IPOs on Chinese financial markets for companies holding Russian assets – Legal Aspects

Financial University Moscow – 8 April 2011 Doran Doeh Managing Partner, Russia

T +7 (4950 229 2333) [email protected]

snrdenton.com

1

About SNR Denton

SNR Denton is a client-focused international legal practice delivering quality and value. We serve clients in key business and financial centers from 60 locations in 43 countries, through offices, associate firms and special alliances across the US, UK, Europe, Russia and Central Asia, the Middle East, Asia Pacific, and Africa, making us a top 25 legal services provider by lawyers and professionals worldwide. Joining the complementary top tier practices of its founding firms — Sonnenschein Nath & Rosenthal LLP and Denton Wilde Sapte LLP —SNR Denton offers business, government and institutional clients premier service and a disciplined focus to meet evolving needs in eight key industry sectors: Energy, Transport and Infrastructure; Financial Institutions and Funds; Government; Health and Life Sciences; Insurance; Manufacturing; Real Estate, Retail and Hotels; and Technology, Media and Telecommunications. 2

Our Locations

3

IPOs by Russian issuers on foreign stock exchanges

 A Russian company may raise capital on a foreign stock exchange in an initial public offering (IPO) by: • listing its own shares; • listing depository receipts (securities issued by a special purpose holder of the company’s shares to enable an IPO); • backing the company into a foreign holding company and listing shares or depository receipts of the foreign holding company.

 The first two alternatives present technical and practical difficulties within Russia, and therefore the third is the most common. Although the Federal Service for Securities Markets is unhappy about use of this approach, its permission is not currently required. 4

Chinese financial markets for issuers with Russian assets

   The Shanghai and Shenzhen stock exchanges are essentially for domestic Chinese use.

There is a scheme to set up a specific platform (so called "International Board") for listing overseas enterprises initially on the Shanghai Stock Exchange. The scheme was adopted as part of the 12th Five-Year Plan of China, and preparatory works are intensively under way. However, for the time being, the listing rules and other relevant applicable laws and regulations in relation to regulating such International Board has not yet been promulgated. Therefore, for the time being, only the Hong Kong stock exchange – The Hong Kong Stock Exchange Limited (THKSE) is available for listing by foreign issuers 5

Chinese financial markets for issuers with Russian assets

    A foreign issuer may only be admitted to THKSE if the issuer is located in a jurisdiction in which the law protecting shareholder rights is consistent with standards applicable in Hong Kong.

In order to simplify admittance of foreign issuers, THKSE introduced the concept of "recognized jurisdictions" whose legislations are officially recognized by THKSE as compliant with Hong Kong requirements for protection of shareholders.

In practice, because Hong Kong legislation is based on English law, the jurisdictions most favoured for issuers on are also based on English law – e.g. Jersey, Cayman Islands, Bermuda. Jersey is particularly favoured for issuers with Russian assets because of its general acceptability – its regulatory standards are highly respected 6

Chinese financial markets for issuers with Russian assets

   Even if the laws of the issuer ’s jurisdiction are not consistent with THKSE, the stock exchange may consider admitting an issuer if its constitutional documents are amended so that shareholders are given the same degree of protection of their rights as those in Hong Kong.

Because of the huge differences in practice between civil law jurisdictions (such as Russia) and common law jurisdictions (such as Hong Kong) it is most readily practicable to do this with companies from other common law jurisdictions, preferably ones who laws concerning companies are based on English law.

It would not be impossible to do it with a company from a civil law jurisdiction but adapting its constitutional documents effectively would be time-consuming, expensive and (possibly) frustrating.

7

THKSE

 THKSE has two tiers – the Main Board (

MB

), which is usually thought the more suitable for issuers holding Russian assets – the Growth Exchange Market (

GEM

) for smaller issuers – the GEM is regarded as a riskier market and is therefore in some ways more highly regulated  In this presentation, we will concentrate on the MB 8

THKSE - Applicable Rules

  LISTING ON THE MB / GEM – The listing of securities on the MB is mainly regulated by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Ltd (the "Exchange Listing Rules“)) which are administered by the Exchange.

– Listing on the GEM is regulated by the GEM Listing Rules.

TSEHK is responsible for the day-to-day administration of all listing matters under the supervision of the Securities and Futures Commission (

SFC

).

9

THKSE - Applicable Rules

 THKSE expects each director of an issuer to be aware of, and reasonably familiar with the obligations and duties imposed upon him and the issuer under: the Listing Rules the Securities and Futures Ordinance the Companies Ordinance the Takeover Code the Code on Share Repurchases.

Each director of the issuer is personally responsible for statements in the prospectus for the IPO and bears personal liability.

10

General Principles

    

Applicants must be suitable for listing The issue and marketing of securities are conducted in a fair and orderly manner and potential investors must be given sufficient information to enable them to make a properly informed assessment of an issuer Investors and the public must be kept fully informed by listed issuers, and in particular immediate disclosure must be made of any information, to be evenly disseminated, which might reasonably be expected to have a material effect on market activity in, and the prices of, listed securities All holders of listed securities must be treated fairly and equally Directors of a listed issuer must act in the interests of its shareholders as a whole, particularly where the public represents only a minority of the shareholders.

11



MB Requirements

     A. Basic listing requirements for equities 1.

An issuer or group (other than an investment company) whose assets consist wholly or substantially of cash or short dated securities will normally be not regarded as suitable for listing (except: securities brokerage) 2.

The issuer must normally have a trading record of not less than 3 financial years under substantially the same management 3.

The profit attributable to shareholders must, for the most recent year, be not less than HK$20 million and, for the two preceding years, be in aggregate not less than HK$30 million Note: current exchange rate of HK$ to US$ is 7.75:1 12

13

  

MB Requirements

B.

Introduction of alternative financial standards

The Exchange has introduced 2 alternative financial tests to provide more flexibility for issuers seeking to list on the Main Board:

Market capitalisation / revenue test; and Market capitalisation / revenue / cash flow test

14

 

MB Requirements

Market capitalisation / revenue test:

Applicants do not require a full 3-financial-year trading record if: they have a market capitalisation of at least HK$4 billion at listing revenue of at least HK$500M for the most recent financial year comprising 12 months.

This test caters particularly for large size applicants who generate substantial revenue and command significant investor interest (at least 1,000 shareholders at listing).

15

MB Requirements

Market capitalisation / revenue / cash flow test:

Listing applicants must have: a market capitalisation of at least HK$2 billion at listing, revenue of at least HK$500M for the most recent financial year comprising 12 months years a positive cash flow from operating activities aggregating at least HK$100M for 3 preceding financial 3 financial years’ trading record 16

MB Requirements

  Rule 8.05A - In the case of the market capitalisation / revenue test, the Exchange may accept a shorter track record under substantially the same management if it is demonstrated that the directors and management have sufficient experience ( at least 3 years) in the line of business and there has been at least one financial year of management continuity Rule 8.05B – also possible to waive shorter track record and waive profit requirement for mineral / project companies.

17

   

MB Requirements

C. Minimum number of shareholders at the time of listing

In September 2010, THKSE published a consultation paper on a proposed change to the minimum number of shareholders required for applicants listing under the Market Capitalisation/Revenue Test ("

MCR Test

") ("

Consultation Paper

"). Proposal: MCR Test - from 1,000 to 300 (This would bring the MCR Test in line with the minimum shareholder requirements for the other two eligibility tests: the Profit Test and the Market Capitalisation/Revenue/Cash Flow Test ("

MCRCF Test

").

Original 100 shareholder requirement - large market capitalisation applicants that are able to generate substantial revenues for the most recent financial year should be able to attract greater market support to justify their listing.

18

MB Requirements

C. Minimum number of shareholders at the time of listing

   REASONS FOR THE PROPOSED AMENDMENT 1.

The market commented that the current minimum shareholder requirement for the MCR Test is too onerous. 2.

HKEx considers the current "public float" (25% public float) requirement under Rule 8.08(1)(a) to be sufficient to ensure an open market and retail investor participation. The public float for a HK$4 billion market capitalisation company (as required under the MCR Test), is HK$1 billion. So it may not be necessary to maintain a higher minimum shareholder requirement than for other eligibility tests.

19

Financial Information

MB – Accountants’ Report

Must be prepared in accordance with either Hong Kong Financial Reporting Standards or International Financial Reporting Standards.

20

Statement of Business Objectives   MB – Business Objectives

An applicant is required to include a general statement of future plans and prospects

21

Public Float

    

At least 25% of the issuer's total issued share capital must at all times be held by the public.

Where the issuer has one class of securities or more, the total securities of the issuer held by the public at the time of listing must be at least 25% of the issuer's total issued share capital. However, the class of securities for which listing is sought must not be less that 15% of the issuer's total issued share capital, having an expected market capitalisation at the time of listing of not less than, Main Board - HK$50 million The Exchange may, at its discretion, accept a lower percentage of between 15% and 25% in the case of issuers with an expected market capitalisation at the time of listing of over HK$10 billion.

22

Management / Ownership

     

MB: new applicant must have a trading record period of at least 3 financial years with: management continuity for at least 3 preceding financial years; and ownership continuity and control for at least most recent audited financial year.

Exception: Under the Market Cap/Revenue test, the Exchange may accept a shorter trading record period under substantially the same management if the new applicant can demonstrate that: its directors and management have sufficient and satisfactory experience of at least three years in the line of business and industry of the new applicant; and management continuity for most recent audited financial year.

23

Competing Business

  MB – Competing Business

Allow competing businesses of directors and controlling shareholders as long as full disclosure is made at the time of listing and on an on-going basis

24

Shareholder Spread

   MB

For issuers qualified for listing under: the profit test or the market capitalisation/revenue/cashflow test: 300 shareholders the market capitalisation/revenue test

:

1,000 shareholders

25

Parties Involved

 

Sponsors

-

A company must appoint a suitable sponsor for its listing proposal. A sponsor must be a corporation or an authorised financial institution licensed or registered by the SFC. The sponsor will be responsible for preparing the company for listing, for lodging the formal listing application and all supporting documents with the Exchange, and for dealing with the Exchange on all matters arising in connection with the application.

Reporting Accountants

-

All accountants' reports must be prepared by professional accountants who are qualified under the Professional Accountants Ordinance for appointment as auditors of a company and who are independent of the issuer. Reporting accountants are responsible for reviewing the company's financial records and position, and preparing the new applicant's group accounts in accordance with relevant accounting standards and regulatory guidelines

26

Parties Involved



Legal advisers - responsible for ensuring that the new applicant will be in compliance with the laws of each of the relevant jurisdictions. They will also work closely with the sponsor and reporting accountants on any restructuring undertaken by the new applicant.



Underwriters / Placing Agents

Exchange Participants who would be responsible for distributing the securities of the company during a share offering. Underwriters are required to underwrite any shares not taken up by investors.

-

typically securities firms and



Valuers

-

appointed to attribute a value to a new applicant's properties prior to a listing. Valuers may also be appointed to prepare valuation on other assets of the company



Technical Experts

–

for particular industries

27

Pre-IPO Group Restructuring



What does group restructuring involve?



Formation of holding company

-

Rationalizing which companies are to be group cos.

-

Separately company into operational / geographical divisions

-

Isolating any divisions for potential future spin-off?

-

Tax-driven / Stamp duty

-

Competition issues

28

Pre-IPO Group Restructuring

 Often, the corporate structure of the group must be rationalized prior to listing. There are many factors which drive this: tax, corporate administration, geographical division etc.

many businesses do not start off as a group but exist as a collection of companies owned by a common shareholder or shareholders group.

You need to work together with accountants and the company to finalize a structure which is desirable from the point of view of the Company and from the accountants.

29

Prospectus Drafting

– Meet Listing Rules / Companies Ordinance / PRC regulatory requirements – True and factual – Understand the investment theme of the listing candidates What would prospective investors be interested in – Do sufficient due diligence; risk factors – Have an outline of what sections should be included in the prospectus – Interview with relevant managers with respect to each of the section in the prospectus – When in doubt, disclose 30

Prospectus Drafting

 Key sections – Risk Factors – Industry background – Corporate Strategy – Competitive advantages of the listing candidate – Future plans & prospects/Statement of Business Objectives 31

Other Documents

 Documents effecting organization of the listed group  Directors’ service agreements - Usually for executive directors. Not that much different from service agreements for directors of private companies  Share Option Schemes Usually a pre-IPO & a post IPO share option scheme.

Chapters 17 of the Main Board rules govern the requirements of a post IPO scheme. 32

Other Documents

 Property Valuation Report Usually you will see a summary in the prospectus.  Foreign legal opinion re corporate establishment and property interest This is important for companies / companies with underlying overseas business which are seeking a listing in Hong Kong, or where part of the listed group involves overseas entities.

 Principal share registrar’s agreement 33

Other Documents

 Hong Kong branch share registrar’s agreement  Receiving Banker’s Agreement This is the document which governs the rights and obligations of a receiving banker who is responsible for collecting the subscription monies from an IPO.

- Usually the listing candidate will open an account with the Receiving Bankers into which IPO application monies are deposited.

34

Other Documents

 Verification notes  Underwriting Agreement  Agreement Amongst Underwriters  Tax Indemnity  Compliance Checklists  Directors’ Responsibility letters, statements of interest 35

Offer Structure

  Offer shares: New shares

Placement = 90%; Public Offer = 10% (subject to clawback)



Reallocation Scenario Reallocation mechanism is prescribed under the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited .

36

Offer Structure



To protect interests of small retail investors, the public subscription tranche divided into two pools in equal size. Applicants may only apply for shares in either pool A or pool B. Multiple applications should be rejected. Shares are allocated on an equitable basis to applicants in respective pool. Where one of the pools is under-subscribed, the surplus shares will be transferred to satisfy demand in the other pool and be allocated accordingly:



Pool A < HK$5 million value in subscription



Pool B > HK$5 million and up to the value of Pool B

37

Moratorium

 MB Management Shareholder(s): Any person regarded as a controlling shareholder at the time of listing undertakes: • Not to dispose of his interest in an issuer during the first 6 months after listing • Not to dispose of his interest in an issuer if such disposal would result in him ceasing to be a controlling shareholder during the second 6 months after listing • To disclose any pledge of shares in an issuer and any disposal of such pledged shares by the pledgee immediately during the first 12 months 38

Issue of Shares

 MB Listed Issuers -

Cannot issue new shares in the first 6 months

-

Cannot issue new shares in the second 6 months if the interest of a controlling shareholder would drop below 30%

39

Continuing Compliance

 1.

See Code on Corporate Governance Practices  2.

Securities and Futures Ordinance (Part XV)  3.

Listing Rules  4.

Takeovers Code 40

 

End of Presentation.

Thank you!

41