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Comparative Analysis of UK Listing Regimes for Equity and GDRs Mark M. Banovich Moscow Office Managing Partner London Stock Exchange Conference on Financing Real Estate through IPOs 19 February 2008 Latham & Watkins operates as a limited liability partnership worldwide with an affiliate in the United Kingdom and Italy, where the practice is conducted through an affiliated multinational partnership ©Copyright 2005 Latham & Watkins. All Rights Reserved. Summary • • Theory behind multiple listing regimes Overview of requirements • • • • • • • • • Oversight Disclosure Corporate governance Corporate actions Market abuse and inside information Periodic reporting Miscellaneous continuing obligations Specialist issuer obligations FSA Discussion Paper Theory • One size does not fit all: • Retail Investors (e.g., primary equity listing, AIM admission) • • • • No substantial relationships with market participants and therefore dependent upon the rules to ensure that issuers make the necessary information available to them and address their concerns Less sophistication and less ability to model around information gaps or to properly discount for streamlined corporate governance Even losses that are small in absolute terms can be financially devastating Issuers should be held to higher standards when seeking capital from such investors, because such investors may not be in a position to assess the associated risks or properly discount share price Professional Investors (e.g., GDR listing) • • • • Access to market participants to make their concerns known Leverage to require the information they believe to be necessary Sophistication necessary to value risks associated with a lower quantum of information and streamlined corporate governance Capacity to bear risk of loss Issuers should be permitted to seek capital from such investors based on lesser standards, because such investors can protect themselves by discounting share price Oversight • Primary equity listing • • • Sponsor provides assurance to FSA as to compliance with listing rules and guides the issuer in understanding and complying with continuing obligations FSA approves a prospectus prepared under Annexes I-III of the Prospectus Rules (“PRs”) AIM admission • • Nominated adviser (“Nomad”) is responsible to LSE for assessing the appropriateness of an applicant, and for advising and guiding an AIM company on its continuing obligations FSA oversight: • • • FSA approves a prospectus under PR Annexes I-III in the case of an offer to the public Otherwise, an admission document is prepared without pre-vetting by FSA or LSE GDR listing • • No sponsor or nomad, but in practice investment banks undertake a gatekeeper function in response to commercial pressures to improve deal pricing and manage reputational and liability risk FSA approves a prospectus prepared under PR Annex X Disclosure • Financial disclosure • Historical financial information • • • • Pro forma and stand alone financials for significant gross change • • • • • • Primary: required AIM: required in modified form GDRs: not required, and unlikely to be included in the absence of a working capital report MD&A and capitalisation table • • • • Primary: required AIM: not required GDRs: not required Working capital statement • • Primary: 3 years, subject to an unqualified audit opinion AIM: Lesser of 3 years or period of operations; audit may be qualified GDRs: Lesser of 3 years or period of operations; audit may be qualified Primary: required AIM: not required GDRs: required Management disclosure concerning conflicts of interest, compensation and benefits, and the composition of the audit and remuneration committees • • • Primary: Required AIM: Not required GDRs: Required Disclosure (continued) • Disclosure in all three kinds of offerings is levelled by the presence of a catch-all disclosure requirement: • • If a prospectus is prepared, it must contain “the information necessary to enable investors to make an informed assessment” of the issuer and its securities An AIM admission document is subject to a similar standard, as it must contain the “information the issuer reasonably considers necessary for investors to form a full understanding” of the issuer and its securities, taking into account the necessity of the information that would be required for a prospectus had the issuer been required to prepare one Corporate Governance • Applicability of the Combined Code • Primary: • • UK companies must comply, pursuant to the Companies Act Overseas companies must: • • • AIM: • • • Disclose the significant ways in which their corporate governance practices differ from the Combined Code Disclose whether or not their corporate governance practices comply with requirements in their home jurisdiction No requirement to comply with the Combined Code or disclose differences from the Combined Code Nomads must assess the suitability of directors and the efficacy of the board for the issuer’s needs, bearing in mind its admission to trading on a UK public market GDRs: • • Disclose whether or not corporate governance practices comply with requirements in the home jurisdiction In practice, investment banks will recommend that an issuer comply with certain aspects of the Combined Code (such as director independence and the establishment of an audit committee) in order to obtain a higher valuation, which suggests that non-compliance is priced in by the market Corporate Actions • Notification and/or shareholder approval of certain transactions • Significant transactions, including reverse takeovers • • • • Related party transactions • • • • Primary: Vote required at 25% of assets AIM: Vote required at 75% of assets GDRs: Not required Primary: Required AIM: Management consultation with the nomad on large deals GDRs: Not required Discounted option arrangements for directors and employees • • • Primary: Required AIM: Not required GDRs: Not required Market Abuse and Inside Information • • Code of market conduct applies to all Model code • • Primary: Issuer must comply and take all proper and reasonable steps to ensure that persons discharging management responsibilities (“PDMRs”) comply AIM: • • • GDRs: • • • Not applicable AIM Rules for Companies impose restrictions on dealings by the issuer, its directors and certain employees during close periods Not applicable Certain GDR issuers are becoming sensitive to the benefits of voluntary compliance Disclosure and control of inside information • • • Primary: DTR 2 requires public disclosure of inside information as soon as possible, unless an exception applies, and maintenance of insider lists AIM: AIM Rules for Companies implement continuing disclosure requirements and exceptions broadly similar to those in the DTRs, but do not require companies to keep insider lists GDRs: DTR 2 requires public disclosure of inside information as soon as possible, unless an exception applies, and maintenance of insider lists Periodic Reporting • Annual reports • Primary: • • • • AIM: Report containing audited financials to be published within 6 months after end of financial year GDRs: • • • Audited financials to be published within 4 months after end of financial year Annual information update to FSA within 20 days after publishing annual financials Half-yearly reports • • • • Audited financials, management report and responsibility statement to be published within 4 months after end of financial year Non-EEA issuers must provide an annual information update to FSA within 20 days after publishing annual financials Primary: Condensed financials, interim management report and responsibility statement to be published within 2 months after end of the period AIM: Report containing 6 month interim accounts to published within 3 months after the end of the period GDRs: Not required, but issuers that prepare interim accounts for their IPO prospectus create a market expectation of interim reporting, which investment bankers may advise them to meet Interim management reports • • • Primary: To be published within 10 weeks after the beginning and 6 weeks before the end of each half AIM: Not required GDRs: Not required Miscellaneous Continuing Obligations • Shareholder disclosure • • • Primary: DTR 5 applies AIM: AIM Rules for Companies may require disclosure of changes to significant shareholders GDRs: • • DTR 5 does not apply unless the shares underlying the GDRs are listed on the Official List GDR depositaries can require that ultimate beneficial owners provide information as to their identity and holdings as a condition to processing voting instructions. Specialist Issuer Obligations • Real estate company • Inclusion of property valuation report in the prospectus • • • • Disclosure of significant property acquisitions or disposals • • • • Primary: Required AIM: Not required GDRs: Required if underlying shares have a denomination of less than €50,000 Primary: Required AIM: Not required per se, but general disclosure obligations may cover this GDRs: Required Real estate company structured as an investing company • • • Primary: The listing regimes applicable to property investment companies or property unit trusts may apply AIM: The company must have an investing strategy that is disclosed in detail in the admission document and is subject to annual shareholder approval GDRs: No material difference FSA Discussion Paper • The existing balance between the stringency of regulatory requirements and the need for investor protection appears to be fundamentally sound • • • Lesser requirements for AIM appear at first blush to be anomalous, but are counterbalanced by the fact that AIM is advertised as a market for small start up companies and by the quasi-regulatory role of the Nomad Lesser requirements for GDRs are counterbalanced by the demands of investment banks and their large customers Investors need to know the benefits and limitations of the market where they wish to trade • • • The FSA Discussion Paper emphasis on proper labeling therefore appears to be appropriate An emphasis on monitoring and enforcement of the regimes already in place would also be appropriate It is less clear that it would be appropriate to introduce a sponsorship role or change the substantive requirements for a professional market, where the need for oversight and regulation is diminished. The principal result may only be to reduce the range of risk-weighted choices available to companies and investors in the London market.