund Market is open to both UK
and international funds, and will be complementary
to the FSA’s Unitary Regime for investment
entities listing on the Main Market. Issuers that
wish to market funds to a wider audience,
including retail investors, will continue to have
access to the Main Market, which offers the
potential for inclusion in index tracker funds in
addition to AIM, and has been very successful in
attracting investment entities, primarily property
funds or other conventional investment funds.
The Specialist Fund Market is a Regulated Market
operated in accordance with EU Directives. The
FSA will approve issuers’ prospectuses in line
with the Prospectus Directive and monitor issuers’
conformity on an ongoing basis with the
Transparency Directive, Market Abuse Directive
Company – Real Estate Money raised (in £m)
Aisi Realty Public Ltd 16
Dragon – Ukrainian Properties 103
KDD Group NV 64
Mirland Development Corporation 143
RGI International Ltd 89
Raven Russia Ltd 153
XXI Century Investments 68
Table 4: Real Estate sector review
and other EU requirements. Once approved by the
UKLA, securities must also meet the Exchange’s
Admission and Disclosure Standards in order to
be admitted to trading on dedicated segments of
the Exchange’s next-generation trading services,
1 2 L i s t i n g i n L o n d o n : C I S P r a c t i c e
Opportunities for CIS companies in London
The London Stock Exchange is committed to supporting the aspirations of the CIS and international
companies seeking access to capital, liquidity and profile on our markets. The significant amounts
raised by CIS companies via IPO and the large volumes traded on IOB are testament to the
confidence investors and advisors have in our markets and the companies profiled there. The highly
successful IPOs of Russian companies in 2006-2007 have helped to attract a critical mass of the
best analysts and investors knowledgeable about the region. In this publication you will have an
opportunity to hear from many of these advisors about the role they play in bringing CIS companies
to London.
English and Russian language information available here:
www.russianipo.com
Please contact the CIS team if you are interested in learning more about this initiative
Jon EdwardsSenior Manager - Russia & CIS Equity Primary Markets London Stock Exchange Direct: +44 (0) 20 7797 1599 Fax: +44 (0) 20 7920 4788 [email protected]
Maria AleksandrovaBusiness Development Executive - Russia & CIS Equity Primary Markets London Stock Exchange Direct: +44 (0) 20 7797 1444 Fax: +44 (0) 20 7959 [email protected]
SETS and SETSqx. Specialist Fund Market
securities will not be included in the FTSE UK
Index Series and will therefore not be included in
index tracker funds.
Copyright © February 2009. London Stock Exchange and the coat of arms device are registered trade marks of London Stock Exchange plc. IOB is a trade mark of London Stock Exchange plc.
International Order BookThe International Order Book (IOB) enables investors to unlock the potential of some of the world’s fastest growing markets.
The service offers easy, cost efficient and direct access to developing markets around the world such as Central and Eastern Europe, Asia, Middle East and Africa via depositary receipts.
More than 270 securities from 46 countries are trading on the service, supported by the quality of our primary markets and global reputation of leading depositary banks.
The IOB benefits from a central counterparty service, providing participants with increased market efficiency and a greater level of confidence in their transactions.
To find out about listing in London or trading on the London Stock Exchange, please visit
www.londonstockexchange.com
There are many reasons for a company to list its
securities on a stock exchange, but the most
common reason to go public is to raise equity
capital. Other objectives may include gaining
access to a highly liquid market and broadening a
company’s investor base. Equity financing is not
only an immediate reinforcement of the capital
base, but also a means of improving the
company’s profile and transparency, as well as
offering an opportunity to raise cheaper debt in
the future as a publicly-listed company. A listing
can also lead to commercial benefits, such as
sales increases in a specific region through added
brand recognition.
Most companies combine a listing on the London
Stock Exchange (the Exchange) with an equity
offering, which can be undertaken by issuing new
shares, selling existing shares or a combination of
both. This process is referred to as an Initial
Public Offering (IPO).
This article will focus on listing on the Main
Market of the Exchange, in the context of Russian
corporates, and on offerings of Global Depositary
Receipts (GDRs).
1 4 L i s t i n g i n L o n d o n : C I S P r a c t i c e
Role of the investment bank in a Main Market listingMichael Boardman, Myles Evanson and Victor Kuzmenko, Nomura International plc
The investment bank plays a crucial role in listing Russian and CIScompanies on the London Stock Exchange
Key considerations
Benefits of a listing on the LondonStock ExchangeLondon remains the international stock exchange
of choice for foreign companies, reflecting
London’s leading position as an international
financial centre. A significant number of Russian
companies have already chosen to list in London
and, with Russia becoming an increasingly
important source of equity capital market
transactions (37 Russian companies have sought
listings on international stock exchanges since
early 2002), more are expected to do so during
2010/2011 (Source: Dealogic).
The Exchange offers a number of benefits for
companies that complete a listing:
• Flexibility in the choice of securities to be listed:
The Exchange provides listing and trading
platforms for all types of shares, depositary
receipts (DRs), or equity-linked securities
• Access to a vast pool of international capital:
The Exchange offers companies the opportunity
to enlarge their existing investor base and gain
access to capital from the international financial
community
1 5L i s t i n g i n L o n d o n : C I S P r a c t i c e
• Enhancement of the company’s profile: listing
on the Exchange encourages broader
recognition of the company, both domestically
and internationally
• Broad analyst coverage: listing on the Exchange
provides access to comprehensive research
coverage by different country and sector
analysts; this plays a vital role in securing
recognition from the international investor
community
• Sector knowledge and depth: an Exchange
listing provides access to investors with in-
depth knowledge of companies and sectors. The
Exchange itself hosts a broader range of
sectors than any other exchange and contains
an extensive depth of peers
• Potentially higher valuation of the company: as
a recognised platform for the international
investor community, an Exchange listing offers
improved valuation potential. Because the
Exchange also offers Russian corporates the
greatest number of peers, this makes the
investors’ task of looking at a new opportunities
easier and provides a wider range of peers to
benchmark against
• Listed securities: listing on the Exchange
creates a liquid currency for future acquisitions,
management remuneration, etc
• Investor confidence: an Exchange listing helps
generate investor confidence via disclosure
requirements
• Flexible approach to regulation and direct
access to regulatory authority: the Exchange’s
regulatory standards are high, but also flexible,
Russian IPOs in London since 2000Figure 1
300
50
100
150
200
250
02000 2001 2002 2003 2004 2005 2006 2007
Al erna ive nves men Marke
ondon
Num
ber
of
PO
s
350
2008 2009
Source:Dealogic
with rules that can be applied on a case-by-case
basis
• Reasonable costs and fees: fees and costs for
the Exchange’s services are competitive in
comparison with other stock exchanges.
The attractiveness of London as a listing venue is
illustrated by the increasing number of foreign
companies on the Exchange: from 49 listed in
2000 to 572 as of 31 December 2009. The
statistics for Russian companies show that 33 out
of 37 (or over 89%) of Russian companies listed
internationally have chosen to list their securities
on the Exchange (Source: London Stock
Exchange, Dealogic).
1 6 L i s t i n g i n L o n d o n : C I S P r a c t i c e
Increase in investor access at thesmall/mid-cap levelWhen assessing investment opportunities from
emerging markets, international investors have
historically focused on the largest and most
attractive companies – the ’blue chips’. These
companies will normally be market leaders in their
respective industries, with significant growth
potential – on account both of regional
development prospects and of their ability to
outperform the competition.
Although the Russian market is still largely
dominated by large-cap companies, including
Gazprom, Rosneft, Sberbank, LukOil and Norilsk
Nickel, investor focus has been gradually moving
towards mid-cap companies, which potentially
Source:Dealogic
Offerings by foreign companies in London since 2000Figure 2
60
10
20
30
40
50
02000 2001 2002 2003 2004 2005 2006 2007 2009
Amoun raised
Number of offerings
Am
oun
rais
ed
US
$ b
illio
n
70
300
50
100
150
200
250
0
Num
ber
of
offe
rings
350
2008
1 7L i s t i n g i n L o n d o n : C I S P r a c t i c e
offer higher returns and stronger growth potential.
Thus, since 2000, there have been 19 mid-cap
Russian companies which have listed in London.
Listing considerations
Listing typesThe listing regime in London has recently been
amended, and the new regime is effective from
April 2010.
Under the new regime, there are two choices of
listing - a "Premium" listing and a "Standard" listing
(which replaces the old "primary" and "secondary"
listings, respectively). Both options are available
to UK and non-UK corporates.
1 Premium listing
Premium listing is available for listing equity (NB:
but not GDRs) and requires compliance with the
super-equivalent regime ie more than the basic
requirements set out by the EU Prospectus
Directive. Examples of additional higher standards
are corporate governance, share dealing and pre-
emption rules (to provide anti-dilution protection),
three year track record and 12 month working
capital statement. The key benefit is that once
the issuer is Premium listed, it will qualify for the
inclusion in the FTSE family of indices.
2 Standard listing
The standard listing requires compliance with EU
Prospectus Directive minimum standards only and
not the additional UK super-equivalent points
required for a Premium listing. So it would have to
comply with Transparency and Disclosure Rules
only, making it less demanding to list on the
Standard platform, but there would be no
qualification for FTSE indices. Russian issuers
listing GDRs on the Exchange are only eligible to
have a Standard listing.
The UKLA is responsible for the vetting and
admission of companies to trading on the
Exchange, and maintains the Official List. The
majority of Russian incorporated companies listing
in London opt for a Standard (previously
secondary) listing of GDRs. (See Figure 1 above
'Russian IPOs in London since 2000' for further
details).
International vs domestic offeringBefore considering listing possibilities on the
Exchange, the company, its shareholders and
management need to be aware of the
requirements placed on Russian corporates by
Russian law.
The regulatory body for Russian corporates is the
Federal Financial Markets Service (FFMS). FFMS
places a number of limitations on a company’s
ability to offer its shares to foreign investors.
According to the new FFMS order registered with
the Russian Ministry of Justice on 6 October
2009 and expected to enter into force on 1
January 2010, the maximum amount of shares or
other securities that Russian issuers can place on
foreign markets will be determined, inter alia, by
the listing level of a Russian company on Russian
stock exchange(s) (MICEX and/or RTS). The
maximum limit is set at 25% for companies in
listing category “A” (ie the largest and most liquid
stocks). In addition, the new order specifies that
the maximum percentage of shares that can be
offered abroad by a company or its shareholders
in an equity offering is 50%.
If the company is not incorporated in Russia, it
will not be bound by Russian corporate legislation
and it can seek a sole international listing without
being required to offer the company’s securities
to domestic Russian investors.
Securities to be listedThe Exchange is the largest stock exchange
globally by number of listed companies with 2,792
listed corporates (including those quoted on AIM)
as of the end of December 2009 (Source: the
London Stock Exchange). The cumulative market
capitalisation of these companies was over
US$5.8 trillion as of December 2009 (Source:
London Stock Exchange).
Both shares and DRs can be listed on the
1 8 L i s t i n g i n L o n d o n : C I S P r a c t i c e
√ Investor familiarity with the product
√ No foreign investment restrictions
√ Enhanced liquidity
√ Ease of trading and settlement
√ Dividends paid in freely convertible currency
√ Easier access to corporate information
√ Flexible GDR nominal value
√ Simple listing requirements
√ No costs involved
√ Wide investor participation
Benefits of GDRs vs sharesTable 1 Exchange. A DR is a negotiable instrument issued
by a Depositary Bank, representing ownership in
shares of a company. The shares are held by the
Depositary Bank’s custodian in the domestic
market of the issuer (ie Russia).
DR methodology is very commonly used by
emerging markets issuers since certain
international investors can be prevented from
trading in Russian securities. Issuing
internationally-recognised DRs may be a
preferable option for most Russian companies.
Indeed, over 90% of foreign issuers listed on the
Main Market of the Exchange have applied a DR
Methodology of a
DR programme in an IPO
Figure 3
The underlying shares for a GDR programmecan be new or existing equity
The lead manager places the GDRs withinternational investors
The depositary issues GDRs to the Glo-Co
The shares are deposited with a depositary
1 9L i s t i n g i n L o n d o n : C I S P r a c t i c e
methodology to their listing (Source: Dealogic).
The precedent also shows that since 2000 nearly
all Russian issuers who listed on the main board
of the London Stock Exchange have used a DR
programme. Several types of DRs can be listed
and traded on the London Stock Exchange,
14 Dec 2009 Exillon Energy Oil & Gas Yes 101
30-Apr-08 Globaltrans Investment plc Transportation Yes 470
08-Nov-07 LSR Group Construction/building Yes 772
02-Nov-07 Novorossiysk Commercial Sea Port Transportation Yes 955
02-Nov-07 Eurasia Drilling Co OOO Oil & gas Yes 783
31-May-07 PIK Group OAO Real estate/property Yes 1,929
10-May-07 VTB Group Finance Yes 7,989
03-May-07 Pharmstandard OAO Healthcare Yes 952
02-May-07 AFI Development plc Real estate/property Yes 1,400
22-Feb-07 Integra Group Oil & gas Yes 768
06-Feb-07 Sitronics Concern OAO Professional services Yes 402
06-Feb-07 Polymetal OAO Mining Yes 605
07-Nov-06 Chelyabinsk Zinc Plant OAO Mining Yes 314
02-Nov-06 Sistema-Hals OAO Real estate/property Yes 432
30-Oct-06 TMK Metal & steel Yes 1,069
14-Jul-06 Rosneft Oil & gas Yes 10,656
10-May-06 Cherkizovo Group Food & beverage Yes 251
07-Feb-06 Comstar UTS OAO Telecommunications Yes 1,062
11-Nov-05 Amtel Vredestein NV Auto/truck Yes 202
21-Jul-05 Novatek Oil & gas Yes 966
01-Jun-05 Evraz Group SA Metal & steel Yes 422
05-May-05 Pyaterochka Holding NV Retail Yes 639
09-Feb-05 Sistema Telecommunications Yes 1,557
Russian IPOs in London from 2005 to 2009Table 2
Pricing date Issuer name General industry GDRs Deal valueUS$m
Source: Dealogic
including global depositary receipts (GDRs),
American depositary receipts (ADRs), both
denominated in US dollars and euro depositary
receipts (EDRs), denominated in euros.
Historically, DRs have also, at times, proven to be
a more liquid trading instrument than shares for
2 0 L i s t i n g i n L o n d o n : C I S P r a c t i c e
international companies.
However, Russian corporates should be aware
that, according to the FFMS order 06-42/PZ-N,
from 18 April 2006, only up to a maximum of 35%
of total outstanding shares of the company can be
deposited into a DR facility. Precedent shows that
0-50 59,256 5.2% 177
50-100 162,296 4.6% 55
100-200 283,100 4.0% 47
200-300 812,513 6.3% 22
300-400 919,559 5.4% 14
400-500 717,462 3.2% 6
500+ 32,162,794 6.5% 44
International securities: common sharesTable 3
Market capitalisation (US$) Average daily traded volume One month trading volume Number of companies(US$) as % of market capitalisation
0-50 47,362 4.9% 54
50-100 293,491 8.3% 40
100-200 348,997 4.6% 49
200-300 1,337,932 12.0% 18
300-400 629,894 3.8% 13
400-500 223,958 1.0% 3
500+ 717,140 1.0% 179
International securities: depositary receiptsTable 4
Market capitalisation (US$) Average daily traded volume One month trading volume Number of companies(US$) as % of market capitalisation
Source: Bloomberg
Source: Bloomberg
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most Russian corporates do not utilise the full
threshold.
In addition to this, in May 2008 the Russian
government passed a law which will limit the level
of foreign ownership in 42 industries, which have
been classified as ‘strategic’. For example military,
space technology, nuclear technology, metals and
mining, oil and gas, energy fall into this strategic
category. Foreign investors will need a
government approval before acquiring a majority
(ie over 50%) interest in companies from these
sectors. In certain sectors, including natural
resources companies exploiting subsoil plots of
federal significance, the threshold has been set as
low as 10%. This law will ultimately have impact
on the size of DR programmes of issuers
operating in these sectors.
Listing venueAs mentioned previously, there are two segments
of the London Stock Exchange where Russian
corporates can list:
• Main board of the Exchange; and
• Alternative Investment Market (AIM).
While the main board is an established
international listing venue for large companies,
AIM attracts corporates by offering a more
streamlined, flexible and cost-efficient process for
smaller, high-growth and other younger
companies. Thus, an average market cap for
companies listed on the main board is US$3.9
billion, compared to US$70 million for AIM
(Source: the London Stock Exchange).
Although technically possible, AIM strongly
discourages foreign companies from listing DRs
on AIM due to the insufficient regulatory
framework around this product on AIM. As of
31 December 2009, there are only three GDRs
trading on AIM, as opposed to 190 on the Main
Market. As a result of this, companies
incorporated in Russia generally list on the main
board of the Exchange, whereas companies with
operations in Russia but which are incorporated
outside of Russia have a choice between AIM and
main board listing, depending on the company’s
profile, size, investor base etc.
Requirements for a listing in LondonRegulatory and legal requirements that are
imposed by the regulatory body on all companies
wanting to list on the Exchange (as discussed
above) are a prerequisite for Russian companies
listing their shares on the Exchange. In addition,
corporates need to be sensitive to what would
make their company look more attractive to the
investor community. International investors target
investments on recognised international
exchanges, such as London, because they provide
comfort regarding international standards of
disclosure, accounting and historical performance.
Transparency is also becoming key, especially for
emerging market companies, and precedent has
shown that investors will pay more for companies
with a high commitment to transparency and
disclosure. International investors will also seek
out companies which can demonstrate value,
attractive growth prospects and dedicated
management.
Corporate profileListing on an international stock exchange, such
as the Exchange, is always connected with raising
the profile of the company from the domestic to
international level and may include restructuring,
rebranding etc. This can become crucial for the
marketing of the investment case and therefore
needs to be addressed at the preparatory stage
of the IPO by the company and its advisers (See
‘Company Restructuring’ for further detail).
FinancialsAs Russian Accounting Standards are not
recognised on an international level, IFRS and US-
GAAP accounts have been adopted by Russian
corporates wanting to list on the Exchange. The
financial statements need to be consolidated in the
case of a group structure. High levels of financial
disclosure and transparency are needed to ensure
that the market is comfortable with the company
and a comprehensive annual report, with detailed
notes accompanying any financial statements, will
be expected. Normally the companies are expected
to have a three-year trading record to be eligible to
list on the Exchange; however the rule can be
waived on a case-by-case basis.
If an offering is combined with new capital being
raised, the amount and use of proceeds need to
be consistent with the company’s existing and
planned financial performance and its capital
spending plans. Investors will also pay attention
to the company’s liquidity and indebtedness
ratios, which need to be fairly robust, otherwise
the business model will be perceived as high risk
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and investors will demand a higher discount at
pricing, or may simply not participate in the
offering.
Corporate governance
Corporate governance is a set of rules, principles,
customs and policies that define the way a
corporation is managed, administered or
controlled. It regulates the relationship between
all the stakeholders of the company and the
operating management who have immediate and
direct control over the company’s actions. Due to
potential conflicts of interest that can exist
between shareholders and the management of the
company, it is imperative that there are systems
in place that can regulate and ensure the efficient
functioning of the company. Corporate
governance is a particular concern with family-
owned companies, where the management also
tend to be the ultimate shareholders of the
company.
Corporate governance for Exchange-listed
companies is regulated either by the Combined
Code, which is binding for all companies listed on
the premium segment of the Exchange, or by the
‘best practice’ standards for all other companies.
The Combined Code uses the ‘comply or explain’
approach, which means that if a company does
not comply with certain provisions of the Code,
they are obliged to explain to investors the
reasons for this.
Establishing a talented board is the cornerstone
of an effective corporate governance system –
this accountability is highlighted by the opening
statement of the Combined Code: ‘Every
company should be headed by an effective Board,
which is collectively responsible for the success of
the company’. The Board of Directors should
comprise of the executive directors, who perform
operational day-to-day activities; and non-
executive directors, who are the custodians of the
governance process. They are not involved in the
day-to-day running of the business, but monitor
the executive activity and contribute to the
development of strategy.
The Combined Code also requires that at least
half of the Board, excluding the chairman, should
comprise non-executive directors determined by
the Board to be independent. There are many
factors that can challenge the independence of a
director, including their previous or current
relationship with the company and its
management/shareholders, material interests
involved and/or time spent with the company, all
of which are stated in the Combined Code.
The Combined Code also provides that the Board
should establish various committees to ensure a
system of internal controls and safeguards
regarding remuneration and nomination of Board
members, as well as dealing with auditors.
Hence, corporate governance has become
increasingly important for Russian companies
recently, as investors have been demanding
greater transparency and management efficiency.
Although not legally binding for Russian
corporates, any foreign company listing on
theLondon Stock Exchange is advised to reflect
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on the Combined Code and offer certain
corporate governance provisions to increase its
appeal to the international investor community.
ManagementThe experience, qualification and constitution of
the management team are all important factors
that international investors will carefully assess
when considering investing in a company. Since
most of them are passive investors (ie they take
no active role in the management of the company
and are not represented on the Board), they need
to ensure that the management team has the
ability and capabilities needed to run the business
efficiently.
The management team must also have a set of
clearly-defined objectives and a strategy on how
to achieve these objectives. In addition, it must be
able to communicate the strategy clearly and to
show evidence of this in the company’s financial
performance.
Special attention should also be paid to
management remuneration packages – investors
are very keen to see compensation structures tied
into the company’s performance, such as, for
instance, an option scheme, as this ensures that
management’s interests are aligned with those of
the shareholders.
Preliminary steps Once a company has formally decided to IPO, it
will need to appoint one or more advisers to
manage the process. The leading role is normally
given to one or several investment banks, often also
referred to as Global Co-ordinator(s) or Bookrunner(s).
These investment banks take the pivotal role in the
structuring and distribution of the transaction, and
ensuring smooth and effective execution.
Syndicate structureIn order to generate demand, the investment
bank, which is normally appointed at the very
start of the process and is also acting as adviser
to the company through all the steps of an IPO,
usually invites a number of international, regional
and local banks to form a syndicate.
This structure will vary depending on several
factors, including:
• size and type of the issue
• geographical targeting of the offering
• company’s preference as to the participation of
certain banks.
The size of the issue is the main reason for a
multiple bookrunner syndicate. The ‘rule of thumb’
is that the larger the offering, the more banks
should be invited. Precedent shows that for
offerings of over US$200m, Russian corporates
usually involved at least two bookrunners.
This syndicate team mobilises the resources
needed to generate the necessary momentum and
demand to ensure a successful placement. The
selection of banks is generally based on a number
of key criteria, including but not limited to the
following:
• track record in relevant offerings
• sector and regional experience
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• proposed team and experience
• research capability
• distribution capabilities, and
• relationship with the company.
The experience and commitment of the
syndicate’s members are critical, since this gives
confidence to both the company and institutional
investors.
Other advisersApart from the banks, the issuer should also
appoint certain other advisors, who will help the
company successfully go through all the stages up
to the closing of the transaction. These include:
• Legal advisers normally include issuer’s
counsel and counsel to the underwriter(s), as
well as any other legal advisors for certain
jurisdictions
• Auditors are responsible for the audit of the
produced financial statements of the company
• Technical auditors are responsible for the
production of an independent technical report
(CPR – Competent Party Report), which is
sometimes required to be filed together with the
Offering Circular of the companies operating in
particular sectors and having a substantial asset
base which is important for their business (eg
mining or real estate companies)
• Public relations agency is responsible for all
communications with the press
• Financial pr int ing company is in charge of
printing and distributing the prospectus.
Pre-IPO financingMany companies may find themselves in a
position where they would like to complete some
financing at a time when they are preparing for –
but not yet ready to complete – an IPO. In this
case, the so-called pre-IPO financing can be
arranged, which can be in a variety of forms from
straight debt, pre-IPO convertible bonds to
straight equity.
Straight debt financing, which is commonly
arranged by the investment bank(s) mandated for
the IPO, provides the company with bridge
financing until the IPO has taken place. The
conditions of this agreement are also very often
subject to the completion of the IPO.
A pre-IPO convertible bond issue is an innovative
type of pre-IPO financing. The company issues
bonds, normally with a much lower coupon than
straight debt for a private company, which are
convertible into shares at an agreed conversion
rate upon the completion of the future IPO. The
main benefits of this type of financing include:
Direct benefits
• the coupon is lower on the pre-IPO bond than
on a traditional bank bridge loan because of the
attractiveness of exposure to an upcoming IPO,
either in the form of a convertible or IPO shares
• there are typically none of the performance-
based covenants usually associated with bank
finance
• it delays and/or reduces the dilution associated
with a capital increase
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• in many cases, original shareholders can often
enjoy the upside in equity valuation until the
IPO takes place.
Indirect benefits
• introduces new investors who are potentially
‘future shareholders’ in the company
• builds momentum towards an IPO, but removes
near-term pressure to complete an IPO within a
narrow timetable
• sets a clear time-frame for the IPO.
The structuring process for this instrument is not
as straightforward as for straight debt and the
company should involve specialist advisers (ie an
investment bank) who will be experienced in
executing this type of transaction.
Offering processThe investment bank must be committed to
executing the transaction – often within a
challenging time-frame – without compromising
any of its duties. All parts of the offering process,
from the inception of the transaction through to
its execution, must be meticulously planned and
agreed by the company. The due diligence
process, prospectus drafting and roadshows take
up significant amounts of senior management
time and so it will be important to ensure that
there are no disruptions to the company’s ongoing
operations.
Among external factors, local and global market
conditions need to be taken into consideration to
ensure that the company accesses the public
markets during favourable and stable market
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Company restructuringIn order to maximise the valuation of the company
and hence the proceeds from the offering, it is
imperative that the structure of the company is
optimised before marketing to investors gets
underway. The structure should be transparent and
it should fully reflect the company’s true value. The
restructuring exercise may involve inclusion or
exclusion of certain company divisions prior to the
offering, registration of a holding company, change
of domicile and restructuring of the Board etc. The
global co-ordinator/bookrunner will typically advise
the company on this during the preparatory phase.
Due diligenceBefore the investment bank can introduce the
Example of typical IPO process for a Russian companyFigure 4
1
Month 1
Kick-off meeting
Due diligence and legaldocumentation
Business plan and financialprojection analysis
Equity story development
Analyst presentation andresearch preparation
Valuation presentation
Research publication andinvestor education
Publication of preliminaryprospectus
Management roadshow
Pricing
Closing and listing
2 432143214321432143
Month 5Month 4Month 3Month 2
Preparation Marketing Pricing
Week
conditions. Of utmost importance, however, is the
strategic reasoning behind the company’s decision
to go public, whether this is the financing of an
acquisition or expansion/growth. This, above all
other considerations, should be seen as the key
driver behind the timing of the whole transaction.
We have provided above (Figure 4) an example of
a typical IPO process for a Russian corporate.
However, timing can vary significantly on a case-
by-case basis. Once the company has met the
basic requirements for a listing and assuming
there are no external factors that are hampering
the process, an international listing and offering
can be executed within three to four months.
The key work-streams in the IPO process include:
2 7L i s t i n g i n L o n d o n : C I S P r a c t i c e
company to the international investor community,
it must obtain a detailed understanding of its
operations and activities. It is important to ensure
that these are presented in a transparent,
accurate and objective manner to international
investors.
The due diligence process involves business, legal
and financial due diligence and the timing of it can
vary depending on a number of factors, including the
complexity of the corporate structure and the level of
transparency in disclosure of corporate and financial
information.
The investment bank will undertake and manage the
business due diligence (eg review of strategy and
business plans, financial model and projections,
review of Board structure as well as full legal and
financial due diligence for the company) with the
assistance of the company’s auditors and the legal
advisers to both the company and the investment
bank. During this process, the investment bank will
thoroughly examine all aspects of the company in
order to provide the appropriate levels of comfort for
the lead manager(s), the international investor
community, as well as for the stock exchange where
the company’s securities will be listed and traded.
The due diligence can often raise issues that must be
resolved prior to the offering, in order to satisfy
investor, regulatory and/or investment bank
requirements. The success of the transaction
depends on full and accurate disclosure, which is the
result of a comprehensive and positive due diligence
process.
It is therefore very important to involve all the
relevant parties in the transaction from the outset
and to communicate, promptly and clearly, the tasks
that must be performed.
Drafting and publication of theprospectusA prospectus is the main disclosure and marketing
document that the company publishes in connection
with the IPO and it serves two main purposes:
• as a marketing document, which provides a full and
detailed description of the company and the
securities offered; and
• as a disclosure and risk mitigation document
covering all material disclosure issues relevant to
Key work-streams in an IPO process
Preparation Marketing Pricing• Market analysis • Due diligence• Valuation analysis • Equity story• Financial reporting • Analyst presentation• Offering strategy • Research preparation• Corporate governance • Prospectus• Incentives for management • Transaction documentsand employees • Stock exchange
• Business plan review discussions • Board structure• Timing and timetable
• Research• Investor targeting• Pre-marketing• Roadshow planning• Roadshow• One-on-ones• Group meetings
• Pricing• Bookbuilding and allocation• Closing and payment ofproceeds
• Listing
• Trading• Stabilisation• Investor relations• Research• Financing strategy andadvice
Figure 5
10-12 weeks 4 weeks Ongoing
an investor making a decision on the offering.
Legal counsel to the company will primarily be
responsible for drafting the prospectus with input
from underwriters and their counsel where
necessary. Other parties, including the company,
syndicate banks and accountants will also provide
input and comments on the relevant sections in
the prospectus.
The prospectus will normally include the following
sections:
• Summary of the offering
• Risk factors
• The offering
• Dividend policy
• Capitalisation / share capital
• Selected consolidated financial information
• Operating and financial review
• Industry
• Business description
• Regulation
• Management
• Principal and selling shareholders (if applicable)
• Description of the GDRs (if applicable)
• Taxation
• Subscription and sale
• Settlement and delivery
• Legal matters
• Independent auditors
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• Index to financial statements.
The publication of the prospectus normally happens
in two forms:
• one in preliminary form (also called a ‘Red
Herring’) with an indicative price range on the front
cover, on the basis of which investors are
encouraged to place orders with the bookrunner(s)
and
• one in final form upon pricing, outlining the final
price and the final number of shares to be
issued/sold etc.
Research Research production and publication, which is
normally handled by the syndicate banks, is the first
step in marketing the company. Any company would
like to ensure coverage by as many research
analysts as possible to ensure that the maximum
number of investors are educated about the
company’s investment case. The role of research
analysts is of paramount importance to an equity
offering. The main tasks accomplished by research
analysts would normally be as follows:
• independent assessment of the company’s
investment case
• identification and evaluation of comparable
companies
• preparation and publication of independent
research report (including forecasts)
• education of syndicate’s sales force
• co-ordination of investor education effort
• identification of key investor concerns to be
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addressed during roadshow
• follow-up calls to institutional investors.
Other documentation Apart from the prospectus, there are a number of
additional documents to be signed/issued during
the IPO process. Key documentation would
normally include:
• Underwriting agreement
The main legal agreement in an international
offering is a subscription or underwriting
agreement. It is entered into by the issuer,
selling shareholders and directors (where
appropriate), the global coordinators and all the
managers. It is normally signed after pricing and
constitutes a firm commitment by the managers
to underwrite the offering subject to certain
conditions precedent and force majeure. The
key provisions of the underwriting agreement
include representations and warranties,
principally dealing with the accuracy and
completeness of the prospectus and compliance
with certain legal matters, undertakings of the
issuer (including lock-up provisions), fees and
expenses, conditions precedent, selling
restrictions and termination events.
• Legal opinions
Typically in international equity offerings
managers receive legal opinions from
transaction counsel covering such areas as the
due incorporation of the issuer, the
enforceability of the legal documents under
their governing law, taxation, US securities law,
and depending on the type of offering, a
disclosure opinion verifying aspects of the
disclosure in the prospectus.
• Auditor’s comfort letters
Comfort letters are letters written to the
issuer and the managers and will typically aim
to achieve two goals:
(i) confirm the accurate extraction of the
financial statements in the prospectus from the
audited accounts; and
(ii) provide comfort on the financial situation of
the issuer in the period from the date of the
disclosed accounts and the offering.
There may be other documents that will need to
be signed at different stages of IPO execution;
however, they are subject to individual
arrangements and are often of a technical nature.
Investor educationOnce the research report has been published, the
investor education period begins (it normally
continues right through to pricing). During this
period, sales people from the syndicate banks will
contact investors and market the company’s
equity story to them. Investors would normally
have received research report(s) by then and will
therefore be able to make initial assessment of
their potential interest and involvement in the
deal. The involvement of the research analyst is
paramount to the success of investor education,
answering investors’ questions with regard to the
research report and providing details to them on
the company’s positioning, as well as key sector
trends. The main aim of investor education is to
get a market view on the company’s investment
case and its valuation.
RoadshowOnce the market has been informed about the
company’s investment case and investors have
had some time to review the research reports and
the prospectus, the roadshow period commences.
The roadshow involves key members of the
management team meeting a number of potential
investors in major financial centres across Europe,
US and Asia, communicating the company’s
investment case to them and addressing any
queries they may have.
Very often, the decision over whether or not to
invest in a certain business will centre on the
calibre of the management involved and so
personal contact plays an important part in this
process (by helping potential investors to feel
more comfortable about their investment, as well
as building up trust and confidence).
Pricing and allocation Pricing is one of the most complex processes in
the IPO as it ultimately defines the market
valuation of the company. Whilst there are many
pricing methodologies that can be utilised in IPOs
by Russian issuers, book-building is the most
common. Under this methodology, the pricing
process is implemented in two stages:
Stage 1: Setting the pr ice range.
Following the investor education period and
usually before the start of the roadshow, the
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company and the syndicate agree on a price
range, within which the offering will be marketed
to investors. Even though it is becoming more
common in emerging market IPOs, a price range
may not be set at the end of the investor
education process, but rather at some stage
during the roadshow itself. This is commonly
referred to as a ‘decoupled’ approach. Whether a
decoupled approach is utilised will depend on the
particular circumstances of the offering at the
time.
The width of this price range (usually around
20%) is primarily dependant on the level of
certainty about the valuation of the company, on
market volatility and on received investor
feedback. Once the price range becomes public,
normally via publication of a preliminary
prospectus, investors are allowed to place orders
with bookrunners for the issuer’s shares within
the indicated price range. The price range is
designed to provide guidance to investors as to
the indicative/intended valuation of the company.
Although the price range can be revised upwards
or downwards later in the process, depending on
the demand for the offering, it is not considered
to be best market practice.
Stage 2: Pric ing.
Based on the order book at the end of the book
building, the issuer and the syndicate decide on
the uniform price at which the shares will be
offered to institutional investors, as well as on
how many shares each of the investors will
receive. Key pricing considerations include the
following: maximising the proceeds from the
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offering, offering new shareholders an attractive
investment opportunity and achieving a good
share price performance in the aftermarket.
Pricing starts with a fundamental valuation,
based on various methodologies, including
comparison to peers (P/E, EV/EBITDA, P/NAV
etc as applicable), DCF, assets’ value etc. This
is often referred to as ‘fully-distributed value’.
However, IPOs rarely price at this valuation. In
order to account for the primary market risk (ie
that the shares do not yet trade in the liquid
environment), and to attract substantial
investor demand, a discount is applied to the
fully-distributed market value (also known as
IPO discount). This discount is normally in the
range of 5-10%.
The banks often refer to this as ‘leaving money
on the table’ for investors. According to the
IPO under-pricing theory, this should lead to a
small ‘pop’ in the first few days of trading to
keep investors happy and indicate longer-term
outperformance.
AftermarketAfter the completion of the offering, it is
necessary to ensure that the secondary market
performance of the company is positive. In
order to maintain a liquid and active secondary
market, the investment bank will commit
considerable efforts to make a market in the
newly-listed securities. Such aftermarket
support is an unconditional commitment of the
investment bank to both existing and
prospective shareholders of the company. The
support of an investment bank in the
aftermarket includes five main commitments:
1 Stabilisation – minimisation of share price
Factors affecting pricingFigure 6
Results of globalbookbuilding
Pricing relative tocomparable companies
Pricing views of investors
Global equity marketconditions
Other important factors
• Overall level of demand and over-subscription• Quality of demand or institutions in the book atvarious prices
• Pricing levels and valuation relative to comparablecompanies
• Performance of Asian, European and US marketsduring marketing stage
• Relative performance of comparable shoppingsector companies
• Company specific objectives• Quality of bookrunners and the approach totransaction
• Demand and pricing views of investors• Price views and intentions in the aftermarket -buy, hold, sell
IPO price
3 2 L i s t i n g i n L o n d o n : C I S P r a c t i c e
4 Research coverage – timely and ongoing
research coverage of the company can
consistently raise the company’s profile in the
investor community and keep investors updated
on the recent company’s developments.
5 Support of investor relations programme – an
investment bank will assist its client to set up
and maintain regular investor relations activities
to ensure that all outside existing and potential
investors in the company are well informed
about the company’s recent progress and
developments.
In addition to the aftermarket support roles
outlined, the investment bank will usually monitor
the company’s performance and continuously
offer recommendations to the company on various
matters. This ensures that a long-term
relationship is built up with a view to ongoing
support being provided to the company and its
shareholders.
volatility post-listing and, if applicable, exercise
of the over-allotment option, if granted. The
ability of a bank to do this is strictly regulated.
An over-allotment option is an option granted to
the investment bank lead-managing the offering
to over-allot usually up to 15% of the overall
number of shares in the offering to investors in
case of strong demand. By using the over-
allotment option, the investment bank can
support the share price, but only if it drops
below the offering price.
2 Trading and market making – in order to ensure
the minimum level of liquidity and constant
availability of a market bid/ask price for the
listed securities, the investment bank will
normally commit to market-making in the stock
following the completion of the offering.
3 Capital commitment – if necessary, the
investment bank should use its own capital to
encourage an active secondary aftermarket in
the stock.
Nomura – a changing landscape
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Moscow, Warsaw, Budapest and Vienna. www.nomura.com
John-Paul Warszewski
Managing Director
Investment Banking
Nomura International plc
Tel: +44 (0) 207 102 2535
Michael Boardman
Managing Director
Global Finance
Nomura International plc
Tel: +44 (0) 207 103 4660
Myles Evanson
Executive Director
Global Finance
Nomura International plc
Tel: +44 (0) 207 103 4664
Nomura is the global marketing name of Nomura Holdings, Inc. (Tokyo) and its direct and indirect subsidiaries worldwide including Nomura International (Hong Kong) Limited, licensed and regulated by the Hong Kong Securities and Futures Commission, Nomura Securities International, Inc (New York), a member of NASD, NYSE and SIPC and Nomura International plc (London), authorised and regulated by the Financial Services Authority and member of the London Stock Exchange.
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Despite market volatility, a number of companies,
whose principal operations or assets are based in
one or more of the 12 countries comprising the
Commonwealth of Independent States (CIS),
continue to consider listing their securities on the
London Stock Exchange (the Exchange). Many
have achieved such a listing.
Companies with operations in the CIS may list
their equity securities on the Exchange either (a)
by listing shares; or (b) by listing depositary
receipts (DRs).
This article focuses primarily on the listing of DRs
by a company incorporated in the CIS. However,
we note that there are also a growing number of
companies incorporated outside of the CIS whose
shares are listed on the Exchange but whose
principal operations are in the CIS. This article
does not address in any detail the listing of debt
securities.
The purpose of this article is to summarise the
role which the company’s UK legal counsel will
typically play, and the main legal issues which the
company will encounter on a listing, in
chronological order. Securities are technically
listed on the Official List of the FSA and Admitted
3 4 L i s t i n g i n L o n d o n : C I S P r a c t i c e
Role of the law firm in a Main Market listingSergei Ostrovsky, Partner, Ashurst and Jonathan Parry, Senior Associate,Ashurst
The company’s lawyers play a central role in the process of representingthe interests of the company and its directors throughout the process ofachieving a listing on the Main Market of the London Stock Exchange.
to trading on the Main Market of the London
Stock Exchange. For ease of reference, this
article will refer to “listing on the `Main Market of
the Exchange”.
Engagement by the company of its UKlegal counselTypically there will be at least two different law
firms acting on a listing. One law firm will
represent the interests of the investment
bank/underwriter. The other law firm will represent
the interests of the company and its directors.
Where the Company is looking to list DRs, the
depository bank will also be represented by
separate legal counsel.
Irrespective of whether the company is
incorporated in one of the CIS jurisdictions (such
as Russia, Kazakhstan or Ukraine), in the
European Union, or elsewhere in the world it is
important that the company understands the
importance of the choice of its UK lawyers.
The team of lawyers based in the UK that will
represent the interests of the company on a listing
is likely to have two principal qualifications:
• an established track record of acting for
companies currently listed on Main Market of
3 5L i s t i n g i n L o n d o n : C I S P r a c t i c e
the Exchange or admitted to trading on the
Exchange’s Aim Market; and
• an understanding of the legal background and
business practices in the company’s country of
operations (irrespective of the company’s place
of incorporation) and the ability to communicate
with the company’s directors and local lawyers
in the language they will find the easiest to
understand.
Engagement of other advisersAn applicant company considering a listing on the
Main Market of the Exchange should look to
appoint its team of advisers at an early stage in
the process.
A number of key advisory roles are played by
one or more investment banks. These roles
include acting as financial adviser to provide
advice in relation to the timing, structure and
process of the listing. The financial adviser may
also act as global co-ordinator if the offer of
securities is being made in more than one
jurisdiction (and particularly if the offer of
securities is being made into the United States).
The applicant will also need to appoint a listing
agent to liaise with the Financial Services
authority (FSA) during the listing process on the
applicant’s behalf.
If, as is usual, the applicant is offering new
securities as part of the listing process, the issue
of these securities will usually be underwritten by
an investment bank. In practice, the roles of
financial adviser, global co-ordinator, listing agent
and underwriter are often performed by the same
investment bank, although these roles may be
shared between investment banks depending on
the size and complexity of the transaction.
Reporting accountants should be appointed to
review the financial track record of the applicant
for the benefit of investors. As well as producing
an opinion on the applicant’s financials for
inclusion in the prospectus, the reporting
accountant will often also produce a more detailed
‘long form’ report on the financial and
management history of the applicant as part of the
financial due diligence procedure.
The applicant will be required to sign engagement
letters which will form the basis of the contract
between the applicant and the investment bank
and the reporting accountant. Investment banks
and accountants will usually have standard forms
of engagement letter and these letters should be
reviewed by the applicant’s lawyers before they
are signed. Important points include: ensuring that
the letter properly covers the scope of activities
the bank or accountants will need to perform
during the listing process; restricting the extent to
which the bank/accountants limit their liability to
the applicant; and ensuring that any indemnity
given by the applicant is reasonable and in line
with market practice. The applicant will also enter
into a separate underwriting agreement with the
investment bank(s) acting as underwriter(s).
Further information on this aspect is set out in the
section ‘Underwriting/Placing arrangements’.
Other roles to consider include depositaries (to
hold the company’s shares on behalf of, and to
issue DRs to, the ultimate investors), registrars
(to deal with applications for the securities and
maintain the share register), public relations
consultants (to generate press interest/publicity
for the applicant prior to listing) and other
specialist advisers depending on the type of
applicant seeking a listing (eg an expert consultant
where the applicant is a minerals company). Any
engagement letters with these advisers should
also be reviewed by the applicant’s lawyers prior
to their execution.
Depositary ReceiptsThe eligibility requirements which must be satisfied
by the applicant in order to list DRs are less
onerous than those which apply on a listing of
shares and the continuing obligations regime
applicable to such applicant is also less stringent.
As a result, companies incorporated in the CIS
jurisdictions have historically usually applied to list
DRs rather than shares. DRs are created by
transferring the relevant shares in the company to a
depositary (usually a bank) who acts as custodian
of the shares. The depositary then issues DRs to
investors which represent the underlying shares
held by the depositary. A DR certificate resembles
a share certificate and is traded in much the same
manner. For the purposes of the FSA’s Listing
Rules (the Listing Rules), the company that issues
the underlying shares is considered to be the issuer
rather than the depositary.
There are additional reasons why companies may
choose to list DRs rather than the shares
3 6 L i s t i n g i n L o n d o n : C I S P r a c t i c e
themselves. These include the fact that shares
issued by companies incorporated in the CIS
jurisdictions cannot settle through CREST (the
electronic settlement system for the United
Kingdom).
It would be poss ble for shares of a company
incorporated in the UK to settle its shares through
CREST, even if the company’s operations and
assets are in the CIS. Prior to listing the UK
company may acquire and hold assets in the CIS
either directly or through intermediary companies.
Upon listing, shares of the UK holding company
would be admitted to trading on the Exchange and
could be settled electronically through CREST.
As mentioned previously, this article will assume
that the applicant is seeking to list DRs rather
than shares on the Main Market of the Exchange.
Applicable regulation/legislationAs detailed below, the Listing Rules set out the
eligibility requirements a company must satisfy if it
wishes to list securities on the Main Market of the
Exchange. The Listing Rules, together with the
FSA’s Disclosure and Transparency Rules, also set
out the continuing obligations that a company must
comply with on an ongoing basis once it is listed.
The FSA’s Prospectus Rules (the Prospectus
Rules) set out the information that must be
included in a prospectus and the circumstances
in which the publication of a prospectus is
required. For the avoidance of doubt, a
prospectus will always be required when a
company applies to have securities listed on the
Main Market of the Exchange for the first time.
3 7L i s t i n g i n L o n d o n : C I S P r a c t i c e
Eligibility for listingA company incorporated in a CIS jurisdiction
seeking a listing of its DRs on the Exchange will
need to satisfy the FSA that it complies with the
various eligibility requirements set out in the
Listing Rules. This is achieved by submitting an
eligibility letter (usually drafted by the financial
adviser in conjunction with the applicant’s lawyers)
establishing the applicant’s compliance.
The main eligibility requirements applicable to a
company on a listing of DRs are as follows:
• the company must be duly incorporated under
the laws of the country of its incorporation and
must be operating in conformity with its
constitution
• the underlying shares which the DRs represent
must also conform with local law, be duly
authorised under the company’s constitution
and have the necessary statutory consents
• the underlying shares must also be freely
transferable, fully paid up and free from any
restrictions on the right of transfer
• at least 25% of the DRs must be held by the
public (directors, persons connected with
directors and any person or persons acting in
concert who have an interest in more than 5%
of the DRs are not considered members of the
public for the purpose of this threshold)
• the DRs must conform with the laws of the
depositary’s place of incorporation, be duly
authorised under the depositary’s constitution
and have the necessary statutory consents
• the DRs must be freely transferable, fully paid
up and free from any restrictions on the right of
transfer; and
• the aggregate market value of the DRs must
be at least £700,000 and the whole class must
be listed.
Responsibility/liability on the publicationof a prospectusOnce the FSA has agreed that the applicant is
eligible for listing, the next stage in the process
involves the preparation of a prospectus. The
prospectus is the document pursuant to which the
DRs will be listed and it is also the principal
document used to market the DRs to investors.
Under the provisions of the Financial Services and
Markets Act 2000 (FSMA) and the Prospectus
Rules, a company that publishes a prospectus in
relation to DRs is deemed responsible for its
contents. Consequently, if a prospectus is published
which contains any untrue or misleading statements
(or omits any required information) and an investor
acquires securities to which the prospectus relates
and subsequently suffers loss, the company may be
required to compensate that investor. In addition, the
prospectus will form the basis of a contract between
the company and investors who acquire securities. If
it is inaccurate or misleading, those investors may be
able to rescind the contract (that is, the company
would be obliged to return the money paid by the
investors) and/or sue the company for damages. In
a prospectus relating to shares rather than DRs, the
directors of the company will also be deemed
responsible for its contents.
The prospectus must contain a statement
acknowledging that the applicant accepts
responsibility for all of the information in the
document and that, to the best of its knowledge
and belief (having taken all reasonable care to
ensure that such is the case), the information
contained in the prospectus is in accordance with
the facts and does not omit anything likely to
affect the import of such information. The
responsibility statement in a prospectus relating
to DRs differs from the corresponding statement
in a prospectus relating to shares which must be
made by the directors as well as the applicant
itself.
It is a criminal offence under the provisions of
FSMA for a director to make a statement,
promise or forecast which he knows to be
misleading, false or deceptive or to conceal
dishonestly any material facts or recklessly make
a statement, promise or forecast which is
misleading false or deceptive, where this is done
for the purpose of inducing another person to
enter into a ‘relevant agreement’ (which would
include an agreement to buy securities in the
applicant). It is also a criminal offence to act or
engage in conduct which creates a false or
misleading impression as to the market in, or
price or value of, any relevant investment, if the
act or conduct is carried out for the purpose or
creating that impression and thereby inducing
another person to acquire, dispose of, subscribe
or underwrite those investments, or refrain from
doing so.
3 8 L i s t i n g i n L o n d o n : C I S P r a c t i c e
Prospectus disclosure requirementsDetails of the information that must be
specifically disclosed in a prospectus are set out
in the Prospectus Rules and the material
information requirements can be summarised as
follows:
• disclosure of the risk factors specific to the
applicant, the industry in which the applicant
operates and the DRs
• details of the applicant’s history and the
structure of its share capital
• an overview of the applicant’s business
• details of the corporate structure of the
applicant’s group
• details of the depositary (name, registered
office, date of incorporation etc)
• an operating and financial review of the
applicant
• details of the applicant’s capital resources
• information on significant trends and prospects
in relation to the applicant
• information on the directors and senior
managers of the applicant
• details on board practices
• a statement as to whether or not the company
complies with the corporate governance regime
applicable to it in its country of incorporation
• details of the applicant’s employees
• details of major shareholders and related party
transactions
3 9L i s t i n g i n L o n d o n : C I S P r a c t i c e
• details of directors’ ownership of
shares/options
• financial statements and explanatory notes
covering at least the three years prior to the
publication of the prospectus, produced in
accordance with International Financial
Reporting Standards (IFRS)
• details of the applicant’s dividend policy
• details of material legal and arbitration
procedures involving the applicant
• a statement as to whether or not there has
been any significant change in the applicant’s
trading or financial position since the date of
the most recent financial statements
• summaries of the applicant’s material contracts
• a summary of the applicant’s constitutional
documents
• information on the applicant’s capital structure
• information on the DRs and the terms and
conditions of the offer
• the intended use of the proceeds of the offer;
and
• the expenses of the offer.
Where a company’s principal activity is, or is
planned to be, the extraction of mineral
resources, the prospectus must also contain a
report on such company’s operations, reserves
and resources from a suitably qualified and
experienced independent expert. The form of
such report will need to be agreed in advance
with the FSA.
The drafting of the prospectus is a collaborative
effort between the applicant, the investment
bank (and its lawyers), the applicant’s lawyers
and the accountants. The drafting process must
also take into account any comments raised by
the FSA during its review of the prospectus.
While the directors of the applicant may not
necessarily be present at each drafting meeting,
they will need to review regularly drafts of the
prospectus to ensure it is complete and accurate
as they are ultimately responsible for its content.
The due diligence and verification procedures
described below are fundamental to ensuring that
full disclosure is made in the prospectus and that
such disclosure is true and accurate.
Due diligenceIn parallel to the business and financial due
diligence procedures, the applicant’s lawyers will
undertake a comprehensive investigation into the
applicant’s operations, financial position and
major risks associated with its business. The due
diligence investigation will include a review of the
applicant’s board minutes, agreements, financing
arrangements and other significant documents,
as well as attending management presentations
and/or due diligence meetings with the
applicant’s senior management.
As well as ensuring that both the applicant and
its advisers are satisfied that the applicant is
suitable for listing, the information collated by the
applicant’s lawyers during the due diligence
investigation will enable the advisers to produce
a high-quality prospectus from a marketing
perspective and one that satisfies the disclosure
requirements of the Prospectus Rules.
The due diligence procedure is key to ensuring
that the prospectus is complete, accurate, not
misleading and does not omit any material
information. The investigation therefore plays an
important role in protecting the applicant’s
directors as persons responsible for the
prospectus. A comprehensive due diligence
procedure can also help to establish a defence of
reasonable care/investigation to allegations of
liability resulting from incomplete or inaccurate
disclosure.
VerificationVerification is the process by which the
information contained in the prospectus and
4 0 L i s t i n g i n L o n d o n : C I S P r a c t i c e
other related documents is checked to ensure it
is true, accurate and not misleading. The
verification process will include the preparation of
verification notes. These take the form of a
series of questions, answers and details of
supporting information which identify and record
the source of and evidence for a large number of
statements, whether of fact or opinion, contained
in the prospectus. Verification answers are given
by reference to authoritative sources such as
documents or extracts either from the applicant’s
own records or, where appropriate, from outside
sources.
It is recognised that it is not always practicable,
nor a sensible use of directors’ time, for each
director to verify personally every detail in the
To order additional copies of Listing in London: CIS Practice
Please contact:
Maria Aleksandrova,Business Development Executive - Russia & CIS [email protected]
4 1L i s t i n g i n L o n d o n : C I S P r a c t i c e
prospectus. The practice of verification notes is
to permit a director, where appropriate, to
delegate the answering of specific factual
questions to others, or to rely on the detailed
work of others to check particular statements. In
so doing, the director must focus on the
suitability of the relevant person for the specific
checking tasks and must be satisfied that such
delegation is reasonable under the
circumstances.
Together, the due diligence and verification
procedures work to minimise the risk of potential
criminal or civil liability arising in respect of the
publication of the prospectus. Where the
prospectus is concerned, the due diligence
procedure is the means by which the applicant
and advisers ensure that nothing material is
omitted from the document. Verification then
ensures that the information that is included in
the prospectus is true and accurate.
Much of the information/documentation
produced as part of the due diligence procedure
will be used as evidence to support the answers
to the verification questions. In addition,
statements in the prospectus will often be
amended or removed where the due diligence
procedure indicates that they are inaccurate or
untrue.
Underwriting/Placing arrangementsA company seeking to list on the Main Market of
the Exchange may not be certain of the level of
demand within the market for the securities it will
issue pursuant to the listing. In order to be certain
that it will raise the required proceeds of the
listing, companies will often arrange for the issue
of the securities to be underwritten. In return for
an agreed commission (which is usually based on
a percentage of the proceeds raised) an
investment bank (which may or may not be the
financial adviser) will agree to subscribe for, or
purchase, any of the securities not taken up by
investors.
Rather than fully underwriting the issue of
securities, the investment bank may agree to use
‘best reasonable endeavours’ to place the
securities with investors. Where this is the case,
the bank would not be legally obliged to subscribe
for or purchase those securities which it was not
able to place with investors.
The underwriting or placing agreement is almost
always drafted by the underwriter’s lawyers. A key
role played by the applicant’s lawyers will be
commenting on and negotiating this agreement on
behalf of the applicant. The applicant and its
directors typically give a number of
representations and warranties to the underwriter,
and the applicant’s lawyers will need to ensure
that these are reasonable and appropriate given
the particular circumstances of the transaction.
The agreement will usually contain an indemnity,
pursuant to which the applicant will agree to
indemnify the underwriter and its associates for
losses flowing out of the performance of the
underwriter’s obligations under the agreement. As
with the representations and warranties, the
applicant’s lawyer will need to ensure that the
indemnity is reasonable and that it contains
appropriate carve outs (for example, where the
loss suffered by the underwriter is the result of its
own fraud or negligence).
The underwriting agreement may also contain
overallotment and stabilisation provisions which
facilitate the increase in the size of the offer
depending on demand and allow stabilisation of
the price of the DRs by the underwriter following
admission. The applicant’s lawyers would review
these provisions to ensure that they comply with
all applicable laws and regulations.
Conclusion
This article outlines the main legal issues that will
typically arise when a company seeks to list equity
securities by way of DRs on the Main Market of
the Exchange. The role of the company’s UK legal
4 2 L i s t i n g i n L o n d o n : C I S P r a c t i c e
counsel in this process is integral to (a) satisfying
the FSA that the applicant company is suitable for
such a listing; and (b) ensuring that the
risks/liabilities associated with listing process and
the publication of a prospectus are appropriately
allocated between the parties. A key function of
UK legal counsel is to explain these issues in
detail in the language which directors and
managers of the company find easy to
understand.
The London Stock Exchange (the Exchange) has
responsibility both for maintaining and supervising
the conduct of the market and for admitting
companies and their securities to trading on its
markets. In addition, it is responsible for
overseeing companies admitted to AIM which is
considered separately at the end of this article. In
its role as the UK Listing Authority (UKLA), the
Financial Services Authority has a legal obligation
to oversee the listing process, and to ensure that
its rules are complied with.
The rules governing the admission of securities to
regulated markets and also the continuing
obligations of companies trading on regulated
markets are made and enforced by the UKLA and
are set out in the Prospectus Rules, the Listing
Rules and the Transparency and Disclosure Rules
(the Rules).
A company seeking a listing on the Exchange
prepares a prospectus document which presents
a wide range of information about management
and the business to enable potential investors to
make an informed investment decision. The
company’s directors have the onerous
responsibility of presenting this information in a full
and fair manner and in accordance with the facts.
4 4 L i s t i n g i n L o n d o n : C I S P r a c t i c e
Role of the accountant in a London listing Clifford Tompsett, Partner, PricewaterhouseCoopers LLP
The accountant’s role in assisting Russian/CIS companies to achieve aLondon listing is broad. It consists of reporting, due diligence, providingprivate reports and comfort letters – in addition to the general task ofpreparing to be a public company.
The company’s financial adviser, accountants and
lawyers (and other experts) assist them in meeting
their responsibilities.
The Rules also require a company seeking a
primary listing of equity securities to appoint a
sponsor to make an assessment of the company’s
suitability for listing and of the quality of the
prospectus. The directors and their advisers carry
out procedures to satisfy the directors and
sponsor that any information for which the
directors and sponsor have a responsibility meets
the required standard, a process known as ‘due
diligence’.
Changes in European capital marketlegislation Companies raising capital and/or listing their
securities on an EU-regulated market are subject
to EU regulations and directives aimed at
facilitating access to capital on a pan-European
basis. In conjunction with the adoption of IFRS as
the standard financial reporting framework, the
Prospectus and Transparency Directives set out
the principal rules for issuers.
The Prospectus Directive sets out the basis for
providing a pan-European regime for offering
4 5L i s t i n g i n L o n d o n : C I S P r a c t i c e
securities to the public, or admitting securities to
trading on an EU-regulated exchange. It provides a
framework for a consistent approach to when a
prospectus is required and sets a common
standard for disclosure. Non-EU issuers were
permitted to continue to provide financial
information prior to 2009 using a GAAP other than
IFRS, provided that the GAAP was deemed to be
equivalent to IFRS and certain conditions are met.
The Transparency Directive focuses on the
availability of information to investors: the
frequency with which companies report, and the
information they provide on matters such as major
shareholdings. This directive has the effect of
introducing new requirements concerning the
annual report into securities law. These
requirements are summarised in Table 1 above.
Member states are permitted to exempt non-EU
issuers from any of the requirements, where the
requirements in their domestic market are
equivalent to the provisions of the directive.
Russian/CIS companies: the route toLondon Requirements for a company seeking a listing in
London vary depending on the market and the
type of security to be listed, impacting the extent
and nature of financial information disclosures and
the scope of the due diligence process. The
routes most commonly adopted by Russian/CIS
companies are discussed below:
Primary listing of equityA primary listing of equity is the most onerous of
the alternatives. In order to obtain a primary
listing, an issuer must meet the eligibility
Annual financialstatements
Half-year report* Intermediate quarters*
Level of in formation Full IFRS financialstatements
Interim financial informationin accordance with IAS 34
Narrative managementstatements – materialevents, general descriptionof financial position
A ud i t or rev iew AuditNot required but disclosedif either audit or reviewcarried out
Not required
F i l ing dead l i ne 4 months 2 months
Between 10 weeks afterthe beginning, and 6 weeksbefore the end of each 6-month period
Table 1
*Interim information is not required for companies with listed GDRs
requirements and continuing obligations set out in
the Listing Rules. The main eligibility requirements
are set out below:
• appointment of a sponsor
• production of a prospectus
• a financial track record covering three years with
unqualified audit opinions (the information must
not be more than six months old)
• at least 75% of the company’s business must be
supported by a revenue-earning track record for
the three-year period
4 6 L i s t i n g i n L o n d o n : C I S P r a c t i c e
• control over the majority of the company’s
assets for the three-year period
• sufficient working capital for at least 12 months
from the date of the prospectus
• compliance with the Listing Principles, and in
particular, the establishment and maintenance of
adequate financial reporting procedures, and
• at least 25% of shares must be in public hands.
The level of due diligence requested by the
sponsor is normally of a high standard and can be
related to specialist areas, for example,
Sponsor Required for certain transactions
Inside information Must be disclosed to the market as soon as possible
Significant transactionsTransactions which are material in size (classified as a reverse takeover or a class 1
transaction) require prior shareholder approval and the preparation of a circular
Related-party transactions Require prior shareholder approval and preparation of a circular
Preliminary statement of
annual results Must be approved and published within 120 days of the year end
Annual accounts Must be approved and published within 4 months of the year end
Half-yearly reports Must be approved and published within 2 months of the year end
Quarterly trading statementsBetween 10 weeks after the beginning, and 6 weeks before the end of each 6-month
period
The Model Code Dealing restrictions on certain persons in possession of inside information
The Combined Code on
Corporate Governance
Non-UK companies must disclose whether or not the company complies with the corporate
governance regime of its country of incorporation, and the ways in which its actual
practices differ from those set out in the Combined Code
Table 2
4 7L i s t i n g i n L o n d o n : C I S P r a c t i c e
environmental risk analysis. The main continuing
obligations are set out in Table 2 opposite.
Although overseas companies listed in London are
not required to comply with the detailed corporate
governance requirements in the Combined Code,
a company seeking a listing in London will find that
investors will expect it to have established
effective corporate governance procedures. In
addition, non-UK companies must disclose
whether a company complies with the corporate
governance regime of its country of incorporation,
and the ways in which its actual practices differ
from those set out in the Combined Code.
Secondary listing of equityA Russian/CIS company with a listing in its
country of incorporation may seek a further listing
of its shares in London. In such circumstances,
the more onerous eligibility and continuing
obligations of a primary listing do not apply. The
company needs only to prepare a prospectus for
approval by the UKLA. The main continuing
obligations are set out in Table 3 below.
In certain circumstances, the UKLA has the
authority to allow a company to obtain a
secondary listing without having its securities
listed on its domestic exchange.
The Professional Securities Market(PSM)On 1 July 2005, the London Stock Exchange
introduced the PSM for the listing of debt,
depositary receipts and convertible securities.
The PSM provides a flexible alternative to the
requirements regarding denomination and
financial information which apply to EU-regulated
markets.
Global Depositary Receipts (GDRs)The most common international stock exchange
for Russian/CIS companies to list on is the
London Stock Exchange. Russian/CIS
companies seeking an equity listing on the
Exchange typically do so by way of a listing of
GDRs.
Inside information Must be disclosed to the market as soon as possible
Corporate governanceDisclosure of whether or not the company complies with the domestic corporate
governance regime. Non-compliance requires a statement to that effect and an explanation
Annual report and accounts Must be approved and published within 4 months of the year end
Half-yearly reports Must be approved and published within 2 months of the year end
Table 3
The following companies with operations in
Russia/CIS have listed DRs on the Exchange:
• Acron
• AFI Development
• Amtel-Vredestein
• JSC Alliance Bank
• AO Tatneft
• Bank of Georgia
• Chagala
• Chelyabinsk Zinc
• Cherkizovo Group
• Comstar-United Telesystems
• Efes Breweries International
• Eurasia Drilling Company
• Evraz
• Gazprom
• Globaltrans
• Halyk Bank
• Integra
• Kazakhgold Group
• Kazakhstan Kagazy
• Kazkommertsbank
• Kazmunaigas
• LSR
• Lukoil OAO
• Magnit
• MHP
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• MMK
• Novatek
• Novolipetsk Steel
• Novorossiysk Commercial Sea Port
• OGK-2
• OMZ
• PIK
• Polymetal
• Polyus Gold
• Pharmstandard
• Rosneft
• RusHydro
• Severstal
• Shalkiya Zinc
• Sistema
• Sistema-Hals
• Sitronics
• TMK
• Trader Media East
• Uralkali
• VTB
• X-Five Retail; and
• Zhaikmunai.
It seems likely that the GDR route will continue to
be the most popular route for Russian companies.
All issuers applying for a listing of GDRs must
4 9L i s t i n g i n L o n d o n : C I S P r a c t i c e
publish a prospectus, unless the application is for
a further issue of GDRs of the same class as are
already listed and there is no increase in the
nominal value of the company’s share capital as a
result. The key information required for a GDR
prospectus, similar to a primary listing, is as
follows:
• details of the persons responsible for the
prospectus, including a declaration by the issuer
(or its directors) that it takes responsibility for
the document, and details of the auditors and
other advisers
• a statement that the issuer’s annual accounts have
been audited for the last three financial years. If
audit reports on any of those accounts have been
qualified, the qualification must be reproduced in
full and the reasons for the qualification given
• information about the business, its financial
position and results of operations, description of
the group’s principal activities, including a
breakdown of revenues during the last three
years by categories of activities and geographical
markets, analysis of costs and profitability,
information about land or buildings owned or
leased, summary information on the extent to
which the group is dependent on patents or
licenses, information concerning policy on
research and development, details of any legal or
arbitration proceedings which may have or have
had in the recent past a significant effect on the
group’s financial position, information concerning
investments, including new plant, factories and
research and development
• the financial information should be derived from
audited financial statements which have been
prepared in accordance with IFRS or equivalent
accounting standards. Similarly, the accounts
need to have been audited in accordance with
International Standards on Auditing, or
equivalent standards
• a description of any significant change in the
financial or trading position of the group that has
occurred since the end of the last financial
period for which financial information has been
published, or an appropriate negative statement
• pro forma information can be provided voluntarily
– if so, then a statement must accompany it that
gives the purpose for which the information has
been prepared, and declares that it has been
prepared for illustrative purposes only and that,
because of its nature, it may not give a true
picture of the issuer’s financial position or results
• in the unusual circumstances that a profit
forecast is included in the prospectus, the
principal assumptions upon which the issuer has
based its forecast must be stated. This is not
required to be reported on by the reporting
accountant
• full details relating to the securities for which the
application is being made, including the rights
relating to them as regards voting and dividends
• full details of the issuer, including the amount of
its authorised and issued capital and the amount
of any capital agreed to be issued, a summary of
the events or transactions during the preceding
three years which have changed the amount of
the issued share capital, the name of persons
who exercise or could exercise control over the
issuer and the name of any person interested in
three per cent or more of the issuer’s capital
• details of the principal contents of each contract
directly concerning the issue and of any other
material contract entered into by any member of
the issuer’s group within the two years
immediately preceding the publication of the
prospectus
• details of certain documents made available
for inspection. These include the issuer’s
memorandum and articles of association, any
material contracts, directors’ service
contracts and the audited accounts of the
issuer. Where these are not in English,
translations into English must also be available
for inspection
• certain details of management and controlling
shareholder(s)
• information on the depositary bank – including
full name, country of incorporation and
legislation under which it operates, amount of
its issued capital and an indication of the
principal holders of the capital, a summary of
the annual accounts relating to the last
completed financial year and a description of
any significant change which has occurred
since the end of the last financial year; and
• information on the certificates – including
voting, dividend and liquidation rights.
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Continuing obligations of an issuer ofGDRsThe key obligations are that the issuer must:
• notify the Company Announcements Office of
new developments, changes in capital structure
and significant share holdings and decisions to
pay dividends on the shares represented by the
GDRs
• ensure equality of treatment for all holders of
shares, including making equivalent information
available to the holders of the UK-listed GDRs
and to the holders of any securities listed
• issue an annual report and IFRS (or equivalent
accounting standards) audited accounts that
are published within four months of the period
end
• disclose whether or not the issuer complies
with the corporate governance regime of its
country of incorporation, or provide explanation
for any non-compliance.
EurobondsFor eurobonds, the requirements are less
stringent compared to those for GDRs. The key
differences include:
• audited accounts must cover the last two years
(compared to three for GDRs), the latest
information being not more than 18 months old;
and
• no requirements to disclose certain information
on the group activities (eg segmental analysis,
research and development activities, material
contracts) in the prospectus.
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The role of the reporting accountantThe scope of the accountant’s role in assisting
Russian/CIS companies to achieve a London
listing is generally broad, consisting of: reporting
on the financial information presented in the
prospectus; undertaking business and financial
due diligence; and providing certain private reports
and ‘comfort letters’. In addition, it can involve
assisting the company in the general task of
preparing itself to be a public company.
Public company readinessThe Exchange, and investors generally, are
becoming increasingly focused on the importance
of best practice corporate governance and the
ability of companies to come to the market as a
running public company. Accountants (sometimes
independent from the auditors) are often engaged
to assist the company in the following areas:
• diagnostic reviews of the issuer’s IPO readiness
• corporate structure
• legal housekeeping
• corporate governance, and financial and non-
financial reporting systems; and
• advice on the preparation of financial
information.
Historical financial informationThe Prospectus Rules allow issuers to:
• include their audited financial statements (as
originally provided to shareholders) in the
prospectus
• prepare special purpose financial information for
the purposes of the prospectus (dated the date
of the prospectus)
• incorporate financial information by reference.
The last option is available only in situations where
the financial information has been previously filed
with the UKLA. In situations where the issuer has
a complex financial history, special purpose
financial information is often the only method
available to present the information in a
comparable and useful form for investors.
In addition, the reporting accountant may be asked
to provide public and/or private reports and
‘comfort letters’ in relation to the following:
• pro forma financial information
• profit forecasts; and
• extraction and significant change comfort.
Business and financial due diligenceThe extent and scope of due diligence carried
out by the reporting accountant varies depending
upon the needs of those to whom the accountant
is reporting and the listing route adopted. There
are usually two key areas of focus.
First, the provision of high level extraction and
significant change comfort to support financial
disclosures made in the prospectus. The
reporting accountant checks the extraction of
financial data from appropriate sources and also
considers and reports on changes in the financial
position and trading performance of the company
in the period subsequent to that covered by the
historical financial information. These matters are
normally dealt with in a ‘comfort letter’.
Secondly, a more detailed business and financial
due diligence exercise is usually performed. This is
to assist the sponsor’s assessment of the issuer’s
suitability to be a public company, and to provide
support for disclosures of the issuer’s business,
risk factors and other matters in the prospectus.
These due diligence reports address the following
areas:
• business and financial due diligence – the nature
and scope of the business and trends in its
performance and finances, management and
employees, and taxation (usually called a ‘long
form report’)
• financial (and non-financial) reporting procedures
– a detailed commentary on the company’s
systems and controls; and
• working capital analysis – detailed consideration
of forecasts of working capital requirements by
the company.
These reports are generally commissioned for a
London primary listing. In other listings, the scope
of due diligence may be reduced.
The sponsor may also request other private
comfort letters from the reporting accountants to
assist in meeting their responsibilities under the
Listing Rules.
Common issues arising for Russian/CIScompaniesAs the most common route for Russian/CIS
companies seeking a London listing is a GDR
listing, the following comments address mainly
issues associated with GDRs:
Historical financial informationThe reporting accountant can advise companies
5 2 L i s t i n g i n L o n d o n : C I S P r a c t i c e
on the best way to present the historical financial
information.
For a GDR listing, the current market practice (on
the basis that the company is not a carve-out and
audited accounts exist) is that historical financial
information is presented in accordance with IFRS
or US GAAP and audited in accordance with
International Standards on Auditing or US
generally accepted auditing standards.
It is common for Russian/CIS companies to have
complex financial histories, involving major group
restructurings, carve-outs, and significant
acquisitions as part of their growth story. This may
involve a substantial amount of work restating, or
supplementing, the financial track record to reflect
the business of the issuer, perhaps including
separate audited historical financial information on
acquired companies. In this case, the reporting
accountant will give an audit opinion on this
special purpose financial information, prepared for
the purposes of the prospectus.
Quality of financial reporting proceduresand controlsInvestors expect a company seeking a public
listing in London to have established and effective
financial reporting procedures. The ability to
produce quality financial information on a timely
basis has been one of the key issues for
Russian/CIS companies. The timing of listing is
usually tied to the availability of financial
information. A company listed in London will need
to comply with the continuing reporting
requirements of the Transparency Directive.
5 3L i s t i n g i n L o n d o n : C I S P r a c t i c e
Furthermore, the investing public will expect
regular communications with analysts to discuss
business developments, including providing timely
and reliable financial information.
US capital market access (privateplacements under Rule 144A)Most Russian/CIS companies listed in London
have also offered their securities to US qualified
institutional buyers in reliance on Rule 144A of the
US 1933 Securities Act. Although registration with
the SEC is not required, market practice for US
offerings, as well as the expectations of US
investors, impose additional prospectus disclosure
requirements and due diligence procedures.
Operational independenceSome Russian/CIS companies may have a
shareholder that would be considered to be a
‘controlling shareholder’ by the UKLA (a 30%-plus
shareholder is considered a controlling
shareholder). When a controlling shareholder
exists, contractual arrangements must be put in
place between the company and the shareholder,
ensuring that the shareholder is bound not to
interfere in the operation of the company, which
must be left to the directors and management.
Related-party transactionsIt is market practice to provide extensive
disclosure in the prospectus of related-party
transactions, even if those transactions were not
considered related party under Russian/CIS law.
For example, Russian/CIS companies may have
transactions with the conglomerate which they are
part of, or were demerged from, or with other
companies with which they are under common
control. Such relationships may not be
documented formally. Once related parties have
been identified, the time and effort required to
identify and quantify disclosable transactions can
be considerable, particularly in respect of
comparative information and the need to consider
whether the transactions are on normal
commercial terms.
Unfamiliarity with the London marketThere are onerous responsibilities laid upon the
directors of a company listing on the Exchange,
even via a GDR issue. Typically, the directors of
Russian companies will have little familiarity with
those responsibilities and the listing process. The
length and complexity of the process and the
nature of some of the information disclosure
requirements can be surprising to those unfamiliar
with the London market. There is a clear need for
companies to have experienced advisers to guide
them through this process.
Continuing obligationsAfter successfully listing securities in London, a
company has various continuing obligations. A
company with listed GDRs is required to publish
audited financial statements within four months from
year end. In addition, any insider or ‘price-sensitive’
information announced to the company’s domestic
stock exchange must be announced on the
Exchange, in English, at the same time. In addition,
listed companies need to be able to continuously
communicate timely and reliable information
(particularly financial information) to the investing
public, to help maintain a liquid market for the GDRs.
Commitment by allThe volume of work and commitment of
management time cannot be underestimated and
are essential for a successful listing. The
company’s finance team will have additional
5 4 L i s t i n g i n L o n d o n : C I S P r a c t i c e
pressures at the same time as maintaining their
existing workload. The most successful listings, in
our experience, are well-planned, have adequate
resources allocated and are those on which senior
management provides clear leadership and
ownership of the project. Accountants and other
advisers should work together as a team to bring
their experience and skills to bear in assisting a
Eurobonds Secondary listing and GDRs Primary listing
Financial information presentation
lMinimum period
lAge
lAccounting standards
lAuditing standards
lForm of opinion
2 years
18 months (with audited interims);15 months (with unaudited interims)
IFRS or equivalent standards
International Standards of Auditing
Accountants’ report prepared forthe prospectus or attach historicalaccounts with audit opinion(s)
3 years (or since incorporation)
18 months (with audited interims); 15 months (with unaudited interims)
IFRS or equivalent standards
International Standards of Auditing
Accountants’ report prepared forthe prospectus or attach historical accounts with audit opinion(s)
3 years
6 months
IFRS or equivalentstandards
International Standards of Auditing
Accountants’ reportprepared for theprospectus or attachhistorical accounts withaudit opinion(s)
Pro-forma information Not required. If presented, notpublicly reported on by theaccountant
Required when there has been asignificant change in the businessprior to listing. Must be reported onpublicly by the accountant whereincluded. Not required fordepositary receipts
If required, accountants’report included inprospectus
Profit forecastinformation
Not required. If presented, notpublicly reported on by theaccountant
Not required. If presented, must bereported on publicly by theaccountant
Not required. Ifpresented, accountants’report included inprospectus
Working capitalstatement
Statement by issuer Statement by issuer required for asecondary listing. Not required forGDRs
Statement by issuer;sponsor declaration letterrequired by UKLA
Financial reportingprocedures
Not required Not required Sponsor declaration letterrequired by UKLA
Business & financialdue diligence (long-form report)
Not required Not required Market practice
Summary of key disclosure differences
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AIM Primary listing
Financial information presentation
lMinimum period
lAge
lAccounting standards
lAuditing standards
lForm of opinion
3 years (or since incorporation)
18 months (with audited interims);15 months (with unaudited interims)
IFRS or equivalent standards
International Standards of Auditing
Accountants’ report prepared forthe prospectus or attach historicalaccounts with audit opinion(s)
3 years
6 months
IFRS or equivalent standards
International Standards of Auditing
Accountants’ report prepared forthe prospectus or attach historical accounts with audit opinion(s)
Pro-forma information Not required. If presented, notpublicly reported by the accountant– market practice is for a privatereport to the issuer and NominatedAdviser
If required, accountants’ reportincluded in the prospectus
Profit forecastinformation
Not required. If presented, notpublicly reported by the accountant– market practice is for a privatereport to the issuer and NominatedAdviser
If required, accountants’ reportincluded in the prospectus
Working capitalstatement
Statement by issuer – marketpractice is for equivalent duediligence to that on the MainMarket
Statement by issuer; sponsordeclaration letter required by UKLA
Financial reportingprocedures
Declaration to the Exchange onapplication by the issuers – marketpractice is for equivalent duediligence to that on the MainMarket
Sponsor declaration letter requiredby UKLA
Business & financialdue diligence (long-form report)
Market practice Market practice
Summary of key differences between AIM and Primary Listing
company through the process and helping it
achieve a successful listing.
AIMAIM is the Exchange’s market for smaller growing
companies and is operated and regulated by the
Exchange. AIM companies are governed by the AIM
Rules for Companies which set out the requirements
and guidance for companies wishing to be quoted on
AIM. The admission document requirements are
based upon the Prospectus Rules requirements with
certain optional exclusions.
A company wishing to gain admission to AIM must
appoint and retain a Nominated Adviser whose initial
role is to ensure the company is appropriate to be
quoted on AIM and that the AIM Rules are complied
with on flotation. In the same way that the Sponsor’s
5 6 L i s t i n g i n L o n d o n : C I S P r a c t i c e
due diligence procedures drive much of the work of
the Reporting Accountant on a Main Market listing,
the Nominated Adviser’s due diligence requirements
drive much of the work of the Reporting Accountant
on an AIM flotation. The main similarities and
differences are summarised in the table above.
Changes to the listing regime
Restructuring of the regimeIn October 2009 the FSA introduced amendments
to restructure the UK Listing Regime into two
segments, Premium and Standard. Companies in
the Premium segment will have to meet the super-
equivalent standards (London’s world-class
standard of regulation based on the requirements
of the UKLA). The Standard segment denotes EU
minimum standards. All securities will be allocated
to the relevant listing category as shown in the
table below.
This approach will ensure that all listed companies
within the same segment, irrespective of their
country of incorporation receive broadly equal
treatment.
A premium listing of equity will replace a primary
listing of equity.
A standard listing of equity will replace a
secondary listing of equity.
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Corporate governance implications An overseas company with securities that have a
premium listing on 5 April 2010 is required to
‘comply or explain’ against the UK Combined
Code in financial years beginning after 31
December 2009.
An overseas company with securities that have a
standard listing on 5 April 2010 will be required to
comply with the EU Company Reporting Directive
which requires them to provide a corporate
governance statement and to describe the main
features of their internal control and risk
management systems in financial years beginning
after 31 December 2009.
The UK Listing Regime
Issuer Segment Premium Listed Securities Standard Listed Securities
Securities CategoryEquity LR6
ClosedEndedFunds LR 15
OpenEndedFundsLR16
Equity Debt GDRs SecuritisedDerivatives
MiscSecurities
© 2008 PricewaterhouseCoopers LLP. All rights reserved. ‘PricewaterhouseCoopers’ refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.
Your gateway to London.
IPOs have many advantages; attracting capital boosting company recognition, and opening doors to new opportunities. There are, however, additional obligations and responsibilities, which are integral aspects of public life.
The PricewaterhouseCoopers Capital Markets Group is a team of experienced professionals who provide a broad range of services to companies and investment banks in relation to the capital markets transactions. These include supporting a company’s preparation to go public; helping to select the right market and advisory team; reviewing accounting practices and financial reporting procedures; advising on the corporate governance arrangements; and undertaking financial and business due diligence investigations.
To find out more contact one of our experts:
UK
Clifford Tompsett, PartnerTel. +44 (0) 207 [email protected]
Katya Kuznetsova, DirectorTel. +44 (0) 207 [email protected]
Russia
Macy Coffey, PartnerTel. +7 (495) [email protected]
22922 - BW.indd 1 16/12/2009 15:40:14
To order additional copies of Listing in London: CIS Practice
Please contact:
Maria Aleksandrova,Business Development Executive - Russia & CIS [email protected]
Communications and public relations are at the
heart of successful listings and, in a period of
unprecedented uncertainty for investors, effective
marketing and public relations (PR) are essential.
The continuing major upheavals in the global
financial system mean that international investors
have more difficult judgements to make about the
opportunities before them and will use every
available piece of information in decision-making.
Now, more than ever, uncontrolled communication
at the time of an IPO can have very damaging
results in undermining the credibility of the offering
and so reducing levels of demand and potential
valuations. It is therefore essential that IPO
companies take the initiative in managing their
communications. Effective PR ensures that the
volume and content of available information about
an IPO reinforces the investment case for a
company and builds confidence in its potential.
Perceptions of the quality of the company to be
listed, and the attractiveness of the share offering,
can be as, if not more, important than the
underlying reality. Any PR programme will seek to
ensure both the success of the listing and the
recognition of its success.
5 8 L i s t i n g i n L o n d o n : C I S P r a c t i c e
Role of the financial PR/IR company in a MainMarket listing and an AIM flotationDavid Westover, Director, Citigate Dewe Rogerson
A company from Russia or the CIS intending either to list on the MainMarket of the London Stock Exchange or to join AIM, should look for a PRfirm that has advised not only domestic companies on their IPOs, but alsointernational companies on successful primary, secondary or dual listingsin London.
Responsibilities of the PR companyThe PR company will work alongside the company
and the other advisers on the listing (particularly
the investment bank and the lawyers) in designing,
managing and implementing a communications
strategy so that it is executed in a timely manner
and in accordance with local and international legal
guidelines.
The responsibilities of the PR company in any
London listing will include the following:
• co-ordinating the overall communications
programme
• raising the profile of the company amongst the
target investor audiences (including international
media, domestic media, potential retail
investors, potential institutional investors,
analysts and other opinion formers)
• managing media expectations and momentum
• ‘packaging’ the equity story for media audiences
• drafting press releases, speeches, Q&As etc
• co-ordinating media interviews, briefings, press
conferences etc.
A proven track record advising on IPOs should be
the first prerequisite when choosing a PR agency.
5 9L i s t i n g i n L o n d o n : C I S P r a c t i c e
A company looking to join the Main Market or AIM
should look for a PR firm that has advised not only
domestic companies on their IPOs, but also
international companies on successful primary,
secondary or dual listings in London and on a wide
number of flotations on both AIM and the Main
Market. The PR agency should also be able to
demonstrate a solid understanding of the sector
within which the company operates. This
knowledge should extend not only to the technical
and operational aspects of the industry, but also
to the challenges and intricacies of communicating
the business model and strategy to the
investment community.
PR companies are successful for the most part
because of their relationships with the financial
media and the wider investment community. These
relationships are fundamental to ensuring that a
company effectively positions and markets itself to
those audiences which will ultimately determine
the success of its flotation. When selecting a PR
adviser, a company should look for strong
evidence of such relationships, including client
references.
A PR agency should also be able to demonstrate
a varied and diverse skill-set, drawn from a variety
of backgrounds, ensuring that any potential
obstacles or issues that surface can be managed
and dealt with effectively. Ideally, the PR firm will
also be well-resourced to ensure that it can
provide the changing levels of tactical and
strategic advice that are required by a company
during the flotation process and beyond.
Co-ordinationEffective co-ordination of communications enables
the release of information to take place in a
controlled and strategic manner; this reinforces
the perception that the listing is being
professionally managed by the company and its
advisers. The communications timetable therefore
has to be integrated into the overall timetable of
the listing.
PR issues for a London listing Russian companies seeking a London listing may
do so as a secondary listing (the primary listing
taking place on a Russian exchange). As a result,
a significant part of the PR and marketing of the
offer will take place in Russia. The success of
these communications programmes will contribute
to the listing being a success within Russia, a fact
which will be noticed by the London investment
community and which will allow the London listing
to be perceived as a success. It is important,
therefore, to consider all aspects of listing
communications from the marketing of shares that
are marketed to Russian investors, to the role of
management interviews with the media (for
example, the Financial Times newspaper in
London).
Russian companies have faced many particular
communications challenges in listing in London in
recent years. First, the Russian market was initially
very unfamiliar to London investors, meaning that
education about the Russian economy and its
potential has been and remains one of the key
components of marketing any flotation.
After the initial wave of listings in the mid 1990s,
confidence in Russian offerings was badly shaken
by the crash of 1998, meaning that Russian
companies had to work hard at their
communications for a long time to show that they
were credible as businesses. This has been
achieved in part through greater transparency and
openness with international media audiences.
Management had to be prepared to talk to media in
a responsive and positive way.
In recent years the situation had evolved and
investors showed a greater willingness to take part
in Russian company IPOs. However, the global
market crisis has thoroughly changed the
environment and Russian companies now have to
re-establish themselves as IPO investments for
international institutions. Investors will have to be
reintroduced to the Russian market and will be
uncertain about its prospects.
In their IPO communications, companies will not
only have to re-educate investors about Russia’s
potential, but also make a distinctive case about
their qualities. Many investors will have seen their
holdings in Russian companies lose significant
amounts of value, so each IPO candidate has to
demonstrate what is outstanding about themselves
as an investment opportunity.
This means that companies will have to be much
clearer about their qualities and about the basis for
the valuation that they are seeking from the market.
Furthermore, investor uncertainty will lead to
questions being asked about standards of
corporate governance. These questions must be
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addressed directly and it is important that
companies seeking listings do not seek to evade
questions about their ownership or history. Many
companies will never experience the same degree
of intense international media attention that they will
encounter during the IPO process and they must be
fully ready to deal with it.
From a communications viewpoint, the primary
benefit of a London listing to a company is the
increased exposure it will have to the London
investment community, and the fact that the
Exchange’s high level of disclosure requirement
means that corporate information is widely and
immediately available. Whether a company lists
through a GDR issue or a share issue, the
communications objectives and methods will remain
the same.
Communications objectivesThe fundamental marketing objective is to create a
perception of scarcity. Unless both investors and
investment influencers alike believe, in advance,
that the offer will be over-subscribed and that the
shares will trade at a premium in the aftermarket,
the offer will be unsuccessful. The principle at work
here is a very simple one, namely that no-one buys
a financial asset today if they believe it will be
cheaper tomorrow.
Creating this perception of value and scarcity is
dependent on two factors, the first being to
generate competitive demand from each of the
potential sources of investment – domestic and
international. This is a delicate balancing act. The
strength (or weakness) of one market has a direct
6 1L i s t i n g i n L o n d o n : C I S P r a c t i c e
and powerful impact on the state of the other.
The second factor is the need to secure strong
endorsement for the offer from opinion influencers
and other commentators, in particular sell-side
analysts and the financial media. Only third-party
comment can recommend a share offer, carrying
the weight of independent endorsement.
These core communications objectives should
support the overall goals of the flotation, namely:
• to position the company as a ‘must-have’
investment opportunity
• to achieve the best and most accurate valuation
• to attract a diverse, high-quality and supportive
investor base
• to ensure the company is well-placed for the next
stage in its development.
At no point should the communications objectives
in a flotation process (or afterwards) adversely
affect the commercial and strategic goals of the
business. Too often, communications surrounding a
flotation are not taken in context and the IPO is
wrongly viewed as an end in itself rather than a
stage, albeit a very important one, in the company’s
development. The communications strategy in the
run-up to the flotation should, therefore, reflect the
long-term strategic goals of the company.
Consequently, considerable time and effort needs
to be devoted to ensuring that the financial media
understand and are supportive of the company and
its management. It is also necessary that they
consider the offer to be well-structured and
realistically priced.
Communications timetable
PhasesListing communications campaigns can typically be
divided into two phases: (i) the corporate or pre-
offer phase and (ii) the offer phase. In the
corporate phase the objective is to raise
awareness and understanding of a company as a
potential investment opportunity. In the offer
phase, the emphasis is on the details of the offer,
the timetable, the subscription period and so forth.
DurationThe length of the phases is variable: the duration
of the corporate phase will vary depending on
such factors as whether it is an Initial Public
Offering (IPO) or secondary offering, the image of
the company concerned and experience of the
investor base.
Momentum managementRegardless of the duration of the communication
campaign, it is essential that the timing and
sequence of messages – ‘the dynamics’ of the
deal – are carefully managed and the momentum
of the campaign maintained. It is vital that the
messages are released across all domestic and
international media at the same time and in a
timely manner. Additionally, all spokespeople must
be briefed simultaneously, so that the information
they disseminate to sometimes disparate
audiences is consistent.
One of the key elements in momentum
management is releasing the right information at
the right time. This particularly applies to details of
the size, timing and valuation of the offer. Early or
speculative release can create misleading
expectations, which will affect perceptions of the
success of the offering if they are not met.
Typically the major announcement positioning a
Russian company with international financial media
is the ‘Intention to Proceed’ announcement, when
it first declares its intention to seek a London
Stock Exchange listing. For many companies, this
is the first time that they will have communicated
with the financial media and so a strong impact is
vital.
Whereas it is important that all audiences should
be provided with consistent information
simultaneously, the tone of voice and style of the
information should be tailored to match the
sophistication of the particular audience. This point
6 2 L i s t i n g i n L o n d o n : C I S P r a c t i c e
is very important in laying the foundations for
future attitudes. If possible, management should
meet key media, so that the journalists feel they
know the personalities behind the business.
The timing of the ‘Intention to Proceed’
announcement usually coincides with the
distribution of detailed research reports on the
company, written by analysts from the
investment banks which are advising the
company on its IPO.
This pre-flotation research on the company
gives potential institutional investors access to
a large amount of previously unavailable
information on the company. The research is
only intended for professional investors, but can
sometimes find its way into the Russian and
international media and consequently
Potential audiencesThe communications programmes will need to target three broad audience groups: investors,commentators and commercial audiences. The listing may need to be communicated to a wide rangeof audiences:
Primary• international institutional investors
• domestic institutional investors
• domestic retail investors
• employees.
Commentators• analysts
• international financial media
• domestic financial media
• media specialists and sector-specific media
• ratings agencies.
Commercial• customers
• suppliers.
6 3L i s t i n g i n L o n d o n : C I S P r a c t i c e
management should be well rehearsed and
prepared to answer any questions on the subject
of both the ‘Intention to Proceed’ announcement
and the research. The next major announcement is
usually the price range for the offering; the
objective is that by this time the media
understands the company’s business and
interprets the price range in that context. In this
way, momentum has been established, so that all
audiences perceive the process to be moving
forward as planned, with a clear understanding of
the investment case.
When the pricing is announced, financial
audiences should recognise the successful
completion of the process, which can be given
additional emphasis through a Listing Day event at
the London Stock Exchange.
Approval of marketing materialsThe most important document that the company
will produce in connection with its share offering is
its ‘Offering Circular’, or ‘Prospectus’. This is the
‘official’ document pertaining to the company’s
business, the competitive environment, its
financial performance, and its prospects. It will
take many months to produce, as each statement
contained in the document will be subject to a
rigorous verification process, called ‘due
diligence’. Once completed, it forms the basis of
an investment decision, for both institutional and
retail investors alike.
Any marketing materials (press releases,
brochures or website content) must strictly adhere
to the information contained in the prospectus. If
any ‘new’ information is circulated in the public
domain, the prospectus may need to be withdrawn
and amended in order to incorporate this new
information, with a consequent delay to the share
offering timetable.
Thus the marketing restrictions surrounding a
share offer relate mainly to the integrity of the
information that is released, and the regulatory
authorities of the exchanges on which the shares
are to be listed will monitor marketing materials
for their accuracy. The PR company will liaise with
the investment bank and legal adviser in order to
secure approval of marketing materials.
Not only from a regulatory perspective, but also in
terms of communications, it is important that what
is said to the media is consistent with what is said
to investors. Consistency of information will tend
to heighten its credibility and impact, supporting
the listing process.
Media relationsA strong media relations campaign is central to
any listing PR campaign. The press must have
good access to the company and its financial
advisers to ensure information is accurate and that
any issues can be quickly addressed as they arise.
Communication of key information about the offer
through press releases, briefings and set-piece
conferences must be clear, comprehensively
prepared and consistent with the planned
timetable.
The international and domestic financial media can
be of crucial importance to any listing. For this
reason, commanding good relationships with the
key international financial media, as well as the
domestic media, can be vital, not just to support
the listing internationally, but also to influence
domestic commentators. On a regular basis,
articles (both supportive and critical) from the
Financial Times and the Wall Street Journal
Europe are picked up and these will heavily
influence the flavour of reporting in domestic
markets.
Conversely, poor publicity can destroy investor
interest. It takes much effort and good publicity to
counter the impact of one bad article in an
important publication. Companies considering
listing in London should not underestimate the role
the British media plays in influencing investor
opinion. Fundamentally there are three types of
media to be considered. First the newswires (eg
Reuters, Bloomberg and Dow Jones) write articles
in short time-periods that are immediately and
widely disseminated throughout the financial
community; company news published on a
newswire has many times had a rapid impact on a
company’s share price or the success of its IPO.
Second, the key daily and Sunday newspapers are
influential in reporting news and providing more
background on stories (such as the Financial
Times and the Sunday Times). Third, comment on
investment opportunities is provided in the Lex
column of the Financial Times or specialist online
services such as Breaking Views.
The role of the financial public relations firm is to
construct a programme for its client that seeks to
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ensure that the financial media has the best
possible understanding of its business. It will
advise on the most appropriate journalists to meet
and the timing and format of the interviews. In
some cases, it will help the company to prepare
for the programme by carrying out media training
with senior management, so that they are familiar
with the approach taken by international media.
The agency will also draft ‘Questions and
Answers’ and other papers to guide management
on the best response to questioning.
Internal communicationsAn audience that is often neglected during the IPO
process is the company’s own employees. It is
absolutely imperative to communicate with them
during the IPO process, explaining the IPO rationale
and reassuring them about their future. Following a
successful admission, there will also be an
opportunity to speak with employees about the
company’s new status and obligations as a public
company. A well-planned and informative internal
communications programme may also encourage
employees to support the offer directly if the IPO
structure permits this. Any employee
communications must strictly adhere to the agreed
public relations strategy to ensure consistency of
messages, both internally and externally.
Furthermore, the timing of such communications is
very important: too early and the story could leak
into the public domain, too late and employees may
resent the lack of communication.
Investor relationsOnce a company has achieved its listing
6 5L i s t i n g i n L o n d o n : C I S P r a c t i c e
ambitions, its transition to being a public company
is complete. However, its new responsibilities to
its shareholders are many, and it is important that
public companies should go beyond the minimum
level of communication demanded by regulatory
requirements and should take the initiative in their
relationships with shareholders. An effective
investor relations programme will be critical to
achieve a share price which is a true reflection of
the company’s value.
A PR company can continue to provide assistance
in the important field of investor relations. This will
include providing advice and guidance on such
areas as:
• the regulatory obligations of a listed company to
its shareholders
• the timely release of financial and corporate
information
• preparation of communications and marketing
materials in accordance with best-practice
disclosure requirements of the institutional
investment community
• review of the company’s share register in an
effort to identify key holders and whether their
holdings are proportionate to the size of the
company (the findings would then be used for
ongoing targeting)
• promoting the company and its management to
the fund management community through
specific roadshows and events such as site
visits and capital markets days (the latter can
include a number of activities, but usually
involves a half to full day of presentations from
the Board and possibly other senior directors,
for example, heads of particular divisions and
product demonstrations, if appropriate)
• regular institutional investor research to refine
messages and address misconceptions and
potential issues in all written and verbal
communications
• management of expectations (to build
confidence and avoid surprises)
• benchmarking the company’s performance,
materials and guidance levels against its peer
group
• advice on corporate governance issues,
corporate social responsibility and other
developing interest areas for investors.
• developing relations with unconnected analysts
Clearly, the most appropriate time for a company
to start its investor relations programme is
immediately after the listing, when investor
confidence is considerable and the profile of the
company is already high following the listing. In
order to capitalise on this situation, the company
will need to have put in place an Investor
Relations Department to manage its ongoing
investor commitments.
Post-flotation: ongoing PR strategyAs well as an active investor relations programme,
continuing media relations activities can help to
manage interest in the company post-flotation.
The company should go beyond the minimum level
of disclosure required and should take the
initiative in its communications with the financial
markets and the media. Maintaining the interest
achieved during the IPO is vital in an ever more
crowded market. The PR firm will work with the
company to implement a comprehensive
programme incorporating the following areas:
• regulatory reporting requirements
• financial calendar (quarterly, interim, preliminary
results and AGM announcements)
• trading updates
• M&A, restructurings and disposals
• future equity or capital raisings
• board and senior management changes
• significant ad hoc news-flow (eg key contract
wins)
• ongoing media and analyst relations
• strengthening and broadening the company and
management’s profile
• market intelligence
• management of expectations
• crisis and issues management
• market research.
6 6 L i s t i n g i n L o n d o n : C I S P r a c t i c e
ConclusionSeeking admission to trading on the London
Stock Exchange is obviously a very significant
decision for any company. On its own, a PR firm
cannot guarantee a successful flotation, nor
guarantee that the best value is achieved for the
vendor. However, good PR advisers can help
ensure that the process is effectively managed
and that the company’s management is given the
very best opportunity to effectively communicate
its story and strategy for the business, giving
crucial support to the overall IPO marketing.
In the current environment investors and financial
commentators will demand clear and professional
communications from public companies listed in
London. A PR firm that has a successful track
record in advising on IPOs will help ensure that a
company’s management is in the best possible
position to make the planned flotation a great
success.
It’s all about trust…With today’s financial markets demanding the very best
in disclosure, engagement and communications you need public
relations advisers you can trust.
Whether it’s for an IPO, M&A transaction or for implementing an
ongoing communications programme, leading companies around
the world trust Citigate to give them the very best independent
strategic and practical advice.
Who do you trust?
Citigate Dewe Rogerson Tel: +44 (0) 20 7638 9571 www.citigatedr.co.uk
Jonathan Clare email: [email protected]
David Westover email: [email protected]
Marina Zakharova email: [email protected]
Citigate offices based in: AMSTERDAM • BEIJING • BRUSSELS • BUDAPEST • CHICAGO • FRANKFURT
GENEVA • HONG KONG • LISBON • LONDON • MADRID • MILAN • MOSCOW • MUMBAI
NEW YORK • PARIS • SAN FRANCISCO • SHANGHAI • SINGAPORE • STOCKHOLM • WARSAW
When the London Stock Exchange created AIM in
1995, it sought to establish a sensible and
practical method of regulation that would be
appropriate for the younger, smaller companies
that it wanted to attract. Realising that many
smaller companies would not have a management
team with experience of running public companies,
the Exchange chose to devolve the responsibility
for ongoing regulation of its AIM companies. It
achieved this by creating a new type of financial
adviser, the Nominated Adviser (Nomad), with
authority and responsibility to decide whether a
company was suitable for admission to AIM and to
provide ongoing advice to AIM-quoted companies.
Such is the importance of the role of the Nomad
to AIM that a company is required to retain one at
all times. Without a Nomad, a company is
effectively unregulated and under the AIM Rules it
will have its shares suspended and eventually will
have its admission to AIM cancelled.
Who can be a Nomad?The AIM Rules are short and considerably less
prescriptive than, for example, the Listing Rules
(which apply to companies on the London Stock
Exchange’s Main Market). A Nomad must be able
to interpret the AIM Rules and advise an AIM
6 8 L i s t i n g i n L o n d o n : C I S P r a c t i c e
Role of the Nominated Adviser in an AIM flotationColin Aaronson, Director, Grant Thornton UK LLP
The Nominated Adviser (‘Nomad’) has authority and responsibility todecide whether a company is suitable for admission to AIM and to provideongoing advice to AIM-quoted companies.
company on its obligations under those rules. This
requires an understanding of best practice in
public company management and corporate
governance, and the ability and experience to
apply this knowledge in the light of the AIM
company’s particular circumstances.
In order to be a Nomad, a firm of advisers must
be authorised by the London Stock Exchange to
act in that capacity, a selection made on the basis
of the firm’s previous experience of dealing with
publicly-quoted companies. Nomads include
accounting firms, investment banks, corporate
finance firms and stockbrokers, all of which
employ a sufficient number (at least four) of
suitably qualified individuals. The Exchange
maintains a register on its website of firms
authorised to act as Nominated Advisers.
The Nomad’s three principal tasksThe Nomad has three principal tasks: determining
if the company is appropriate for admission;
managing the flotation process; and after flotation,
advising the AIM company in respect of its
compliance with the AIM Rules and general
corporate governance.
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Determining suitability for admission Unlike the Main Market, where a company’s
suitability for listing is assessed by the United
Kingdom Listing Authority (‘UKLA’), the decision
as to whether a company is appropriate for
admission to AIM rests with the Nomad. The
Nomad’s primary responsibility and duty of care
are owed to the London Stock Exchange and it
must ensure that the admission and conduct of a
company do not impact adversely on the
reputation or integrity of the Exchange.
Sometimes a company may be appropriate for
flotation on AIM, but joining AIM may not
necessarily be in the company’s best interests.
The costs and ongoing obligations of an AIM
quotation may well outweigh the benefits that
admission brings, particularly where there are
other fundraising methods that may be more
appropriate. As a general corporate finance
adviser, the Nomad should also ensure that an
AIM flotation is actually in the best interests of the
company and its shareholders.
Project managing the flotation processOnce a Nomad has agreed that a company is
suitable for admission to AIM and a broker has
agreed to raise the necessary funds, the Nomad’s
task is to bring together a full team of advisers, set
a timetable, allocate responsibilities and ensure that
all parties adhere to the programme that has been
agreed.
Advising on regulatory matters An AIM company is under an obligation to comply
with the AIM Rules. The Nomad will ensure that its
client has appropriate systems in place to enable it
to comply with those rules and it is becoming
increasingly common for AIM companies to
document those systems and procedures in the form
of an AIM Rules compliance policy that has been
formally adopted by the board of the AIM company.
Beyond ensuring compliance with the AIM Rules, the
Nomad will sometimes need to advise on the
interpretation of those rules. The Nomad is also
expected to give guidance on the appropriate level of
corporate governance for the company.
The City CodeThe City Code on Takeovers and Mergers (‘City
Code’) is a set of rules and principles that governs
the way takeovers and mergers of public limited
companies are carried out in the UK. As such, it
applies to all UK, Channel Island and Isle of Man
resident AIM companies. Although companies
registered or managed outside these geographic
areas are not themselves subject to the City Code,
companies seeking to merge with or take over a
UK public limited company will need to comply with
its rules.
The City Code does not specifically concern itself
with commercial aspects of a takeover or merger,
or with the way a business is run. Rather, it is
concerned broadly to ensure the protection and
equal treatment of shareholders in certain takeover
and merger situations and where there are changes
in the individuals and groups that control that
company. In simple terms, ‘control’ is defined as a
30 per cent (or greater) shareholding in a
company.
Although a Nomad’s principal role is to advise a
company on its compliance with the AIM Rules, in
practice, as the company’s financial adviser, the
Nomad will also need to advise the company on
any obligations under the City Code. Sometimes,
certain aspects of an AIM admission itself will
require the Nomad to advise on the City Code and
to liaise with the Panel on Takeovers and Mergers
on the company’s behalf, for example where the
company is ‘reversing’ into a quoted cash shell.
The Nomad and the broker The roles of Nomad and broker are often confused,
particularly as both roles are often performed by
the same organisation. In fact, the roles are
completely different and separate. The Nomad’s
role is to provide general corporate finance advice,
project manage the flotation and act as the AIM
company’s regulator. The broker’s principal
responsibilities are to raise funds from its
institutional clients and manage the ‘aftermarket’,
publishing research where necessary and ensuring
that there is both a healthy interest in the
company’s shares and sufficient stock to satisfy
that demand.
The Nomad’s client is the company and its dealings
with the company are private. The broker’s clients
are its institutional investors and it is not privy to
the confidential communications between the
Nomad and the AIM company. Where one firm
(known as an ‘integrated house’) plays both roles,
there must be a clear separation of responsibilities
and a ‘Chinese wall’ must be established between
the two parts of that firm.
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Assessing suitabilityUnlike for the Main Market, there are very few
prescriptive pre-conditions for admission to AIM.
An AIM company’s requirements are to appoint
and retain a Nomad and a broker, to prepare an
AIM admission document and to ensure that its
shares are freely transferable, including, in most
cases, in dematerialised form (ie electronically).
This contrasts with the Main Market, where
companies are required to comply with a number
of pre-conditions including, among other things, to
be operated independently and be revenue-
generating for at least three years, have a
minimum market capitalisation and have at least
25 per cent of its shares in public hands.
Since it is quite straightforward to satisfy the
objective requirements for admission set by the
AIM Rules, the greater challenge for the company
seeking admission to AIM is to satisfy a Nomad
that it is appropriate for such admission. Advisers
will consider the following types of questions
before taking a view:
• does the company have a management team
with the skills and experience to run a public
company and can the management team
members demonstrate their integrity and
financial probity?
• does the company have a viable business model
such that it is likely to grow and deliver value to
investors?
• if the AIM admission involves a fundraising, is
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there a realistic possibility that the broker will be
able to raise the funds at a valuation acceptable
to existing shareholders?
• does the company have the management and
financial controls and reporting systems
sufficient to enable it to discharge its obligations
under the AIM Rules?
While it is common for UK businesses which
serve, primarily, domestic markets, to seek a
quotation on a London based stock-exchange, the
Nomad will normally require that an overseas
company’s business be international in nature and
not limited to its local market. Certain types of
business, such as natural resources and
biotechnology, are by their nature international.
Other types of overseas companies should at
least have international markets or be seeking to
expand internationally.
For a Nomad, the reputation and integrity of the
market are paramount. A Nomad should only
proceed with the flotation of a company if it is
confident that the company will enhance the
market’s reputation and has a realistic chance of
delivering real value to shareholders. In assessing
a company’s suitability, a Nomad must ultimately
ask itself if it really wishes to be associated with
this company.
ManagementA company will be judged, above all, on the quality
of its management. Some criteria are objective, or
at least fairly obvious. A strong management team
typically has the following characteristics:
• it has a clearly defined structure, with a clearly
identifiable leader
• it has a full set of skills encompassing finance,
operations, marketing and sales. Operations
include procurement, human resources,
production and distribution. In most cases, an
experienced and capable finance director is
essential to the success of a quoted company
• there is strength in depth. A company must have
a sufficiently strong management team such that
the loss of one particular individual will not
cause irreparable damage to the business
(although this can be mitigated to some extent
by keyman insurance). More subjectively, a
business whose leaders are too ‘hands-on’ will
not be able to think strategically. From a more
practical point of view, the flotation process can
be extremely time-consuming for management
and the company must be able to continue its
business during the flotation process without
suffering from the absence of key directors
• its team members can demonstrate relevant
experience in business generally and specifically
in the sector in which the company operates
• its members work well together. A strong
managing director should have colleagues who
are able to stand up to and not be dominated by
him or her
• it is able to provide accurate, reliable and
comprehensive management information in a
timely manner – otherwise, the company cannot
be said to have the appropriate systems
necessary to run the business. Indeed, as part
of its due diligence on the prospective AIM
company, a reporting accountant will review and
comment on the company’s financial control
systems
• the accounting policies selected by the
management team should err on the
conservative and should be consistently applied
• it should have strong non-executive directors
who are experienced in City practices and are
able to impose proper public company practices
on their colleagues.
As part of its procedures for determining whether
a company has suitable management, the Nomad
will conduct due diligence on the directors and
sometimes on key managers. Directors will be
asked to complete a questionnaire that gives
information such as past and present directorships
and details of any personal bankruptcies or
business insolvencies. This information must be
disclosed in the AIM admission document. Proof of
identity (such as the photograph page of a
passport) and proof of address (for example, a
driver’s licence) will be required as part of the
Nomad’s due diligence.
The Nomad will review each director’s curriculum
vitae, from which information will also be taken and
included in the AIM admission document.
References will be taken and detailed background
searches will be made using either publicly-available
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information or specialist agencies where
appropriate. Past financial performance will provide
a strong indication of management’s ability.
Although a company’s commercial success would
suggest that its managers are capable, the reality
could be that they are running an underperforming
company in a successful sector. It is therefore
important to benchmark the company against other
companies in the sector. Management may also be
reacting to events rather than driving the business
forward, while erratic or declining profits should ring
alarm bells. Ultimately, assessment of management
is highly subjective. Different advisers have
different criteria, but experience has shown that:
• successful companies usually have a strong,
proactive leader who is passionate about the
business
• directors of a successful company have detailed
knowledge of markets, competition and
developments in their sector. It is particularly
important that they understand and can explain
the reasons for their success and how that
success can be built upon
• directors of a successful company have quiet
confidence or cautious enthusiasm, grounded in
reality
• directors of a successful company should be calm
and must be able to deal with strategic matters.
The business must be able to function
during their absence, demonstrating that
underlying management is adequate
7 3L i s t i n g i n L o n d o n : C I S P r a c t i c e
• successful companies have managers who deliver
on their promises. Otherwise, why should
investors trust them?
Finally, a Nomad will want to ensure that the
directors of a company are fully aware of (and are
prepared to accept) the costs and obligations of
being an AIM company, that they have considered
and have rejected the alternatives and that they
are seeking admission to AIM for the right
reasons. AIM is not an immediate exit route for
owner-managers and, rather, should be seen as a
source of development capital. AIM companies
often have a narrow shareholder base, and
liquidity in a company’s stock may initially be
limited. Institutional shareholders often have a
comparatively long-term investment horizon and
expect to provide follow-on funding provided
milestones have been met. AIM, therefore,
displays several of the characteristics of private
equity.
While for most companies their admission to AIM
forms part of a fundraising exercise, there are
other good reasons for a company to float on
AIM. These include expanding its ability to acquire
other businesses by issuing quoted shares,
establishing a value for the business and
enhancing the attractiveness of its employee
incentive programmes and share option schemes.
Corporate governance A private company with a single or small number
of shareholders may not have given much thought
to the way the company (as distinct from the
business) is managed. For any company, and
particularly for quoted companies, it is essential to
ensure that the interests of all shareholders are
protected and that the interests of management
and shareholders are closely aligned. A quoted
company, for example, will need to ensure that
there is a remuneration package (which might
include suitably-designed share option schemes)
that will incentivise management to work for the
benefit of the business as a whole, and that there is
a method of determining whether that package is
appropriate to the business (this usually involves a
remuneration committee). The company will need
independent non-executive directors on the board
to represent the interests of outside shareholders.
Some private companies will lack an appropriate
level of corporate governance at the outset. What
is essential, however, is that there is a basic
minimum level of corporate governance and a
willingness on the part of management to adopt the
necessary procedures to steer the company
towards best practice.
Business viabilityIrrespective of their ability, in the long run managers
cannot make a success of a fundamentally-flawed
business model. In assessing the long-term viability
of the business, Nomads will be asking the same
sort of questions as investors.
A detailed analysis of business strategy is beyond
the scope of this publication, but a Nomad will
consider the long-term viability of a business in
the context of its past financial performance,
products, customers and suppliers.
A company with a history of growing profits in a
growing sector will, on the face of it, be a strong
candidate for admission. Where a business is not
yet profitable, the Nomad needs to be confident
that the company will become profitable within a
reasonable timescale.
A successful business, or a business with
potential to be successful, need not itself be in a
growing sector. Unless the sector is in steep
decline, such a company may still be worth
investing in. What is important is the company’s
position within its particular sector.
Management needs to be able to control the
company’s business to drive it forward. An
insignificant player in a market may be subject to
forces beyond its control. Where possible, a
company’s products and/or services should be
differentiated by quality, innovation or branding.
Ideally, there should be sufficient goodwill in the
brand such that the company can charge a
premium for its products. Where the product or
service is more generic, it is important that the
company is a significant supplier in that product or
service market, is a highly efficient operator within
its sector, or controls a specialist niche.
A technology company, for example, may be
attractive precisely because it owns intellectual
property which is protected by patents, copyright
or know-how that give it a degree of product
exclusivity. Such companies will find that their
intellectual property is the subject of specific due
diligence undertaken by patent agents and by
specialist technology experts. The company
7 4 L i s t i n g i n L o n d o n : C I S P r a c t i c e
should not be over-reliant on one product. There
should be a family of products and services and a
pipeline of new products under development. With
very few exceptions, the company should not be
reliant on one or even a very small number of
customers (whose business can decline and
whose management can change). Certain
products, components and services may be
available from only a few suppliers or even from
one alone. Management should ideally have the
ability to switch to alternative suppliers or change
components. It is crucial that the company being
considered for flotation can continue trading, even
if a key supplier is unable or unwilling to continue
supplying to it. Different criteria will apply to
natural resource companies, for many of which
AIM has become the market of choice. For such
companies, the track record of its management is
of crucial importance, as is the competent
person’s report into the company’s resource
assets.
The investors’ view A company may have strong management and a
viable business model, but unless investors are
prepared to invest at a price that the company’s
present owners find acceptable, it will not be
possible to complete a fundraising and a flotation
on AIM may be inappropriate. A Nomad must
therefore be confident that there is a realistic
chance of raising the necessary funds at a
valuation acceptable to the existing shareholders.
The Nomad will need to assess whether a
fundraising is likely to be successful through its
7 5L i s t i n g i n L o n d o n : C I S P r a c t i c e
knowledge of the market and its contact with
different brokers.
Working capitalA Nomad will only bring a company to market if it
believes the company will be a long-term success,
will deliver value to its investors and has sufficient
working capital to achieve its objectives.
Nevertheless, the AIM Rules specifically require
that the AIM admission document contains a
statement that the company has, in its directors’
opinion, sufficient working capital for at least 12
months from the date of admission. While the age
and size of companies seeking admission to AIM
have increased considerably since 1995, and the
number of genuine trading start-ups has
decreased as a proportion of companies admitted,
this is still one of the most important statements
made in an admission document. Such is the
importance of this statement, that reporting
accountants will be specifically instructed to
conduct detailed due diligence on the company’s
financial forecasts and confirm whether, in their
opinion, the statement has been made after ‘due
and careful enquiry’. For most companies with an
existing business, this means ensuring that the
forecasts are sufficiently robust to cope with any
adverse events or a downturn in trade. For a pre-
revenue business (a start-up), there should be
sufficient working capital to continue operating at
anticipated levels even if there are no sales at all.
Managing the flotationThe two key tasks in any AIM flotation are
preparing an AIM admission document (which can
sometimes be referred to as a prospectus,
depending on the size and nature of any
fundraising) and arranging the fundraising itself.
Fundraisings usually take the form of a placing of
shares to institutions and sometimes to certain
private investors, although a fundraising can also
take place via an offer for subscription to the
public. Whichever route is chosen, arranging the
fundraising is the role of the broker.
Starting the flotation processOnce the company and its advisers have agreed
to proceed with a flotation, and after the key
professionals have been appointed and their terms
of engagement agreed, the Nomad will call all
parties to attend a meeting to agree a timetable,
which must be adhered to if the process is not to
drift. Apart from preparing a detailed timetable,
with responsibilities clearly identified, the Nomad
will also circulate a detailed list of parties with
contact details and a list of documents to be
produced. The Nomad will take as its starting
point the end of the flotation process. The key
date is known as ‘Impact Day’. It is on this day
that the AIM admission document is finalised and
posted to shareholders and potential investors.
Admission to AIM and receipt of funds usually
take place shortly afterwards.
The company will often need or want to secure
funds by a particular date, in which case that date
will determine the Impact Day. The broker will
advise on a good time to introduce the company
to the market, having regard to Christmas, Easter
and summer holidays, market sentiment and the
broker’s own workload. From this point the
7 6L i s t i n g i n L o n d o n : C I S P r a c t i c e
Nomad will work backwards, setting dates for the
completion of the final AIM admission document,
the placing proof and the pathfinder (if applicable),
the accountants’ and experts’ reports and the
legal, financial, technical and commercial due
diligence. An illustrative timetable is shown in
Table 1 below.
Central to the Nomad’s work, and indeed to that of
all the professional advisers, is the preparation of
the AIM admission document. A considerable
amount of the professional advisers’ work revolves
around preparing an AIM admission document
that describes accurately and in sufficient detail
the business, activities, financial information and
•
Admission timetableTable 1
1week 2 3 4 5 6 7 8 9 10 11 12 13 14
Test marketing
Long-form report produced
Accountants’ report produced
Working capital review
Drafting of AIM admission document
Legal due diligence report produced
Verification
Pathfinder completion
Marketing
Placing list finalised
Placing proof prepared
Placing proceeds received by broker
Completion meeting
Admission to AIM and dealings commence
Proceeds of the placing paid to company
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The very front • cover page including important information for investors in overseas jurisdictions• summarised key information• index• list of directors and advisers• list of definitions and glossary of technical terms• timetable• placing statistics
The front end • history of the business• information about the present-day business
A detailed description of the • key business and market trendsbusiness, in effect, the • summarised information about key personnelinvestment proposition • intellectual property
• information about the placing or offer for subscription• company policy on corporate governance• use of funds• share option arrangements and dividend policy• risk factors relevant to the business• City Code information (if applicable)
Table 2: Principal AIM admission document
Historical financial information • audited historical financial information, covering up to three complete years prior tofloatation. Sometimes it is necessary to include interim accounts to a later date, whichmay or may not be audited.
• an auditor’s or reporting accountant’s opinion as to whether the financial informationshows a true and fair view for the purposes of the AIM admission document
• if appropriate, pro forma financial information
Other reports • experts’ reports (if necessary or desirable)
The back end • directors’ responsibility statements (directors and proposed directors must acceptresponsibility for every statement contained in the AIM admission document)
• details of the incorporation and legal status of the company, its registered office and itsobjects
• information about share capital, including authorities to issue further shares• summarised information about the company’s memorandum and articles of association• directors’ interests in the company and directorships of other companies• substantial shareholders• share option plans• material contracts• related party transactions• summarised tax position• the working capital adequacy statement• terms and conditions of any offer for the sale of shares• sundry information
legal structure of the company. All AIM
admission documents have a common structure,
even if the size, style and contents differ
considerably. The contents of an AIM admission
document are determined by the AIM Rules and
market practice, and are summarised in Table 2
above
Assembling the team
The four key advisers in any flotation are the
Nomad and the broker, together with the
company’s solicitors and the reporting
accountants. The company’s solicitors will
perform three main tasks in relation to an AIM
flotation:
• compiling the statutory and general information
that comprises the back-end of the AIM
admission document
• verifying every statement in the AIM admission
document
• undertaking a legal due diligence review to
confirm title to important assets and to ensure
that there are no matters that might prevent
the company from achieving its business
objectives, or issues such as major outstanding
litigation that might call into question its
suitability for admission.
The solicitors will often also need to do a
considerable amount of work to get the company
ready for flotation, such as ensuring that the
company’s capital structure is properly
organised, that the directors have the necessary
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authorities to issue shares, that the company has
articles of association or statutes suitable for a
quoted company and that appropriate contracts
of employment are in place. A company may
already retain a firm of solicitors which can
perform these tasks. If not, the Nomad will
introduce the company to a firm with the
necessary experience of AIM flotations.
The company will prepare the historical financial
information in the AIM admission document,
which the reporting accountant will review and
report on. The reporting accountant will also
review and report on working capital and financial
controls and undertake financial due diligence
into the company. It is important that the firm
acting as reporting accountant is experienced in
working on AIM flotations. The reporting
accountants are often the same firm as the
company’s own auditors, although if they are not
able to act as reporting accountants, the Nomad
will introduce the company to firms who are
sufficiently experienced in AIM work.
The Nomad will set the scope of work for both
the solicitors and reporting accountants. Where
it considers it appropriate to have additional due
diligence, for example on the company’s
technology or on its natural resource assets, the
Nomad will also set the scope of work for the
professionals undertaking such due diligence.
Starting work The order in which work starts will depend on
what information is available. Typically, the first
task will fall on the reporting accountants to
7 9L i s t i n g i n L o n d o n : C I S P r a c t i c e
begin work on the long-form (financial due
diligence) report. While their work is underway,
the lawyers will start legal due diligence and
commence drafting the statutory and general
information section of the AIM admission
document. The Nomad and the company will
begin work on the front part of the AIM
admission document and the directors will draft
the historical financial information for inclusion in
the AIM admission document.
If any commercial due diligence has to be
undertaken or any experts’ reports prepared, this
work will commence at a very early stage.
Meanwhile, the company will be required to
prepare working capital forecasts in support of
the statement on the adequacy of working capital
(which the directors have to make in the AIM
admission document). The forecasts should
comprise a pack containing income statements,
cashflow and balance sheet forecasts together
with underlying assumptions. These forecasts will
normally be required to cover a period of at least
18 months from the date of publication of the
AIM admission document.
On completion of the draft long-form report, a full
first draft of the AIM admission document will be
compiled under the Nomad’s supervision. The
reporting accountants will then typically begin
work on reviewing the working capital forecasts.
During this part of the process, the AIM
admission document will go through a number of
drafts. As the AIM admission document takes
shape, the lawyers will begin the verification
process and the broker will start to sound out
the market informally as to who might be
interested in taking the shares to be issued. In
any event, the broker would normally have
undertaken some market testing before it agreed
to act as the company’s AIM broker. The PR
advisers will work on the press coverage to be
sought for the issue.
If a pathfinder (sometimes known in the United
States as a ‘red herring prospectus’) is to be
produced, it is likely to be required some 10–14
days before Impact Day. This is an essentially
complete document (save for agreement as to the
price at which the shares are to be placed) which
can be taken to potential institutional investors to
gauge the level of interest and to determine the
placing price. During this period the company is
often required to make presentations in order to
‘book build’ a list of potential investors.
After the book has been built, the company issues
a ‘placing proof’, sometimes described as a ‘p-
proof’. This is in all material respects a finished
document, except it is marked as a proof. Having
generated interest using presentations or a
pathfinder prospectus, the broker gives the
placing proof to potential investors to secure their
formal commitment to invest prior to completing
and registering the AIM admission document
itself.
Once the brokers know the amount of the funds
that will be raised and know the price at which
the shares will be placed, the company is ready
to complete its AIM admission document and a
completion meeting will be arranged for the day
before Impact Day. At this meeting all documents
will be signed and the directors will formally
approve and take responsibility for the AIM
admission document. Many other documents,
including the verification notes which record the
underlying evidence for statements contained in
the AIM admission document, will be completed
and signed and the order will be given for the
bulk printing of the AIM admission document.
This is then printed overnight and on Impact Day
it is filed with the relevant authorities and
distributed to shareholders, potential investors or
anyone interested in receiving a copy. The AIM
admission document must be made available on
a website that the company is now obliged to
maintain under the AIM Rules revised in February
2007.
With an institutional placing, admission usually
takes place within a fortnight of Impact Day. The
flotation process may continue for up to about a
month after Impact Day, either if there is an offer
for subscription to the general public or if the
company‘s shareholders need to approve any
aspect of the transaction in a general meeting.
Apart from project managing the flotation process
and co-ordinating the work of the various parties,
the Nomad will need to liaise with AIM Regulation
at the London Stock Exchange. An AIM company
will need to issue a statement of its intention to
seek admission to AIM 10 business days before
the proposed admission date (other than a
company transferring from the Main Market or
8 0 L i s t i n g i n L o n d o n : C I S P r a c t i c e
one of several other ‘AIM-Designated Markets’,
for which 20 business days’ notice are required).
The Nomad will draft and issue that statement. It
will also arrange the formal application, which
must arrive at least three working days before the
proposed date of admission.
Advising the company after flotationA Nomad’s responsibilities continue after
admission and until such time as the company
leaves the market. A Nomad’s principal ongoing
duty is to advise its AIM company clients on their
obligations under the AIM Rules. Much of the
work will involve advising on the need for
announcements and on their form and content.
Announcements that must be made include
interim and final results, share dealings by
directors or significant shareholders, the issue of
new shares, board changes, substantial and
related-party transactions and any price-sensitive
information. Price-sensitive information is defined
as any development in the business which, if
made public, would be likely to lead to a
substantial movement in share price. These
developments involve changes in the company’s
financial condition, sphere of activity, business
performance or performance expectations (ie
profits warnings or adjustments).
While in general more information is better, care
has to be taken to ensure that announcements
are not misleading, as the consequences of
issuing misleading announcements can be severe
under the AIM Rules, as well as under the
Financial Services and Markets Act 2000.
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Where the market as a whole is not aware of an
important event or fact relating to the company,
and the share price does not reflect that
information, a ‘disorderly market’ in the shares is
said to exist. The Nomad will maintain close
contact with its clients to ensure that the market
is aware of all information that needs to be in the
public domain. On occasions, the Nomad may
need to agree with the Exchange for a temporary
suspension of trading in a company’s stock in
order to prevent shares trading in a disorderly
market. Companies will often ask their Nomad
for advice on corporate governance or other
issues that are not specifically covered in the
AIM Rules, such as the suitability of share option
arrangements or related-party contracts. The
broker will advise on what investors will find
acceptable; the Nomad must advise on what is
appropriate from the perspective of corporate
governance and what is necessary to protect the
market’s reputation.
When a company enters into a transaction that
might need to be disclosed under the AIM Rules,
the Nomad will advise the company on its
position and may need to clarify certain issues
with AIM Regulation at the London Stock
Exchange.
Identifying a suitable NomadThe Nomad is the single most important adviser
to any prospective AIM company and must be
selected with care. Flotation can be an arduous
process and it is essential that the company’s
directors have confidence in their Nomad and
feel comfortable working with it. The Nomad
must also demonstrate a clear understanding of
the company’s business and its surrounding
issues.
Things to look for when appointing a Nomad
• AIM experience
• sector expertise
• house type – is it an independent Nomad or an integrated house?
• global reach – ability to handle cross-border flotations
• willingness and resources to manage the flotation
• commitment to looking after the company post flotation
• personal chemistry.
Any company looking to float on AIM can obtain
a list of approved Nomads from the London
Stock Exchange’s own website,
www.londonstockexchange.com/aim. Many
companies will already know of Nomads – either
through the directors themselves, or through
contacts such as solicitors or accountants. In the
end, a company’s choice of Nomad often boils
down to personal chemistry and a prospective
AIM company would be well advised to meet more
than one potential Nomad before deciding which
one to appoint.
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© 2009 Grant Thornton UK LLP. All rights reserved. ‘Grant Thornton’ means Grant Thornton UK LLP, a limited liability partnership. Grant Thornton UK LLP is a member firm within Grant Thornton International Ltd (‘Grant Thornton International’). Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered by the member firms independently.
www.grant-thornton.co.uk
We’ve always had a great deal of confidence in our AIM.
At Grant Thornton, we meet the needs of our clients by remaining flexible. We treat each client individually, dedicating the right people to the job in hand. It’s been a successful formula. And by investing our time in understanding the needs of AIM companies, we continue to be retained auditor or nominated adviser to over 240 of them. More than any other firm*. That’s why we’re the leading adviser to the AIM.
*Source: Hemscott September 2009
For more information, contact:
Philip Secrett Ivan SapronovT +44 (0)20 7728 2578 T +7 (495) 258-99-90 E [email protected] E [email protected]
An increasing number of companies which are
incorporated in the CIS, or have their main assets
and/or operations in these countries, have been
admitted to the Alternative Investment Market
(AIM). As a result, considerable legal experience
has accumulated in the last few years in relation
to admitting such companies to AIM. Although,
generally, the legal issues relating to the AIM
flotation of a company with interests in the CIS
are the same as those applying to other
companies, there are some specific issues which
do apply. This chapter provides a brief and
practical guide to the legal issues attaching to AIM
flotations in general, as well as highlighting those
issues which are specific to CIS companies.
Main conditions to be satisfied byapplicants to the AIM marketThe rules for trading securities on AIM are set by
the Exchange (the AIM Rules). Accordingly, each
company applying to be admitted to AIM must:
• be a public company limited by shares, and be
able to offer its shares to the public
• appoint and retain a Nomad at all times
• appoint and retain a broker at all times
• have no restrictions on the free transferability of
8 4 L i s t i n g i n L o n d o n : a p r o f e s s i o n a l h a n d b o o k
Role of the law firm in an AIM flotationPhilip Rogers, Partner, and Ildiko Gergely, Senior Associate, Clyde & Co LLP
The company’s lawyers play a central role in the flotation process,advising on the structuring of the company and its subsidiaries, on thedocumentation involved and on the directors’ responsibilities.
shares (which must not be subject to pre-
emption rights)
• ensure that all (and not some) of the shares in
any particular class are admitted
• prepare an admission document
• publish accounts which conform either with
International Accounting Standards (IAS) or with
UK, US, Canadian, Japanese or Australian
Generally Accepted Accounting Practices
(GAAP)
• (where the company has not been independent
and revenue-earning for at least 2 years) any
group companies and the substantial
shareholders (ie holding 10% or more of voting
rights) must enter into a lock-in agreement
preventing them from selling their shares for at
least 12 months following admission
• comply with AIM Market Rules and, where there
is a public offer, the European Prospectus
Directive. Each of the directors of an AIM
company must accept full responsibility,
collectively and individually, for compliance with
the AIM Rules.
Member companies can be incorporated in any
8 5L i s t i n g i n L o n d o n : a p r o f e s s i o n a l h a n d b o o k
country. It is possible to admit all types and
classes of securities (including ordinary and
preference shares and debt securities). The
application process is the same for all types of
companies.
Although companies from the CIS may have their
securities directly admitted to trade on AIM, they
often choose to join AIM by incorporating a
holding company, either in the UK or in an
offshore jurisdiction such as British Virgin
Islands, Jersey, Isle of Man, Bermuda, Cyprus
etc.
Simultaneously with an application for admission
to trading of a company’s securities on AIM, the
company generally also offers new securities to
investors (usually to raise capital for future
development of its business). The offer of
securities is commonly referred to as an ‘IPO’
(initial public offering). Not every admission is
coupled with a placing and companies may offer
securities to the public without being admitted to
trade on AIM. Companies often engage the
services of a broker to procure investment in
their share capital with the specific purpose of
preparing the company for joining AIM. This is
often referred to as ‘pre-IPO fundraising’.
Russian companies must also consider local
legislation to decide whether concurrently with
any shares being offered outside Russia, such
shares must also be offered for placement
domestically through a Russian stock exchange
or a broker. Where a company is listed on more
than one stock exchange, it should take into
account the possibility of a difference in the
settlement facilities available to such stock
exchanges. In the context of Russian securities,
settlement can be facilitated by recently
introduced mechanics, described further in
Admission Process – Company and group
structure below.
It is important to note that The Federal Law of
the Russian Federation No 57-FZ dated 29 April
2008 on Procedures for Foreign Investments in
Companies of Strategic Significance for State
Security and National Defence (the ‘Federal Law’)
imposes restrictions on transactions with
companies involved in any of the 42 types of
activities defined in the law as having strategic
significance to national defence and state security.
This law imposes limits on the number of shares
that can be acquired by a foreign entity in such
companies to no more than 25% of all voting
rights in companies involved in most of the
strategic activities, and no more than 5% of all
voting rights in companies involved in subsoil
operations (including mineral exploration). Any
acquisition of shares over the statutory limits will
require the prior approval of the relevant
governmental body. This poses a practical
obstacle to such companies joining AIM.
In addition, the Russian legislator reduced the
number of shares which Russian companies,
including companies involved in strategic activities,
may place outside Russia. No more than 30% of
the share capital of Russian companies may now
be placed outside of the country.
Admission processThe admission process generally consists of the
following key stages:
1 Planning and preparation
2 Due diligence
3 Negotiating and drafting the admission
document and ancillary documentation
4 Impact and admission.
Each of these stages involves different legal
issues and is subject to various legal
considerations.
Planning and preparationGood preparation is vital to a successful AIM
flotation as it may reduce the time and costs of
the flotation process considerably. This stage
usually includes the following considerations:
Accounting and financial reporting
If the company proactively deals well in advance
with issues relating to accounting and financial
reporting, ownership and group structure and
corporate governance, it will have to spend less
on professional fees during the flotation. Much
time and cost is wasted when the company
records are in bad order and the professional
advisers have to make persistent requests for
information or reconcile conflicting information.
Companies should also ensure the integrity of
their management information systems and
financial controls and, to the extent possible,
address any issues that have arisen in this respect
since the company’s incorporation.
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The company’s accounts must generally be
prepared in accordance with IAS. Since accounts
are needed for the last three years (if the
company has been trading that long), the sooner
they are compliant with required standards, the
more time and money will be saved during the
flotation process.
Company and group structure
The key consideration in this respect is to decide
whether the securities of the company seeking
admission are to be admitted to trading directly, or
whether a holding company will be incorporated.
This decision is generally based upon tax
considerations (on which the company’s lawyers
and accountants should provide advice). The
company’s directors should also decide on the
type of securities that will be admitted to trade on
AIM. Companies from the CIS usually choose to
list global depositary receipts (GDRs) when listing
their securities on the Main Board of the
Exchange. There is, however, less precedent for
these on AIM where the shares of non-UK
companies which are registered outside of the UK
and the Channel Islands and are admitted to trade
on AIM are represented by depositary interests
(DIs).
DIs allow non-UK companies to raise funding by
providing for electronic settlement of transactions
through the CREST system (a commonly used
system of real-time electronic settlement for UK
and international securities). A company wishing
to list its shares in the UK will issue those shares
to a specialised entity that, in turn, issues DIs to
8 7L i s t i n g i n L o n d o n : a p r o f e s s i o n a l h a n d b o o k
investors and will be shown as the shareholder on
the company’s register. DIs can then be traded
and settled via the CREST system. Shareholders
can withdraw their shares from the DI facility and
hold them in certificated form at any time. Since
shares of Russian companies cannot be directly
admitted to CREST, DIs provide an alternative
solution to the settlement issue.
Settlement of DIs has also been facilitated by an
acquisition by one of two leading English
companies specialising in share registration of the
National Registry Company (NRC), Russia’s
largest independent registrar, allowing the English
company to manage settlement of Russian DIs.
This arrangement therefore allows access to AIM
for Russian issuers and at the same time
facilitates oversight by the Federal Financial
Market Service.
Other key issues to consider are as follows:
• when setting up the group structure, it is
essential that the company takes into account
the relevant local securities law and regulations
which might otherwise prohibit or restrict the
offering and listing of its shares overseas
• particular attention should be paid to the
corporate laws of the country in which the
company is registered and especially to those
provisions which protect minority shareholders.
For example, pre-emption rights (as used in the
Russian Federation) in certain instances require
prior consultation with shareholders. In some
countries, such as the Russian Federation,
certain transactions with related parties may be
invalid, even if so approved by a minority of the
company’s shareholders
• the management should carefully consider the
ownership structure of the group to ascertain
the most favourable arrangements from a
taxation perspective. As an efficient tax structure
may take a long time to implement, this must be
an essential part of the planning process
• the company’s articles of association might have
to be amended to ensure that the shares are fully
transferable
• the composition of the board and the directors’
service agreement will have to be assessed.
The ownership and group structure of the company
will have to be fully disclosed during the process.
This will include the full disclosure of the beneficial
owner or owners of the ultimate parent company,
even if they are beneficiaries under a trust and
regardless of the jurisdiction in which any holding
company and or trust is registered.
Corporate governance
Corporate governance refers to and includes a
wide range of principles which aim to enhance the
value of shareholders’ interest in the company. In
its narrowest sense, the principles of corporate
governance set out the way in which companies are
operated and controlled. Although specific rules
applicable in different countries are varied, these
principles apply in most cases. These basic
principles of corporate governance include:
• Disclosure and transparency of the operation
and control of the company.
Companies should make public all material
information to allow investors to make informed
decisions about investing in the company’s
securities and about exercising their rights as
shareholders. The AIM Rules contain provisions
as to specific information which must be made
public without delay, the most important of which
are the financial results, any changes to the
management, major shareholders, voting rights
and major transactions. In many companies, the
requirement for transparency represents a
significant cultural change from being a private
company where secrecy is often the paramount
concern.
• Responsibilities and accountability of the
company’s management to shareholders
Directors of a listed company must fulfil the
following key functions for which they are
collectively and individually responsible:
• provide entrepreneurial leadership by setting
corporate strategy, business plans, annual
budget, performance objectives and risk
policy
• assume responsibility for the executive
management of the company, including the
selection and remuneration of directors
• monitor and manage potential conflicts of
interest of management, board members,
external advisors and shareholders
• ensure the integrity of the accounting and
financial reporting process.
One of the most important principles of a well-
8 8 L i s t i n g i n L o n d o n : a p r o f e s s i o n a l h a n d b o o k
governed company is that the board of directors
must be able to exercise independent judgement
and come to decisions which are in the best
interests of the company, free of any external
influence exerted on any individual director on
the board as a whole. In the UK, the board of
directors consists of executive directors and
non-executive directors as a matter of market
consensus. The executive directors manage the
company’s day-to-day business and operation
and are employed by the company as well as
elected as directors, therefore it is accepted that
by definition they are not considered to be
independent. Non-executive directors, on the
other hand, should retain their independence,
and their livelihood should not be dependent on
the company (so that they can contribute an
impartial view to board decisions). There are no
legally binding rules as to what the ratio of
executive and non-executive directors should be,
but institutional investors will be hesitant to
invest in companies where that ratio is less than
50:50 and the company is unable to provide
justification for the lack of non-executive
directors.
Where a director of a company is also a
significant shareholder, the company is expected
to ensure that it is capable at all times to carry
on its business independently of any controlling
shareholder influence and that all transactions
and relationships between the company and
such shareholder are at arm’s length and carried
out on a normal commercial basis. For these
purposes, companies enter into a so-called
8 9L i s t i n g i n L o n d o n : a p r o f e s s i o n a l h a n d b o o k
relationship deed with such directors / significant
shareholders (and also separately with any other
significant shareholder in the company) which
sets out rules that would govern certain aspects
of the ongoing relationship between the parties,
including exercise of shareholders’ rights.
Further, in civil law jurisdictions, which include
countries of the CIS, company law often requires
a two-tier board structure for public companies
consisting of the management board and the
supervisory board. Although, it is accepted that
the supervisory board takes on the function of
the UK non-executive directors, it is likely that
amendments to the structure of the board, as
well as the constitution of the company, will have
to be made to bring the two systems of
corporate governance closer together.
• Fair treatment of all shareholders
Although in most jurisdictions company law
includes provisions relating to the fair treatment
of shareholders, it is the directors’ duty to make
sure that the rights of all shareholders (including
minority shareholders) are protected by affording
each of them an equal opportunity to exercise
their rights. These safeguards should include
measures introduced by the board to ensure that
all members can attend and vote at meetings, as
well as being given access to information.
• Rights of shareholders and key ownership
functions
The most important rights of shareholders are
protected by law, such as voting rights, the right
to attend and call a meeting and the right to
appoint and dismiss directors. However, the law
allows certain deviations from the rules. It is,
therefore, important that any diversion from the
key principles, particularly those which grant
power to certain shareholders disproportionate
to their shareholding, should be disclosed and
justified.
Other than some provisions in the AIM Rules in
relation to corporate governance, there are no
mandatory rules in respect of corporate
governance applicable to companies on AIM.
However, there are certain published rules for
institutional investors with which most companies
admitted to trade on AIM choose to comply.
These rules are not suitable for all companies and,
therefore, the UK promotes a ‘comply or explain’
approach. When reporting on their compliance
with corporate governance guidelines, companies
should justify themselves when they depart from
given guidelines. In practice, particularly for larger
companies, many institutional investors will be
deterred from investing in a company if it is unable
to demonstrate a sound and transparent corporate
management and reporting system in operation.
Demonstrating active compliance with good
corporate governance principles is therefore not a
theoretical issue, and can significantly enhance a
company’s valuation.
In view of the differences in the interpretation of
corporate governance principles accepted in the
UK and the CIS, the corporate governance of an
applicant company should be evaluated at the
planning stage. Working on this matter with legal
advisers from the outset will ensure that the
company is better positioned to fulfill its economic
and social responsibilities.
Advisers
At this stage the company will also appoint various
professional advisers, such as a nominated
adviser (‘Nomad’), broker, lawyers and
accountants (see other chapters in the AIM
section of this guide).
The company’s Nomad will also appoint its own
lawyers to obtain an objective opinion on the
contents of the admission document and the
ancillary documents.
Although many terms of the agreements with the
Nomad, broker and reporting accountant are
standard, some can be subject to negotiations.
Therefore, the company’s spend on advisers can
be reduced by seeking legal advice at an early
stage.
Management team
Finally, a company preparing and going through an
AIM flotation will need considerable human
resources to deal with the process itself. Where
the management of the company, instead of a
designated project team, is responsible for the
flotation, the company’s business often suffers. A
dedicated IPO team at the company saves time
and expense and frees up management time to
focus on the business.
Due diligenceAlthough legal and financial due diligence during
9 0 L i s t i n g i n L o n d o n : a p r o f e s s i o n a l h a n d b o o k
the IPO is similar to that carried out during the
acquisition of a company, the purposes of these
two exercises are different. The purpose of the
financial and legal due diligence during the IPO is
to confirm the company’s suitability for being
admitted to AIM and to support the contents of
the admission document.
The due diligence also provides an opportunity
for the company to reveal any shortcomings
which may discourage prospective investors or
have an effect on the price for which the shares
can be placed, allowing for the necessary
corrections to be made.
A carefully and thoroughly conducted due
diligence will also provide invaluable defence in
case anyone involved in the flotation faces legal
action at a later stage.
Legal due diligence usually covers the following
issues:
• corporate structure and history
• capital structure and the history of its
ownership
• constitution (including capital structure and
history and memorandum and articles of
association)
• business activities (including all material
agreements) and details of principal customers
and suppliers
• trading matters
• investigation of title to any major property and
premises
9 1L i s t i n g i n L o n d o n : a p r o f e s s i o n a l h a n d b o o k
• finance (assuming that financial due diligence
will, in addition, be carried out by the
accountants)
• intellectual property
• computer systems
• employees (including any incentive
arrangements and details of directors’ service
contracts)
• pension schemes
• environmental issues
• litigation
• fixed assets and insurance
• regulatory framework (including compliance
with laws and regulations material to the
group’s business)
• company’s strategy, future plans and
projections.
Some aspects of the due diligence exercise
during the IPO process (such as title to the
company’s assets) play a significant role. This is
because, although the parties can resolve
problems by reducing the purchase price during
the acquisition process, during the IPO process
certain problems might mean that the company
does not comply with the standards set for AIM
companies, thereby making the IPO impossible.
This is, however, unusual and most issues can be
resolved much more easily by disclosing them in
the admission document, which means that the
investors are investing in the company in full
knowledge of these matters.
Negotiating and drafting admissiondocument and ancillary documentationAdmission document
The general rule is that all information which can
be reasonably expected to allow investors to form
a full understanding of the rights attaching to the
shares, the financial position, the assets and
liabilities and the prospects in general of the
company must be disclosed in the admission
document. If there is a ‘public offer’ of shares, the
admission document will have to comply with the
provisions of the European Prospectus Directive
(Commission Regulation (EC) 809/2004,OJ 2004
L149/1) (‘Prospectus Directive’) which are stricter
than those of the AIM Rules.
Under the Prospectus Directive, any company
wishing to seek admission of its securities to
trading on a regulated market or offer securities
to the public in the European Union, must publish
a UK Listing Authority (‘UKLA’)-approved
prospectus relating to those securities . Although
the AIM market is not a ‘regulated’ market, an
application for admission of securities to trading
on AIM might involve an offer of securities to the
public, in which case the publication of a UKLA-
approved prospectus will be required, unless one
of the exemptions set out in the Prospectus
Directive applies. The most frequently relied upon
of these exemptions are where:
• the total consideration for the securities on offer
is less than 2.5 million euros
• the securities are offered only to qualified
investors (such as financial institutions,
insurance companies, banks, large enterprises
or persons who regularly invest and are
registered with the relevant financial regulatory
authority in their country) or to fewer than 100
other persons or
• the offer is of securities whose denomination
per unit is at least 50,000 euros, or requires
payment of a minimum consideration per
investor of euros 50,000 euros.
One of the distinguishing features of AIM is that it
is not reliant on retail investors as in most cases
an AIM IPO is conducted as an institutional placing
rather than as a public offer. Retail investors
generally invest indirectly through private client
stockbrokers who subscribe for shares in the
placing on behalf of their managed or discretionary
portfolios. If compliance with the Prospectus
Directive is necessary and the admission
document will have to be approved by the UKLA,
the timing and costs of the flotation are both likely
to increase. However, as most offerings on AIM
are structured as institutional offerings, the
Prospectus Directive of the European Union does
not apply, which leads to time and cost savings. It
is therefore important to confirm early on in the
process whether there will be a public offer
element to the AIM IPO (otherwise there will be
an impact on timing and costs).
Where an approved prospectus is not required, an
admission document must be published as
required by the AIM Rules. The admission
document must be made available to the public for
at least a month after admission. The content of
9 2 L i s t i n g i n L o n d o n : a p r o f e s s i o n a l h a n d b o o k
both a prospectus and an admission document is
largely similar and usually includes:
• information relating to the persons responsible
for the document, the advisers, the securities to
which the document relates, the terms of the
offer of securities, general information on the
company (including its capital, assets and
liabilities, activities, financial position,
management and supervision, recent
development and prospects)
• financial information which must be presented in
the form of an accountant’s report on the last
three financial years of the company (and its
group)
• risk factors inherent to investing in the company
• directors’ statement that the company’s working
capital is sufficient for at least the next 12
months
• statement in respect of the lock-in agreement (if
any)
• prescribed details with regard to each director
(other directorships, insolvency, possible
convictions and public criticism by regulatory
authorities in the UK and elsewhere)
• contractual arrangements entered into by the
company relating to the payment of fees and
other benefits with a value of £10,000 or more
to a person and the company’s relationship to
such person
• persons interested in 3% or more of the voting
rights in the company’s share capital
• any other information that might be necessary to
enable investors to form a full understanding of
the matters contained in the document.
The content of the admission document must be
agreed by the Nomad. Both the company and its
directors are personally liable for the contents of
the admission document. Therefore, as a final
check (so as to protect the company and the
directors from any claims based on the admission
document), the content of the admission
document is invariably ‘verified’ by the legal
advisers who ensure that every statement in the
admission document is, wherever practicable,
supported by information from external sources. If
the management bears in mind the need to justify
every statement in the admission document by
external evidence from the very outset, much time
and effort will be spared in avoiding attempts to
verify statements which cannot be verified.
For companies not based in the English-speaking
world, the verification of the admission document
(as well as the due diligence) is also likely to take
less time, and hence be cheaper, if the company
has legal advisers who can read documents in the
local language (so that the supporting documents
do not have to be translated into English).
Ancillary documentation
Where the admission of securities to AIM is
coupled with the placing of securities, the key
agreement of the transaction is the placing
agreement, agreed between the company and its
broker, which will have to be carefully negotiated.
In the placing agreement, the broker undertakes
9 3 L i s t i n g i n L o n d o n : a p r o f e s s i o n a l h a n d b o o k
to act as the company’s agent to procure
investment to the agreed value in the company’s
share capital. The broker’s authority as an agent is
clearly defined in the agreement in order to
prevent him from binding the company in an
undesirable manner.
The broker may agree to underwrite the placing in
case he cannot raise sufficient investor interest. In
case of an underwritten placing agreement, the
conditions of the underwriting have to be carefully
considered to ensure that there is a real incentive
for the broker to raise satisfactory investor
interest in the company’s shares. Whereas
underwriting has traditionally been rare in AIM
transactions, it has recently become more
common as larger amounts have been raised
through major investment banks.
The directors of the company (alongside the
company itself) are expected, as a general market
practice, to personally warrant and give indemnity
to the broker that the content of the admission
document is true, accurate and not misleading. It
is possible, however, to negotiate certain
limitations to the directors’ personal
responsibilities.
If the company does not offer securities at the
time of admission, the company and the broker
will enter into an admission agreement which will
cover similar issues to the placing agreement, with
the exception of the provisions relating to the
placing of securities.
Documents prescribed by the AIM Rules, such as
the lock-in agreements (where necessary) and the
directors’ responsibility statements, will also be
drawn up and agreed between the Nomad and the
company prior to admission.
Additionally, some companies enter into relationship
agreements with their major shareholders. In such
agreements, the shareholders undertake not to
abuse their position to the detriment of the
company and other shareholders. Such agreements
(or lack of such agreements) should be disclosed in
the admission document.
Impact and admissionOnce all documentation is agreed and finalised,
the management of the company will present the
business to various potential investors in face-to-
face ‘roadshow’ meetings arranged for them by
the broker. The Nomad and public relations firm
make an invaluable contribution to the success of
the IPO by coaching the management in making
effective roadshow presentations. Whilst the
admission document is the key document from a
legal point of view, the decision of the investors
as to whether to invest is often heavily influenced
by the roadshow meetings and the analysts’
reports.
On impact day, the flotation is announced and the
application for admission is submitted to AIM. By
impact day, the investors will have returned to the
broker the signed placing letters together with the
funds. The funds are paid to the company on the
day of admission. Admission is granted three days
after impact day at 8.00am and trading
commences on that day.
9 4 L i s t i n g i n L o n d o n : a p r o f e s s i o n a l h a n d b o o k
Timing and costsThe whole process – from the planning stage to
admission – usually takes three to four months,
depending on the company’s degree of suitability
and the results of the due diligence exercise.
The costs of the flotation, if expressed as a
percentage of the funds raised, typically vary from
4% to 10% (depending on the amount raised). This
is taken into account when calculating how much is
required by the company.
Continuing obligationsAdmission to a stock exchange is not the end of
the process, but rather the beginning of a new
stage which is governed by new rules. Companies
admitted to AIM (AIM companies) have to comply
with the following rules:
General disclosure obligation
An AIM company must notify the Regulatory
Information Service of the London Stock
Exchange (there are specific agencies authorised
by the Exchange to disseminate information on
AIM companies, as set out in the AIM Rules)
without delay of any new developments which are
not public knowledge concerning a change in its
financial condition, its area of activity, the
performance of its business, or its expectations of
performance, which, if made public, would likely
lead to a substantial movement in the price of its
AIM securities.
It is the company’s responsibility to ensure that
the information it notifies is not misleading, false
or deceptive and does not omit anything likely to
affect the value of such information.
Specific disclosure obligation
The company must notify without delay:
• any transactions by its directors
• any changes to the holding of a significant
shareholder (ie holding 3% or more of the voting
rights of any class of securities)
• resignation, dismissal or appointment of any
director
• change in accounting reference date, name
issue or cancellation of AIM securities
• material change between its actual trading
performance or financial condition and any profit
forecast, estimate or projection included in its
admission document or otherwise made public
on its behalf
• change in the company’s Nomad or broker.
Half-yearly reports
An AIM-quoted company must prepare a half-
yearly report and notify it to the Exchange no later
than three months after the end of the relevant
period. The report must contain a balance sheet,
income statement, cash-flow statement and
comparative figures for the corresponding period
in the previous financial year.
Annual accounts
An AIM-quoted company must publish its annual
audited accounts prepared in accordance with UK,
US, Australian, Japanese or Canadian GAAP or
IAS.
Restriction on deals
An AIM company must ensure that its directors
9 5 L i s t i n g i n L o n d o n : a p r o f e s s i o n a l h a n d b o o k
and applicable employees (ie those who are
interested in 0.5% or more of a class of AIM
securities) do not deal in any of its AIM securities
during certain time periods prior to publication of
results and at times when there is price-sensitive
information concerning the company.
Substantial transactions
An AIM company must notify the Exchange
without delay as soon as the terms of any
substantial transactions are agreed. A substantial
transaction is a deal that exceeds 10% in any of
the class tests specified in the AIM Rules. Each
class test involves a comparison between the size
of the transaction with the size of the AIM
company (gross assets, profits, turnover,
consideration to market capitalisation and gross
capital).
Related-party transactions
Any transaction with a related party which
exceeds 5% in any of the class tests must be
notified. In addition, the directors (often having
committed with the Nomad) need to confirm that
the terms of the transaction are fair and
reasonable.
Reverse takeovers
A reverse takeover is an acquisition (or a series of
acquisitions within 12 months) that for an AIM
company would:
• exceed 100% in any of the class tests
• result in a fundamental change in its business,
board or voting control or
• depart substantially from the investment
strategy stated in the admission document of an
investment company.
Any agreement constituting a reverse takeover
must be approved by the shareholders, notified to
the Exchange and supported by the publication of
an admission document.
Market abuse and insider trading
Regulations governing market abuse also support
the principles of transparency. They state that it is
a criminal offence to make false or misleading
statements relating to investments in order to
induce anyone to deal, or refrain from dealing, in
9 6 L i s t i n g i n L o n d o n : a p r o f e s s i o n a l h a n d b o o k
investments or to exercise or refrain from
exercising rights attached to investments.
Creating a false or misleading impression of the
market or value of any investments is also an
offence.
Insider-trading rules also restrict directors’ rights
to deal with the company’s shares. These
regulations provide that a person is an ‘insider’ if
he deals in securities or encourages another
person to deal in securities while in possession of
inside information relating to those securities.
Directors of AIM companies are insiders for the
purposes of these rules.
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An issuer of debt securities wanting to list on the
London Stock Exchange (the ‘Exchange’) may
choose from two routes to listing: it may have its
securities listed either on the Regulated Market
(the ‘Main Market’) or the Professional Securities
Market (‘PSM’). The PSM was established in July
2005 following the implementation of the
Prospectus Directive (2003/71/EC). In response
to concerns from non-EU issuers, in particular that
the Prospectus Directive regime would require
them to seek listings outside the EU, the London
Stock Exchange established the PSM, an
exchange-regulated market combining detailed
disclosure requirements providing a good level of
information for investors whilst removing some of
the barriers for issuers. This article examines the
reasons behind the creation of the PSM, the
opportunities it offers Russian issuers of debt
securities, and the disclosure regime applicable to
debt securities admitted to trading on the PSM.
The Prospectus DirectiveThe regulatory regime imposed by the Prospectus
Directive created two levels of financial disclosure
obligations for issuers of debt securities wanting
to offer to the public or list on a regulated market
within the EU. The regime distinguishes between
9 8 L i s t i n g i n L o n d o n : a p r o f e s s i o n a l h a n d b o o k
The Professional Securities Market of the LondonStock Exchange Anna Delgado, Partner, Ashurst and Paula Clarke, Senior Associate, Ashurst
The Professional Securities Market is regulated by the London StockExchange and is not a ‘Regulated Market’ for the purposes of theProspectus Directive.
securities with denominations under euros 50,000
(which are designated as being aimed at the
‘retail’ market even if they are intended for
professional investors only) and those with a
minimum denomination of at least euros 50,000
(designated as being aimed at the ‘wholesale’
market).
An issuer wanting to offer or list retail securities is
subject to more stringent financial disclosure
obligations than an issuer wanting to offer or list
wholesale securities. The additional obligations
imposed under the retail regime are summarised
in Table 1 below. The key difference is that an
issuer following the retail regime is required to
prepare its financial information to International
Financial Reporting Standards (‘IFRS’), or an
equivalent standard, for any financial year starting
on or after 1 January 2007. Under the wholesale
regime, an issuer is required to provide a
summary of differences between the accounting
principles used by the issuer and IFRS. Since
2004, commercial banks operating in Russia have
been obliged to prepare financial statements in
accordance with both Russian Accounting
Standards (‘RAS’) and IFRS. The Ministry of
Finance of the Russian Federation recently
9 9L i s t i n g i n L o n d o n : a p r o f e s s i o n a l h a n d b o o k
announced that RAS would be harmonised with
IFRS effective from 2010, but until such
harmonisation, Russian issuers can list their
securities on PSM where their financial
information is prepared in accordance with RAS.
The disclosure requirements may be of concern
Summary Must be written in non-technical language. May need to be translated into the language of the EEAmember state in which the securities are either offered to the public or listed.
Annual InformationUpdate
Provide a list of all the information the issuer has been obliged to publish or make available to thepublic over the preceding 12 months pursuant to securities laws in any other jurisdiction worldwide.
IFRS Accounts Prepare two years of historical financial information in accordance with IFRS or equivalent.
Interim Financials Interim financials must be included in the prospectus if it is dated more than nine months after theend of the last audited financial year.
Selected FinancialInformation
The prospectus must also contain a summary of selected financial information for the relevantfinancial periods.
Principal Investments Provide a description of principal investments made since the date of the last published financialstatements, plus a description of future principal investments that the issuer has committed to.
Trends and ProfitForecasts
Include information on any known trends, uncertainties, demands, commitments or events that arereasonably likely to have a material effect on the issuer’s prospects for at least the current financialyear. Any profit forecasts must be accompanied by an auditor’s report stating that the profit forecastis consistent with the issuer’s accounting principles.
Board Practices Give details of the issuer’s audit committee as well as a statement as to compliance with the localcorporate governance regime.
ConstitutionalDocuments
Include a description of the issuer’s objects and purposes and detailed information relating to theissuer’s share capital.
Securities SpecificInformation
Give reasons for the offer if different from making a profit and/or hedging certain risks.
Give information on taxes on the income from the securities withheld at source and an indication asto whether the issuer assumes responsibility for the withholding of taxes at source.
Give details of the conditions, offer statistics, expected timetable and any action required to apply forthe offer.
Give details of plans for distribution and allotment along with placing and underwriting arrangements.
Additional obligationsunder the TransparencyObligations Directive
This requires annual and semi-annual financial reports prepared using IFRS or an equivalent standard,including management reports detailing important events that have occurred within the relevantperiod. These reports are designed to help investors take investment decisions and relevant officersof the issuer will have to take responsibility for them. As publication of the reports will be EU-wide,there is potential multi-jurisdictional liability should the reports omit or misrepresent importantinformation.
Table 1: Additional requirements of the Retail Regime
to issuers who might want to list debt securities
denominated below euros 50,000, but which are
not aimed at the retail market. This is particularly
so for Russian issuers, whose accounting
standards are currently not deemed equivalent to
IFRS. The cost of re-stating or providing
additional disclosure under the retail regime
could be prohibitive to such issuers.
Before the introduction of the Professional
Securities Market in 2005, there was
considerable speculation about the potential
damage that the Prospectus Directive would
inflict upon European exchanges. There was an
expectation that non-EEA issuers would seek
alternative listings, outside the EEA.
The London Stock Exchange’s responseThe response of the London Stock Exchange to
the projected impact of the Prospectus Directive
was to create the PSM. The PSM is regulated by
the London Stock Exchange itself (ie it is an
‘exchange-regulated market’), and is therefore
not a ‘Regulated Market’ for the purposes of the
Prospectus Directive. Consequently the
Exchange was able to tailor the listing
requirements of the PSM to circumvent the
difficulties posed by the Prospectus Directive to
potential issuers of debt securities denominated
below euros 50,000, but aimed at the wholesale
market. Principally, the PSM allows issuers to list
debt securities with a denomination of less than
euros 50,000, whilst complying with the
‘wholesale’ standard of disclosure. In particular,
issuers need not restate their accounts to IFRS.
1 0 0 L i s t i n g i n L o n d o n : a p r o f e s s i o n a l h a n d b o o k
In March 2007 (only two years after its
establishment) over 670 issues of securities had
been admitted to trading on the PSM, raising just
over £40 billion since the market opened in July
2005. In August 2009, the total number of issues
of securities admitted to trading on the PSM was
553. The decrease can be explained by the fact
that US GAAP, Canadian GAAP and Japanese
GAAP are now considered equivalent to IFRS and
so the issuers who report in those standards are
able to list on the Main Market.
Reliability and legitimacy of the PSMDespite the fact that the PSM is an exchange-
regulated market and can therefore list debt
securities from issuers that do not produce IFRS
accounts, the disclosure obligations of issuers on the
PSM broadly mirror those of issuers listing their debt
on the Main Market. Issuers intending to have their
debt securities listed on the PSM have to comply
with Chapter 4 of the Listing Rules and produce
listing particulars which have to be approved by the
UKLA. Once a company has its securities admitted
to the PSM, it has to comply with the continuing
obligations set out in the Listing Rules.
By electing the Professional Securities Market
route to listing, issuers are able to list any type of
debt security, including those carrying the right to
convert or acquire equity, of any denomination and
follow the wholesale disclosure regime, without the
requirement for additional equity disclosure for
convertible securities (see Table 2 for a summary of
the disclosure requirements).
1 0 1L i s t i n g i n L o n d o n : a p r o f e s s i o n a l h a n d b o o k
Persons responsible Details of persons responsible for the information in the prospectus and declarations ofresponsibility for such information.
Auditors Details of auditors for the period covered by disclosed financial information. An indication of anyinformation in the prospectus that has been audited or reviewed by auditors and a copy of anyauditor report (or a summary of such report if permitted by the competent authority).
Advisers If mentioned in the prospectus, a statement of the capacity in which the advisers have acted
Risk factors Both in respect of the issuer’s ability to fulfil its obligations under the securities and any factorsmaterial to an assessment of the market risk associated with the type of securities beingissued. These must be given prominent disclosure and a separate heading.
Information about the issuer Including name, history and development, registration and incorporation details, domicile, legalform, details of registered office and/or principal place of business and any recent eventsmaterially relevant to an evaluation of the issuer’s solvency.
Information about thesecurities
Total amount being admitted; description of type, class, form and rank; identification code (egISIN); governing law; currency of the issue; rights attaching to the securities; interestprovisions; maturity date; repayment procedures; indication of yield; form of representation ofholders of the securities; statement of resolutions, authorisations and approvals under whichthe issue is made; issue date; description of any restrictions on free transferability; marketwhere securities will be traded; details of any paying agents and depository agents; estimate ofexpenses relating to admission to trading.
Interests of persons involved in the issue
Disclosure of any interest, of any legal or natural person, that is material to the issue.
Business overview Principal business activities and basis for any statements in the prospectus about the issuer’scompetitive position.
Organisational structure Details of group membership (if any) and disclosure of any dependence upon other entitieswithin the group.
No material adverse change declaration
Declaration of no material adverse change in the issuer’s prospects since the last auditedaccounts were published.
Optional profit forecasts If an issuer chooses to include a profit forecast, it must disclose its principal assumptions uponwhich the forecast has been made and include a statement that they have been properlyprepared.
Administration andmanagement
Details of members of the issuer’s administrative, management and supervisory bodies andtheir activities, plus any potential conflicts of interest.
Major shareholders Details of known direct or indirect ownership or control of the issuer and measures in place toprevent abuse of such control. Any arrangements known to the issuer that may later result in achange in such control.
Table 2: Summary of information to be disclosed in the prospectus for a listing of securities on theProfessional Securities Market
1 0 2 L i s t i n g i n L o n d o n : a p r o f e s s i o n a l h a n d b o o k
Financial information Audited historical financial information covering the latest 2 financial years and auditreport for each year. Where the financial information is not prepared in accordancewith IFRS (or equivalent) a declaration that it has not been so prepared and adescription of the differences between IFRS and the accounting principles adopted bythe issuer is required (although the requirement for such a declaration may in practicebe waived for many issuers admitting to the PSM).
Proceedings Information on any legal or arbitrational proceedings (covering at least the last 12months) that may have or have had a significant effect on the issuer’s financialposition.
Significant change in financialor trading position
Description of any such change affecting the issuers group that has occurred sincethe end of the last financial period covered by published audited or interim financialinformation.
Material contracts Summary of all material contracts not entered into in the ordinary course of theissuer’s business that could affect an issuer’s ability to meet its obligation to securityholders.
Expert information Details of any third party that has submitted information to the prospectus as anexpert and a declaration of any material interest of such a party in the issuer.
Responsibility for third-party information
Declaration that any information sourced from a third party has been accuratelyreproduced and that the issuer is not aware of any omission that would render theinformation inaccurate or misleading, and details of the source of such information.
Credit ratings Details of credit ratings relating to the issuer or its debt securities at the request orwith the co-operation of the issuer in the rating process.
Documents on display An undertaking to keep on display, and details of where the following documents aredisplayed: (i) issuer’s constitutional documents; (ii) documents referred to or includedin the prospectus; and (iii) historical information relating to the issuer and any of itssubsidiaries covering the 2 years preceding the publication of the prospectus.
Table 2: continued
Impact of the implementation of theTransparency Obligations DirectiveThe implementation of the Transparency
Obligations Directive in the UK has imposed new
periodic reporting requirements on issuers of
securities admitted to trading on Regulated
Markets. In light of these requirements the
Professional Securities Market may appear
increasingly attractive to Russian issuers. Should
the continuing obligations under the Transparency
Obligations Directive prove difficult to comply with
because the relevant issuer does not produce
IFRS accounts, issuers can transfer their debt
securities from the Main Market to the PSM. This
is a relatively easy process and incurs no charge
from the Exchange. A number of non-EU issuers
have already transferred their debt securities to
the PSM in order to avoid having to comply with
the Transparency Obligations Directive and other
European directives that apply only to the
Regulated Market.