A practical guide to listing on the Italian Stock Exchange

Transcription

1 A practical guide to listing on the Italian Stock Exchange Contact: Alessandra Piersimoni Italy Federica Munno Italy

2 INTRODUCTION This guide gives an overview of the listing process of an Italian joint stock company on an Italian regulated market managed by Borsa Italiana. It is a practical manual covering all aspects of the float, ranging from listing requirements to life of an issuer after the float. 2

3 CONTENTS 1. Definitions 4 2. Frequently Asked Questions 6 3. Parties involved in the listing procedure Issuer and other members of the working group Public Authorities and other parties involved in the listing procedure Listing requirements Getting the company ready Corporate governance Corporate Actions Overview of the listing procedure Preliminary Phase Structure of the offer and preparation of the documentation The procedure with Borsa Italiana and Consob The offer and the beginning of the trading of the shares on the MTA Due Diligence Offering Documentation Prospectus International offering circular Comfort letters and opinions Comfort letters Legal opinions Publicity and Marketing Publicity during the listing procedure Marketing activities Structure of the global offer Public offer and institutional offer Reserved tranches of the public offer and incentives Underwriting syndicates and underwriting agreements Lock-up commitments Greenshoe or over-allotment option Offer Period and allocation of the shares Pricing Book building Price methodologies Stabilization activities Fees Life after Float Issuers disclosure obligations 45 APPENDIX A - INDICATIVE TIMETABLE 48 APPENDIX B - LEGAL FRAMEWORK 1 Applicable laws and regulations 1 3

4 Italian markets organised and managed by Borsa Italiana 2 FLOAT GUIDE 1. Definitions Borsa Italiana CFA Corporate Code Consob Governance means Borsa Italiana S.p.A., the company managing the Italian Stock Exchange means Legislative Decree 24 February 1998, No. 58 enacting the Consolidated Financial Act. means the Codice di autodisciplina issued by Borsa Italiana S.p.A. means the Commissione Nazionale per le Società e la Borsa, the Italian stock exchange authority. Global Coordinator Instructions Issuers Regulation Listing Rules MAR Markets Regulation MIV MTA OPS means the manager responsible to overseeing the Global Offer and for coordinating the activities of the consortium. means the relevant instructions issued by Borsa Italiana in connection with the Listing Rules. means Consob Regulation No /1999 implementing the CFA. means the rules of the markets organised and managed by Borsa Italiana. means the EU Regulation 596/2014 (and relevant enacting regulations) implementing the market abuse regime. means Consob Regulation No /2007 implementing MiFID Directives means the Mercato Telematico degli Investment Vehicles organised and managed by Borsa Italiana means the Mercato Telematico Azionario (Electronic Share Market) organised and managed by Borsa Italiana. means offerta pubblica di sottoscrizione, an offer to the public of new shares issued by the company by way of a share capital increase (also known as primary component ). 4

5 OPV Prospectus Directive Prospectus Regulation QMAT Responsabile del collocamento STAR means offerta pubblica di vendita, an offer to the public of shares sold by one or more of the current shareholders of the issuer, such as its founders or other equity investors (also known as secondary component ). means Directive 2003/71/CE (as amended). means Commission Regulation (EC) 809/2004 (as amended). means Quotation Management Admission Test, which is a document required by Borsa Italiana to analyse the Issuer s business model, to identify the relevant stakeholders and to understand the competitive situation. means the lead manager of the public offer, i.e. the bank that forms and coordinates the consortium for an Italian public offer. means the Segmento Titoli con Alti Requisiti, a segment of the MTA. 5

6 2. Frequently Asked Questions Why should an issuer decide to go public? The most common reasons for an issuer to go public are the access to new sources of financing and the chance to strengthen its national and international standing through the adoption of a solid corporate structure aimed at creating value for its shareholders. What are the main advantages and disadvantages involved in going public? The advantages and disadvantages of going public can differ greatly depending on the background and profile of each issuer approaching the market. However, in very broad terms, the main advantages are the following: - greater financial soundness and improvement of the corporate image; - source of new equity for finance expansion programmes; - enhanced capacity to attract highly qualified managers willing to share the benefits and undertake responsibilities in connection with the company being constantly assessed by the market; - higher marketability of the shares. On the other hand, going public can have, inter alia, the following disadvantages: - volatility of the share value, which often depends on the mood of the market instead of the performance of the issuer; - higher risk of shareholders losing control in the event of a hostile takeover; - significant changes in the corporate culture due to the depersonalization of the issuer and compliance with strict rules on corporate governance; - high expenses and commissions for the listing procedure. Only industrial companies can be listed? Besides industrial companies seeking for the above mentioned improvements of their business and structure, also investment companies and funds meeting certain portfolio s diversification criteria can be listed on a regulated market (the MIV). In particular, in the last few years the Italian market has seen a significant number of SPACs (special purpose acquisition companies) going public. Based on the US and UK model, SPACs are shell companies incorporated by certain promoters to raise money on the market and then complete a business combination with a target company, mainly through the merger of the latter by 6

7 incorporation into the SPAC. Through the merger into the listed SPAC, the target company gets automatically public by means of a process that - compared to the traditional IPO path - does not have to face any market risk connected with the placement of the shares. Italian SPACs are mainly listed on the AIM and very few of them (characterized by a larger size and a more sophisticated investors platform) are listed on the MIV. On which Italian markets can shares be listed? The foremost regulated market in Italy is the MTA. Within the MTA, there are two specific segments aimed at diversifying certain classes of issuers: - the STAR, on which issuers are required to comply with enhanced standards of transparency, corporate governance, and share liquidity; and - the MTA International, on which shares of foreign issuers, whose shares are already traded on other regulated markets of European Union, can be admitted to trading. Another regulated market, where the financial instruments issued by investment companies, funds and SPACs are traded, is the MIV. Borsa Italiana also manages certain non-regulated markets, introduced primarily with the aim of simplifying the listing procedure for small-medium issuers. The most relevant is the AIM. What requirements must the issuer meet to become listed? There are several listing requirements which are described further in this guide. The following table shows the main requirements which an issuer must keep in mind when first assessing the possibility of going public on the main Italian stock markets: Free float resulting from the offer Audited financial statements Foreseeable market capitalisation MTA STAR MIV AIM 25% 35% 35% 10% last 3 years prior to filing foreseeable market capitalisation of at least Euro 40 million. last 3 years prior to filing foreseeable market capitalization at least equal to Euro 40 million and not exceeding Euro 1 billion last 3 years prior to filing foreseeable market capitalization at least equal to Euro 40 million last 3 years prior to filing not required 7

8 What does the issuer have to bear in mind after applying for admission to listing? From the date on which the application to listing has been filed, the issuer must comply with Article 114 of the CFA (implementing the MAR) stipulating the issuers obligation to fully disclose any price-sensitive information to the public, i.e. any privileged information which - if made public - could significantly affect the price of the issuer s shares. Who will buy the shares? In the context of a public offer aimed at listing, the shares may be purchased by institutional investors and retail investors, depending on the structure of the offer. Usually shares are allocated between the two categories of investors in the following way: - 80% to institutional investors (including foreign investors, which in recent years have played an important role on the market by purchasing significant amounts of shares in IPOs); - 20% to retail investors. How long does it take to complete the listing procedure? The duration of the listing procedure may be influenced by many factors such as the size of the issuer, its corporate and organisational structure, the sector in which it operates, the structure of the offer, and the level of complexity of the due diligence process. However, the average duration of the entire listing process is usually around weeks. 8

9 3. Parties involved in the listing procedure To achieve the goal of listing its shares on the stock exchange, the issuer needs to set up a working group capable of handling the various aspects of the listing project. 3.1 Issuer and other members of the working group The issuer and its legal and financial advisors The issuer is a crucial actor in the process, as it plays a pivotal role in drafting almost all the key documents of the transaction. Thus, the issuer must be ready to commit significant resources, including its senior and top management, to the process. The issuer is primarily assisted by a legal counsel and often by a financial advisor. The legal counsel carry out the legal due diligence on the issuer (and delivers the relevant comfort letter/legal opinions to the underwriters), leads the drafting of the prospectus (and of the international offering circular, if any), assists the issuer in setting up the corporate governance and in the negotiation of agreements with other parties involved in the transaction (such as, inter alia, the underwriting agreement, the engagement letters of the auditors, and the agreement with the specialist, see below). The issuer is often assisted by a financial advisor who advises on drafting the budget, the business plan and the QMAT. The financial advisor also assists the issuer in discussing key elements of the transaction with the underwriters, such as the structure of the offer, the evaluation of the issuer, and the final pricing of the shares. Banks Various financial institutions are usually involved in an IPO and act in different capacities depending on the size and structure of the offer. Traditionally, in the basic scheme of an IPO a bank or a group of banks is engaged by the issuer to place the shares with investors and underwrite the offer. Within this basic scheme, however, each bank can play a different role, as outlined below. The Global Coordinator is the lead manager of the institutional offer. The Global Coordinator forms the consortium in charge of placing the shares with institutional investors and, eventually, underwriting the offer. The function of a Global Coordinator can be per- 9

10 formed jointly by several banks acting as Joint Global Coordinators, often including international banks when the offer is addressed to institutional investors outside Italy. The shares of the issuer are generally placed by means of a public offer to retail investors or by means of a private placement with institutional investors in Italy and/or abroad. The bank that forms and coordinates the consortium for a public offer (which is referred to as Responsabile del Collocamento ) has a specific role because it undertakes certain responsibility regarding the accuracy and completeness of the information included in the prospectus. Underwriters are assisted by an Italian legal counsel and an international legal counsel, which are in charge of carrying out the legal due diligence on the issuer and on its group and participate in the drafting of a prospectus and an offering circular and assist underwriters in the negotiation of agreements relating to the transaction. Under the Listing Rules, the issuer must also appoint either a Responsabile del Collocamento or a Global Coordinator to act as the issuer s sponsor for the IPO. The sponsor is required to assist the issuer during the IPO and to act as a gatekeeper for the issuer during the flotation process. To this end, the Listing Rules require the sponsor, inter alia, to provide Borsa Italiana with a negative assurance as to the adequacy of the internal control system and the reasonableness of the assumptions and forecasts included in the business plan relating to the year in which the issuer requested the admission to listing (or the first six months of the following year, if the issuer requested listing of its shares after September 15). Moreover, at least for the first year following flotation the sponsor must publish a minimum of two analysts researches per year concerning the issuer and organise at least two meetings between institutional investors and the management of the issuer. In order to ensure that the market for the newly listed shares is sufficiently liquid the issuer may appoint a financial institution to act as a specialist. Under the Listing Rules the appointment of a specialist is required for issuers listed on the MIV and on the STAR segment of the MTA. The specialist acts as a market maker for the shares by continuously posting bid and ask prices (within a range established by Borsa Italiana), thus reducing the volatility and spread of the shares on the market. 10

11 Auditors and other consultants Auditors and other consultants are involved in the IPO, as their assistance is needed to carry out procedures to ensure the correctness of the information included in the documentation and provided to the investors, Consob, and Borsa Italiana. Auditors of the issuer are primarily responsible for the audit of the financial statements covering at least the last three financial years which must be included in the prospectus (including the pro-forma financial information, where necessary). In addition to the audit of financial statements, auditors are generally required to perform additional procedures, which are the subject matter of a separate engagement and are aimed at issuing comfort letters addressed to the issuer and/or the underwriters for the purposes of their due diligence. Public Relations firm Marketing and advertising campaigns in the context of a public offer require specific capabilities which issuers generally do not have in-house. Thus, the issuer may appoint a specialised public relations firm to lay down a communication and advertising plan for the offer and handle media relations. The communication plan is usually agreed with the Global Coordinators. Legal counsels are often involved in the process as the matter is subject to tight regulation. 3.2 Public Authorities and other parties involved in the listing procedure Consob and Borsa Italiana Consob and Borsa Italiana play a crucial role in the flotation process. Consob is the authority in charge of approving the prospectus under the Prospectus Directive, thus its main objective is to ensure that the market and investors are properly and adequately informed about the issuer and the offer. After the first draft of the prospectus is filed with Consob, its officers conduct a thorough review of the document, often asking the issuer and its counsel to modify and restate some parts before granting final approval. Borsa Italiana also conducts its own due diligence on the issuer, which is primarily aimed at ensuring that the issuer complies with all the requirements for listing set forth in the Listing Rules and the Instructions. 11

12 Monte Titoli S.p.A. and the manager of securities services Monte Titoli S.p.A. is a clearing house that provides settlement and custody services for its participants. Under the Listing Rules the issuer s shares must be dematerialised in order to allow settlement through the clearing house of the transactions that occur on the stock exchange. For this purpose the issuer usually appoints a manager of securities services, a specialised company which dematerialises the shares, obtains the relevant ISIN (International Securities Identifying Number) code, and takes care of all the formalities related to the record keeping obligations of the issuer (such as keeping the shareholders ledger, handling proxy voting at the issuer s general meetings, etc.). 12

13 4. Listing requirements Before an issuer can be floated on the MTA, it must satisfy certain requirements relating to market capitalisation and free float, and it must also ensure that its corporate governance is consistent with the Listing Rules. The table below sets out the main requirements that must be met by the issuer and its shares for admission to listing on the MTA and additional conditions to be satisfied for the listing on the STAR segment. It is understood that the list below is not exhaustive: in certain circumstances, to satisfy investors need of protection Borsa Italiana may impose further conditions for admission to listing subject to prior notice to the issuer. Requirements to be met by the consolidated annual financial statements of the preceding the issuer for admission to three financial years must have been published, filed with the listing on the MTA company s register, and audited by an auditing firm. Admission to listing may not be granted where the auditing firm has rendered a negative opinion or refused to render an opinion assets or revenues may not consist predominantly of an investment in a company whose shares are admitted to trading on a regulated market the issuer must carry on an activity capable of autonomously generating revenues an auditing firm must be appointed by the issuer to audit its financial statements foreseeable market capitalisation of at least Euro 40 million. Requirements to be met by the Borsa Italiana may admit shares with a smaller market capitalisation where it believes that an adequate market for such shares shares for admission to listing on the MTA will develop free float resulting from the offer of at least 25% of the capital represented by shares of the same class, where free float means adequate distribution of the issuer s shares among the public, assessed without taken into consideration (i) shareholdings exceeding 3% (or 5% if the issuer qualifies as medium-small company), (ii) shareholdings bound by shareholders agreements 13

14 Additional requirements for admission to listing on the STAR and (iii) shareholdings subject to lock-up agreements with a duration of more than 6 months. market capitalization at least equal to Euro 40 million and not exceeding Euro 1 billion. free float resulting from the offer of at least 35% of the capital represented by shares of the same class. See above for a definition of free float. a specialist acting as market maker for the shares must be appointed by the issuer the composition of the board of directors of the issuer, its internal committees and the directors remuneration policies must comply with principles and criteria of the Corporate Governance Code periodic financial statements must be made available to the public on the issuers website in both Italian and English within specific time limits issuers must have adopted an adequate internal control system and the organisational model provided for by Legislative Decree 231/2001, aimed at preventing the issuer s liability for certain types of crimes committed by its representatives/directors/employees. * * * * * Very few foreign companies are listed on the MTA. The Listing Rules require that foreign issuers seeking listing provide certain additional documentation and comply with certain specific requirements. 14

15 5. Getting the company ready Turning a private company into a public one entails many fundamental changes. The organisation and corporate governance structure that worked well while the issuer was in private hands must often be reshaped to comply with stricter legal provisions and meet expectations of the market. 5.1 Corporate governance The legal framework applicable to the corporate governance of Italian listed companies comprises a variety of sources, including provisions of law (such as, in particular, those included in the CFA), the Listing Rules and some soft law instruments (such as the Corporate Governance Code). Also, in structuring the corporate governance of a listed company, the management should give proper consideration to the market practice and the model of governance adopted by the issuer s peers. The Board of Directors The composition of the Board of Directors of a listed company tends to be very different from that of a private company, and often needs to be enlarged to comply with rules aimed at achieving a balanced composition in terms of members skills, independency, experience and genders diversity. According to the CFA, an Italian listed issuer must at least (i) have not less than one independent director (or not less than two, if the Board is composed of more than seven directors); and (ii) grant the minority shareholders the power to appoint not less than one director. Besides this legal requirement, the Listing Rules and the Code of Best Practice require that issuers listed on the STAR segment must have not less than (i) two independent directors if the Board is composed of up to eight members; and (iii) three independent directors if the Board is composed of more than eight members. As to the ratio between executive and independent directors, the Markets Regulation sets out additional requirements for issuers subject to guidance and coordination by another entity and in particular: (i) if the entity exercising guidance and coordination is a private company, the internal committees established by the Board of Directors must be composed only of independent directors; and, in addition to such requirement, (ii) if the entity exercising guidance and coordination is a listed company, also half members of the Board must be independent. 15

16 Moreover, the less represented gender must have at least 1/3 of the seats at the Board of directors (with the possibility to reduce the ratio at 1/5 for the first appointment of the Board members made in accordance with the new rules). A company found in breach with this requirement is sanctioned by Consob with an administrative pecuniary measure along with a request to comply, by modifying the Board composition within four months as of the authority s request. If there is a further breach, the elected members of the concerned body will automatically cease from their office. Considering soft-law, the Code of Best Practice contains certain recommendations as to the composition and functioning of the Board of Directors which are, in general, not compulsory, but are often followed by the issuers. In any case, non-compliance with such recommendations should be explained in the corporate governance report yearly published by the issuer (so called comply-or-explain principle). In particular, such recommendations include: a) the establishment and composition of committees within the Board of Directors such as, in particular, an internal control committee, a remuneration committee, and an appointment committee; b) more stringent independence requirements for independent directors; c) a separation of roles between the chairman of the Board of Directors and the CEO or, alternatively, the appointment of a lead independent director; d) the appointment of a director specifically responsible to monitor the internal control system and the adequacy of the internal procedures set up for the purposes of risk assessment and risk management; e) a recommendation to avoid the so called cross directorship, i.e. a CEO of company A may not be appointed as director of company B (not belonging to the same group of company A) if the CEO of company B has already been appointed as director of company A. Concerning the remuneration of directors, the Code of Best Practice encourages the adoption of mechanisms that link a significant part of the compensation of the executive directors with the medium/long term results of the issuer. These typically include the adoption of a bonus scheme or other incentive plans that tie part of the compensation to the market price of the shares (such as stock option plans, and granting of shares). These principles 16

17 have been reflected in the model of remuneration report - to be published yearly by the issuer according to the CFA - as provided by the Issuers Regulation, according to which non-compliance with said criteria must be explained. Statutory auditors, external auditors and officer in charge of financial reports The system of internal control of a listed company must be consistent with the following requirements: a) the members of the board of statutory auditors (which is in charge of ensuring the issuer s compliance with law and the adequacy of the issuer s management and accounting system) must have certain specific qualifications and minority shareholders must have the power to appoint at least one member of the Board. Please note that also the composition of the Board of Statutory Auditors has to reflect the requirements in terms of gender diversity; b) the appointment of an external auditor, which is required to audit the financial statements of the issuer and must be in charge for nine years (not immediately renewable at the expiration of the term); c) the appointment of an officer or a director of the issuer who will take responsibility for the information included in the financial statements. Relations with shareholders The Corporate Governance Code encourages issuers to promote shareholders interest and participation at shareholders meetings by making corporate documents easily accessible and appointing a person in charge of investor relations who is responsible for dealing with enquiries from investors and other members of the financial community. Although this appointment is mandatory only for issuers listed on the STAR under the Listing Rules, almost all listed issuers appoint a person in charge of investor relations within their organisation. Procedures The issuer is required to put certain procedures in place to handle some of the most critical aspects of the life of a listed company. Under the CFA, the issuer must adopt a procedure for transacting with its related parties, while the Corporate Governance Code encourages the issuer to adopt a procedure for handling inside information and to comply with the 17

18 rules on internal dealings in accordance with the MAR. 5.2 Corporate Actions Several actions need to be taken by various corporate bodies to implement the listing procedure. Actions relating to the listing and the structure of the offer Generally, the shares offered in an IPO include both (i) shares sold by the current shareholders of the issuer, such as its founders or other equity investors (e.g. private equity firms or venture capitalists) seeking return on their investment (the so-called OPV), and (ii) shares issued by the company, which will then retain the proceeds and invest them in accordance with its strategy (the so-called OPS). Various corporate actions are required, depending on whether or not the offer includes an OPS. In any event, the decision to list on the stock exchange requires - upon proposal of the board of directors - the approval of the general meeting of the issuer, which is generally called once the structure of the offer has almost been determined. Moreover, if the offer comprises an OPS the extraordinary general meeting of the issuer will have to resolve a share capital increase to make the new shares available to the investors that will subscribe to the offer. The proposal by the board of directors concerning the share capital increase is particularly important, as existing shareholders have, in principle, an option right in the case of a rights issue. The option right, however, can be waived by the company if the directors show that the waiver is necessary to pursue the interests of the company, as in the case of flotation. Actions regarding the corporate governance of the issuer In order to implement the corporate governance structure described above, several actions need to be taken by the general meeting and by the board of directors of the issuer. In terms of timing, necessary resolutions must be adopted by the competent bodies before the offer begins, but the effectiveness of these resolutions is often conditional upon the beginning of trading of the shares. It is a simple precaution aimed at avoiding the burden of unwinding a complicated corporate governance structure if the IPO falls apart. The general meeting must approve the new by-laws of the issuer, which will reflect the 18

19 new corporate governance of the issuer. Also the general meeting will have to approve the listing procedure in its entirety, adopt the regulation which will govern the conduct of the shareholders meetings and often appoint the new members of the board of directors and an auditor. The board of directors usually convenes several times during the IPO. First, it will approve the appointment of the Global Coordinators and all other parties involved in the process. At a later stage, it will have to adopt the procedures described in paragraph 6 below, appoint committees and their members and, sometimes, modify the powers of the executive directors so that the most important matters are reserved to the decision of the board of directors. 19

20 6. Overview of the listing procedure The listing process lasts approximately 24 to 30 weeks. It starts with a kick-off meeting with all the parties involved and, after having obtained the necessary approvals and authorisations and having agreed on various contracts, comfort letters and legal opinions, is completed on the first day of trading of the shares. 6.1 Preliminary Phase Before starting the float process, the issuer needs to appoint the members of the working group. For the process to succeed it is important that all members of the working group - particularly the issuer, for whom the flotation is often a once in a lifetime experience - are fully aware of their roles and responsibilities including, in particular, the sign-offs that each party is expected to give throughout the process. In order to balance the success of the float process with the efficiency of the management of the issuer s ordinary business, the issuer should assign the responsibilities for handling the IPO to one or two executives, so that the rest of the management team can remain focused on running the business, thus minimising the impact on day to day operations of the issuer. In order to set out clearly the respective areas of responsibilities and the timing of the required activities, the preliminary phase includes the organisation of a kick-off meeting aimed at (i) presenting the working group and outlining the role of each member; (ii) illustrating the main features of the transaction, and (iii) sharing the main steps to be followed. In order to ensure coordination of all necessary steps, the members of the float team responsible for preparation of the documentation (i.e. the issuer, the banks, the legal counsel and the auditors) immediately after the kick-off meeting should circulate and comment on an indicative timetable outlining the respective responsibilities. 6.2 Structure of the offer and preparation of the documentation The first phase of an IPO includes the following activities to be performed simultaneously: a) setting up a data room for the due diligence process to be conducted by the legal counsel of the issuer, the banks, the auditors and other consultants involved in the process. The legal counsel and other consultants have access to the data room 20

21 from the very beginning of the float process until the cut-off date of the last comfort letter (i.e. the time of pricing and signing of the institutional underwriting agreement or at the time of exercise of the greenshoe option, where applicable); b) definition of the structure of the offer (i.e. OPS and/or OPV; extension of the private placement with institutional investors in Italy and/or abroad and/or in the US; decision to reserve certain amounts of the shares to special categories of potential investors and initial evaluation of the different tranches of the offer); c) introductory meeting with the competent authorities: the representatives of the issuer and the banks organise a preliminary meeting with the authorities to present the issuer, illustrate the main features of the offer and submit a proposal for the timing of the listing (i.e. indicative dates for the filing of a prospectus and expected date of the approval). The expected timing of the IPO should be discussed at the beginning of the IPO with Consob and Borsa Italiana, in order to clear in advance any potential issue which may cause delays in the process; d) preparation of the documentation: a first draft of the prospectus is circulated among the parties and is commented also on the basis of the initial results of the due diligence investigation conducted by the respective legal counsel. For this purpose, all parties are invited to participate to the various meetings organized for drafting the prospectus. Besides the offering documentation, the issuer helped by its consultants starts preparing the so called business documentation that must be attached to the request for admission to trading as required by the Listing Rules and the Instructions (i.e. the budget and industrial plan, the QMAT, the memorandum of the management control system and the corporate governance report). First drafts of the legal opinions and comfort letters should also be circulated among the parties from the beginning of the process in order to avoid last minute negotiations that could be an obstacle to the final sign-offs. 21

22 6.3 The procedure with Borsa Italiana and Consob Once the sign-offs have been given by the relevant parties, the draft prospectus is ready to be filed with Consob and Borsa Italiana, which will conduct a simultaneous review of the document. In particular, Consob will verify coherence and clarity of the information included in the prospectus and may also require the issuer to provide clarification or additional information, or amend the prospectus. On the other hand, Borsa Italiana will focus on the issuer s compliance with all listing requirements under the Listing Rules. Consob has 20 business days to approve the prospectus. However, this term is suspended if Consob requires the issuer to provide additional information or missing documentation but, in any case, the entire procedure cannot last more than 70 business days, starting on the date in which the filing is deemed complete. As to Borsa Italiana, it generally grants the admission to listing a few days before Consob s approval of the prospectus. Generally, the overall procedure takes approximately 2 months from the first filing of the prospectus with the respective authorities. 6.4 The offer and the beginning of the trading of the shares on the MTA Once Consob has approved the prospectus, the offer can begin. Generally, the retail offer starts a few days after Consob s approval of the prospectus allowing the issuer to carry out marketing activities to promote the offer. At the end of the offer period, the Global Coordinators proceed with the allocation of the shares and assist the issuer in setting the appropriate price. Once the offer is closed and there is an adequate free float of shares, Borsa Italiana determines the market segment in which the shares will be traded and fixes the starting date of the trading - which normally falls on the settlement date, i.e. 5 trading days from the closing of the offer. 22

23 7. Due Diligence The purpose of the due diligence for an IPO is to ensure that the prospectus contains all the information necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profits and losses, and prospects of the issuer. Under the CFA the issuer and the offeror are primarily responsible for the information included in the prospectus, and are liable for damage incurred by investors who reasonably relied on the truthfulness and completeness of the information included in the prospectus. The same liability attaches to the Responsabile del Collocamento. The due diligence defense is, however, available under the CFA for both the issuer (and the offeror) and the Responsabile del Collocamento. Under this defense, there is no liability if the defendant can prove that he acted with the diligence required to ensure that the information included in the prospectus is accurate as to the facts stated therein, and does not contain any omission capable of altering their meaning. Therefore, in the context of an IPO, the role of the due diligence is twofold. On one side, the due diligence is necessary to gather the information required to draft the prospectus accurately. On the other side, its proper performance is a defense against liability and, therefore, needs to be accurately documented. Also, the results of the due diligence should be properly reflected in the prospectus, which is generally drafted simultaneously with the due diligence. This result is generally achieved by having the prospectus reviewed by all the parties involved during the due diligence process, and the content of the prospectus discussed in several drafting sessions before its final release and sign off. Most often, the legal due diligence is carried out by the legal counsel of both the banks and the issuer, while other consultants usually carry out an audit on other aspects of the issuer s organisation, such as the management control system, and give their sign-offs on the data included in the prospectus or other documentation of the IPO (such as accounting data, non-financial information or the business plan). Comfort letters are issued based on the results of the due diligence and are then released to the banks. Although comfort letters are important to protect the banks from liability in connection with the prospectus, their existence is not in itself sufficient to discharge the banks from their due diligence obligations. On the contrary, the issuer and the banks 23

24 should be active participants in the due diligence process, as they must be satisfied with the adequacy of the due diligence system, scrutinise all the materials prepared by the consultants and if necessary ask for further investigations. 24

25 8. Offering Documentation The publication of a prospectus is required to make a public offer of securities and/or have securities listed on a regulated market. 8.1 Prospectus In terms of structure, the prospectus can be prepared as a sole document or as three separate documents, including the summary, the information about the issuer and the information notice relating to the offer. The latter solution allows greater flexibility as to the timing of the offer, particularly when the markets suffer periods of high volatility. In terms of content, the prospectus must generally contain all information necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profit and losses, and prospects of the issuer. Whenever any material information becomes available after the approval of the prospectus but before the end of the offer period, a supplement to the prospectus must be published, granting investors who have already applied for the shares a right of withdrawal to be exercised within a timeframe set by the issuer but, in any case, not shorter than two business days. The prospectus must include not only the information known to the issuer s management and other persons responsible for drafting the prospectus, but also the information which could have been known after reasonable investigation. That explains the need to conduct a proper due diligence. Below is an itemised list of the information concerning the issuer that needs to be included in the prospectus, in accordance with the Prospectus Regulation. Please consider that, in evaluating the extent and adequacy of the information to be provided under the items below, Consob takes into account the ESMA Recommendations for the consistent implementation of the Prospectus Regulation. Introduction Persons responsible for the prospectus Statutory auditors Selected financial information Risk factors 25

26 Main facts about the issuer, business description and investments Operating and financial review, capital resources Management, employees and corporate governance Related parties transactions Financial information concerning the issuer Material contracts History and development of the issuer Investments Principal activities Principal markets Organisational structure Property, plants, and equipment Financial condition Operating results Capital resources Overview of senior management and main corporate bodies Conflicts of interests of managers, officers and directors Remuneration and benefits Practices of the Board of Directors Employees Major shareholders Share capital and description of the articles of association Details of related parties transactions Historical financial information Pro-forma financial information (to be included if the issuer s corporate structure underwent significant changes affecting the comparability of the results in the reference period) Financial statements and auditors certificates Interim and other financial information Dividend policy Legal proceedings Description of material contracts other than those entered into in the ordinary course of business (typically financing agreements) Financial information The prospectus must include the audited financial statements of the last three financial years. The last two years of historical financial information should be presented and prepared in a form consistent with that to be adopted for the future financial statements. Therefore, if the financial statements of the preceding three years were drafted by the issuer in accordance with Italian GAAPs, it will be required to restate the financial statements of at least the preceding two years in accordance with the IFRS. If the prospectus is dated more than nine months after the end of the last audited financial 26

27 statements, it must contain an interim financial statement covering at least the first six months of the year which, under the Listing Rules, should also be audited. Also, according to the Listing Rules, the prospectus should include interim financial information for the first or the third quarter if the issuer is admitted to listing after 45 days as of the end of each quarter. If the issuer has undergone a material change, it must include pro forma financial information in the prospectus, showing the effects of such changes, which must include a report prepared by the issuer s auditors. Profit forecasts and estimates There is no legal requirement to include profit forecasts or estimates in the prospectus. However, the issuer often includes certain narrative descriptions of the various factors that may influence its results, in order to meet investors expectations. If the issuer chooses to include a profit forecast or profit estimate in the prospectus, the prospectus must contain (i) a clear explanation of the basis of the forecast or estimate; and (ii) a report prepared by the issuer s auditors stating that the estimate was properly compiled and is consistent with the accounting policies of the issuer. The preparation of such a report by the auditors may take some time and cause delays to the timetable of the offer. Dividend policy The prospectus requires the issuer to state its dividend policy. The dividend policy is defined by the issuer, usually upon consultation with its financial advisors and the underwriters, as it can impact the pricing of the shares. The policy is generally defined taking into account the expectations of the investors, the policy adopted by the issuer s peers, the profitability of the issuer and its need to reinvest profits. Risk factors The risk factors section is the section of the prospectus that is most thoroughly discussed between the issuer, the banks and the regulator. The purpose of this section is to warn investors as to the risks associated with the purchase of the issuer s shares, including the risks related to the issuer, the market in which it operates, or the conditions of the offer. 27

28 According to the Prospectus Regulation, the risk factors must be drafted in a plain language and presented in a decreasing order in terms of importance of the relevant risks. 8.2 International offering circular Within the context of an IPO, the offer is usually addressed to retail investors in Italy and institutional investors in Italy and abroad. Offers to international institutional investors are generally set up in such a way to benefit from an exemption from the requirements to draft a prospectus under the US Securities and Exchange Act, either under the Regulation S or Section 144A of the rules implementing the Act. The offer to institutional investors is usually made on the basis of an offering circular the content and structure of which follow a well-established market practice. The offering circular may only be circulated among institutional investors, as the only source of information for Italian retail investors must be the prospectus. The offering circular is drafted by an international legal counsel of the issuer and the underwriters, while Italian counsels will give their sign-offs stating that the content of the offering circular is coherent with the information included in the prospectus. Indeed, while the content of the offering circular must be coherent with that of the prospectus, the format of the document is in fact quite different. The offering circular contains most of the same items as the prospectus (such as those relating to the issuer s directors and officers, related parties transactions, governance, historical financial information, business description, etc.) as well as the chapter that is most relevant to institutional investors containing the so-called management discussion and analysis (MD&A). The MD&A is a description of the financial results and of all the factors that influenced or are expected to influence the performance of the issuer (a view of the issuer s results and prospects through the management s eyes ). Since the MD&A often includes forward looking statements, which can be slightly different from those included in the prospectus, this section should be reviewed with particular attention. From a practical standpoint, the banks in charge of the offer to international institutional investors usually market the offer on the basis of the so-called red-herring offering circular a draft of the document which is complete in all respects save the indication of the price, which will be determined at the end of the book building period, once the offer is 28

29 closed. The final draft of the offering circular including the final price of the shares is then sent by the banks to the investors to whom the shares are allocated. 29

30 9. Comfort letters and opinions The auditors are required to issue certain comfort letters and bring-down letters for the benefit of the underwriters and the sponsor. Also the Italian and the international legal counsel of the issuer and the underwriters are required to issue legal opinions. 9.1 Comfort letters The auditors of the issuer are required to issue certain comfort letters and bring-down letters for the benefit of the underwriters and the sponsor. These letters confirm that certain figures (in particular the financial information) contained in the prospectus and in the offering circular have been verified by the auditors. The auditors are also required to include a negative assurance in their comfort letters, stating that no changes have occurred in certain line items (such as the net financial indebtedness or the share capital) of the financial statements included in the offering documents since the relevant reference date. Such statements can only be given if not more than 135 days have elapsed between the last audited financial statements included in the offering documents and the day of issue of the auditors' letter. It is very important to bring the auditors on board at the very beginning of the process so that they could participate in the preparation of the prospectus and the offering circular, as the financial data included in the offer documents is generally subject to confirmation by comfort letters of the auditors. The following table indicates which type of comfort letters the auditors are usually required to provide at different steps of the process: Timing Prospectus Offering circular Filing of the prospectus with Consob and Borsa Italiana Consob s approval Signing of the Italian underwriting agreement Pricing/signing of the institutional underwriting agreement Comfort letter Comfort letter with negative assurance, if possible Bring down letter with negative assurance, if possible Bring down letter with negative assurance, if possible None Preliminary offering circular: comfort letter with negative assurance, if possible None Final offering circular: comfort letter with negative assurance 30