University of Milan Law School Legal English Course LISTING ON THE STOCK EXCHANGE IPO - INITIAL PUBLIC OFFERINGS

Transcription

1 LISTING ON THE STOCK EXCHANGE IPO - INITIAL PUBLIC OFFERINGS April/May

2 DEFINITION OF LISTING Listing means the admission of a company s shares to the Official List of a given stock exchange whether or not as a result of an IPO and thereby their admission to trading. As a result of the listing, the shares float and can be continuously and easily purchased and sold by the public investors. Although most of the listings occur as a result of a public offering (IPO), a listing may also occur in many other circumstances. 2

3 DEFINITION OF IPO IPO = Initial Public Offering Offer of a company s shares to the public for the listing on a stock exchange the flotation that follows the IPO allows the company s shares to be continuously and easily purchased and sold by the public investors. 3

4 PURPOSES THE CAPITAL STRUCTURE OF A COMPANY Shareholders Lenders Equity Debt Company s resources 4

5 PURPOSES THE CAPITAL STRUCTURE OF A COMPANY - EQUITY Founders funds: money provided by the people who started the business from scratch. Venture capital: money provided by VC firms, i.e. entities that help promising, early-stage businesses to develop and grow. Private equity: money provided by PE firms, i.e. entities that provide the company the financial resources to a later and further development and growth. ALL THOSE FORMS MAY COEXIST AT THE VARIOUS STAGES OF THE COMPANY S HISTORY 5

6 PURPOSES THE CAPITAL STRUCTURE OF A COMPANY - DEBT Bank loans: money provided by banks or other financial institutions by virtue of loan agreements. Debt securites: money provided by public or private lenders by virtue of the issuance of bonds or other securities. ALL THOSE FORMS MAY COEXIST AT THE VARIOUS STAGES OF THE COMPANY S HISTORY 6

7 PURPOSES An IPO may consist in: Share Capital Increase: the company issues new shares to be subscribed by the public investors; and/or Sale: current shareholders sell to the public investors all or part of their stake in the company. By going public, the company may: Raise money: to finance the company s expansion plans or to stay competitive in its current business without incurring into any debt; and/or Allow its shareholders to realize their investment: by selling (all or part of) their shares to the public investors; and/or Optimize its capital structure: by paying off all (or part of) its debt. 7

8 PURPOSES The choice between the different IPO structures depends on: Shareholders structure: if the company has VC/PE Firms (or the family founders) among its shareholders, they may sell (a part of) their stake to the public investors as an exit strategy, instead of selling it to another private investor; Stage of company s development: if the company is an early-stage business in need of money to finance its growth and expansion, the IPO will contemplate a new issue of shares by virtue of a capital increase, to gain access to capital without incurring into any debt; Competitiveness: if the company needs money to stay competitive in its business, the IPO will contemplate a new issue of shares by virtue of a capital increase as well. THOSE STRUCTURES MAY COEXIST IN THE SAME IPO 8

9 PURPOSES Further elements may lead to listing: Reputation developement: the process of going public and the life as a public company require high-standard governance and management by the company; by going public a company gives a signal of high quality showing its will to take the challenge to adopt and maintain high standards of governance and management. Core market visibility: going public enhances the value of an already good market reputation because of the increased coverage by the market and the media a public company receives. Labor market visibility: being a public company increases the opportunities to attract (or keep) experienced managers and employees. 9

10 SETTING UP THE PROCESS The set up process is aimed at veryfing if the company: Needs an IPO to address its capital requirements. Has a business plan and a competitive position (or outlook) attractive to potential investors. Has a management team ready and capable to withstand the heavy scrutiny it will receive once the company is listed and willing to commit time and resources to do all the activities usually required to a listed company s management further to running the business. Satisfies the regulatory requirements set forth by the relevant stock-exchange listing rules. Is properly organized to tackle all the abovementioned issues related to being a listed company and, if not, how to get ready for that. 10

11 PEOPLE INVOLVED The pre-listing set up process is run by the following people: Company s management: in charge of the whole process. Business consultants: provide advice on how to organize the company prior to the IPO to make it more attractive to the market. Lawyers: provide advice with reference to all the legal issues of the IPO/listing (governance, regulatory issues, etc.). Auditors: certify the company s accounting documents and provide advice on the tax and accounting strategies; Other consultants: to advise on specific single issues that may arise from time to time. 11

12 PEOPLE INVOLVED The following people are usually hired once the company has decided to go public: Sponsor: an investment bank in charge of assessing (under its own responsibility) if the company is suitable for the listing, as well as providing advice on the best ways to structure the IPO. Corporate broker: is a bank who plays as interface between the company and the market, providing a vital analysis on the market situation and the likely response the potential investors will give to the IPO, as well as stimulating the business community s interest on the IPO itself. PR firm: helps to influence the opinion that the public and the press will have on the IPO itself and on the company thereafter. 12

13 THE CORE OF THE PROCESS Once the decision to go public and to organize the Company accordingly has been made, a multi-track process takes place: Due Diligence Documents Drafting Valuation 13

14 THE CORE OF THE PROCESS Due Diligence: an extensive review of the company aimed at ensuring its suitability for the listing - to have a clear and accurate view of the company to be represented in the IPO/listing documents under the responsibility of the Sponsor and of the company s directors; Documents Drafting: preparation of the documents to be published for the IPO/listing the most important of those documents is the prospectus, that sets out a coherent and complete description of the business, to allow the potential investors to have a clear view of the company and assess their interest in investing in the company; Valuation: in the case of an IPO, the company is valued to determine the IPO price the results of the valuation activity allow the company s management to make the strategic and financial decisions with reference to the IPO. 14

15 THE PROSPECTUS The prospectus is the most important IPO/listing document, it is the document by which the company introduces itself to the investors and is the main source of information they have to assess the convenience of investing in the company s shares. The investors must be enabled by the company under the responsibility of its directors and of the Sponsor to make an informed assessment of the assets and liabilities, financial position, profit and losses, prospects and of the rights attaching to the company s shares. Those requirements are set forth by the EC Directive 2003/71 and the EC Regulation 809/2004 in order to (i) ensure equal investors protection standards for the whole European Union, (ii) improve European markets efficiency, (iii) broaden the range of the intra-eu investments in listed companies by making such companies more easily comparable. 15

16 THE PROSPECTUS The prospectus consists of three parts: The share registration document The pro-forma financial information document The shares securities note 16

17 THE PROSPECTUS The share registration document: contains general information about the company s structure, business overview, investments and strategic plans, risks, corporate governance, present and future shareholder structure, financial situation and outlook as well as its share capital structure. The additional pro-forma financial information document: this document is mandatory only in the event of significant gross change in the situation of the company due to a particular transaction recently occurred. The shares securities note: contains information regarding a description of the rights attached to the company s shares and the procedure for the exercise of any rights attached thereto as well as a description of the IPO price and procedures. 17

18 THE PROSPECTUS The prospectus is prepared by the company with the help of all the relevant advisors during repeated meetings aimed at ensuring that all the statements reported are correct. All this cautiousness is for the protection of the persons responsible for the data and the information reported in the prospectus (i.e. the Sponsor and the company s directors). The prospectus should also represent the company in an appealing fashion to the potential investors. 18

19 AUTHORITIES INQUIRY Prior to its publication, the prospectus must be approved by the relevant stock-exchange authority and, in some cases, by the market on which the company s shares will be listed. Once a draft of the prospectus is ready, it is filed (together with other documents) with the relevant national stockexchange authorities and with the relevant listing market for an inquiry. The inquiry is aimed at ensuring that the prospectus contains all the information and data and complies with the relevant regulation provisions whose aim is to ensure that the investors are able to assess the convenience of investing in the company s shares. During the inquiry, the Authorities may ask the company supplemental information and clarifications. The process takes several weeks, with the stock-exchange authority usually taking the final 20 working days for its approval. 19

20 AUTHORITIES INQUIRY The national stock-exchange Authority and the market may approve or reject the prospectus - thereby authorizing or not the IPO and/or admitting or not the company to listing and the prospectus may be published. The stock-exchange Authority s approval gives the prospectus a European Passport, i.e. that the IPO may be carried out in every EU Country without necessity of further approval, provided that the relevant stock-exchange authorities, as well as the ESMA, are duly notified. The procedures and the issues for the IPO s/listings on the most important US markets the New York Stock Exchange and the NASDAQ are basically the same, with the Company having to fulfil the requirements of the abovementioned U.S. market regulations, the SEC (the U.S. stock-exchange Authority), as well as the provisions of the 2002 Sarbanes- Oxley Act. 20

21 UNDERWRITING AGREEMENT In an IPO, the Underwriting Agreement is entered into by the company and the Corporate Broker. The Corporate Broker is in charge of selling the IPO shares to the public investors through its sales force. The Corporate Broker may also bear the IPO proceeds risk by buying the entire offering from the company for a fixed price and reselling the shares at whatever price it can get. In other cases, the Corporate Broker guarantees only a best effort to sell the offering, being paid for what he sells. The U.S. investment bank W.R. Hambrecht has developed an Internet-based auction system for the IPO s it underwrites, but so far, this method has seldom been used. 21

22 IPO MECHANISMS The IPO mechanisms fit into the following categories: Book-building Auction Fixed price 22

23 IPO MECHANISMS Book-building: the Corporate Broker sales force approaches potential investors and compiles (nonbinding) indications of interest, assessing institutional and retail demand for the IPO and determining the final size, timing and pricing of the IPO itself - the process is helped by the PR firm, that organizes presentations and road shows with potential investors and helps putting the company on the map of the business community. Book-building is the dominant mechanism worldwide. Auction: the investors submit to the corporate broker the amount of shares they are willing to buy an the price they are willing to pay the offer price is determined by the intersection of the demand curve and the fixed supply. Fixed price: the company assesses the price and the Corporate broker collects the orders the process may be combined with a prior book-building. 23

24 SHARE ALLOCATION The IPO mechanisms may be run prior to the actual publication of the prospectus, the Corporate Broker compiles (nonbinding) indications of interest, assessing institutional and retail demand for the IPO and determining the final size, timing and pricing of the IPO itself. After the publication of the prospectus, the Corporate Broker collects the final (and binding) applications from the investors as well as the cash to be paid by them as consideration. If more shares are requested than are available, the Corporate Broker may be granted the Greenshoe Option by which it is allowed to allocate to the investors additional shares. In the opposite case, if less shares are requested than are available, the Corporate Broker may pick up the unallocated shares at the agreed price. 24

25 START OF TRADING At the end of the IPO process, once the shares have been allocated to the investors and the company (and/or the selling shareholders) has (have) cashed the IPO price, the shares start floating and can be continuously traded by the investors. In the case of a listing without an IPO, the shares start floating right after the publication of the prospectus. A PUBLIC COMPANY IS BORN 25

26 LIFE AS A PUBLIC COMPANY In the first days of trading, the company s shares trade volumes (i.e. the number of the company s shares traded on a given day) are usually high until the market settles and discovers the right price. This process may drive the shares price excessively down, increase their volatility (i.e. the instability) and, ultimately, the risk of the investment. High volatility is not always justified by the company s situation and may harm the shares performance in the long run. 26

27 LIFE AS A PUBLIC COMPANY To expedite the price discovery by the market and to keep volatility down, the stabilization activity takes place. A bank (the Sponsor, the Corporate Broker or a third bank) engages in market transactions ( buy or sell orders) to absorb the excessive supply/demand - thereby stabilizing the shares price at a certain level. The provision of the stabilization activity may have a positive effect on the IPO value, with the investors knowing in advance that the price they will pay will not fall too much once the company starts floating. 27

28 LIFE AS A PUBLIC COMPANY Stabilization alters the price discovery process. As a general rule, practices that impede the unfettered price formation are prohibited. Nonetheless, stabilization is aimed at reducing the volatility, and is seen as an effective mechanism for fostering an orderly distribution of the company s shares and promotes the interests of both the company and the investors. Therefore, stabilization as long as it follows certain guidelines is granted a safe harbor (EC Directive 2003/6). 28

29 LIFE AS A PUBLIC COMPANY Stabilization can be also achieved by the following pre-ipo provisions: Lock-up undertakings: (some of) the company s core shaeholders undertake not to sell their shares, thereby showing the market their commitment to the company these provisions are mandatory for the listing in some markets. Extra shares: after a certain period of time, the most faithful shareholders are granted extra shares for free thereby encouraging the shareholders not to sell their shares right after the IPO. 29

30 DUTIES AND RULES OF CONDUCT Once a company is listed, the management must focus on the following issues the way they are tackled affects the way the whole company is run as well as the individual manager s behavior at risk of breaking the law or negatively affect the company s share price: Loss of control: the management of a listed company must take into account outside shareholders opinion (particularly when it comes to make decisions that require the shareholders approval) at the risk of being ousted by the shareholders meeting. 30

31 DUTIES AND RULES OF CONDUCT Loss of privacy: the way a listed company is run is under a heavy scrutiny by the public, the press and the market, therefore, the company s results (good or bad) are magnified by all the attention the company has from being listed and that may have a big impact on the share price. Disclosure of information: a listed company has an obligation (EC Directive 2003/6) to timely and accurately notify the market of any information which is likely to affect the share price, to ensure that all the investors trade the company s shares on the basis of the same information and data. 31

32 DUTIES AND RULES OF CONDUCT Directors behavior: further to running the business, the listed company s directors must, on one hand, ensure the compliance with the rules and the practices placed on a listed company and, on the other hand, comply themselves with their responsibilities; such responsibilities include (i) a broad set of disclosure rules related to their compensation (salaries, stockoptions, etc.) and the dealings they conduct in the company s shares, (ii) bans on dealing in the company s shares during many periods of the year, (iii) monitoring of their fellow directors behavior, (iv) prohibition from exploiting their inside information (EC Directive 2003/6). 32

33 DUTIES AND RULES OF CONDUCT Financial reporting obligations: listed companies must provide the market with periodical financial reports and statements; such reports must accurately reflect the situation of the company and be fully certified by an Auditing Firm to ensure the compliance with the relevant financial reporting standards (IFRS/U.S. GAAP/2002 Sarbanes-Oxley act). Transaction disclosure: extensive information about all the major strategic transactions the company is involved into. 33

34 DUTIES AND RULES OF CONDUCT Compliance with the best practices: further to the compliance with the provisions of law and regulations, listed companies abide to a wide range of practices and codes of conduct to improve their relations with the public and the business community. Relationship with investors and media: the abovementioned issues are also tackled by planning and giving an effective message about adopted principles and policies to the public, the press and the whole business community. 34

35 DUTIES AND RULES OF CONDUCT Monitoring shareholders activity: the management must be at any time well aware of how the shareholder base is structured (the balance between institutional investors and private individuals, and the amount of the single investor s shareholding), to better assess the shareholders relationship issue and to spot early any stake-building behind a potential take-over threat. Dividend policy: choice between an immediate satisfaction of the shareholder base (an annual dividend payout) and the longterm management logic (no dividend distribution). 35

36 DUTIES AND RULES OF CONDUCT Footing the compliance bill : all the issues related to floating are tackled at a substantial cost, the cost of the time the company s management devotes to them and the fees to be paid to the relevant advisors; although, a proper answer to all those issues may enhance the reputation of the company and of its management as well to the benefit of the share performance in the long run. 36

37 ANALYSTS COVERAGE Analysts are people (usually working for investment banks or other financial institutions) who examine the company to point out its strenghts and weaknesses to produce useful information for the investors. The information consists in buy, hold or sell recomendations, as well as forecasts for future earnings and target prices. Analysts recomendations may deeply influence the investors opinion of the company, thereby driving up or down the shares price. 37

38 ANALYSTS COVERAGE The larger a company is, the more attention it draws from analysts. The more attention the company receives from analysts, the more liquid its shares may become. The management of the company has an open-line with analysts an effective communication with analysts is an integral part to a good investor relations policy. 38

39 ANALYSTS COVERAGE Analysts independence has become a major issue particularly when they work for the same company that serves as Sponsor/Corporate Broker. A conflict arises whenever the unbiased analysts opinion of the company is at odds with the positive opinion the Sponsor/Corporate Broker have. To grant fair and unbiased recommendations (and to preserve their reputation after the last investigations and cases), investment banks have created Chinese walls between corporate finance and equity research departments. 39

40 POST-LISTING FINANCING A listed company has a broader access to capital than a privately-held one: Follow-on offerings: the company may issue additional shares ( rights issue ) whenever it wants to finance its further growth without incurring into debt. Issuance of bonds: a listed company can issue bonds or other debt securities more easily. Acquisition currency: listed shares may be used to pay for the consideration of later corporate acquisition deals. 40

41 POST-LISTING FINANCING Visiblity: being listed enhances the visibility of the company and eases its access to traditional form of financing. Furthemore, the existing shareholders may sell part of their shareholding later if they so choose (in compliance with the relevant market regulations). 41

42 SPECIAL LISTINGS Cross (or Dual)-listing: a company is admitted to trading (following an IPO or not) in more than one market, to enhance its liquidity and visibility. Non-IPO listings: every time the company s shares are already widely distributed among the public investors and there is no need to enlarge the shareholder base to meet the regulatory requirements: (i) post merger/lbo listings, (ii) post spinoff listings, (iii) listing of a company whose shares are already widely distributed. 42