considerations in connection with migrating from a gdr listing to a premium listing of shares on the...
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Considerations in connection with migrating from a GDR listing to a Premium Listing of Shares on the LSELondon Stock Exchange – Russia in Global Markets
Greg Stonefield, Alexandra Schukina and Allan TaylorNovember 2011
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Outline
Rationale for migrating from a GDR Listing to a Premium Listing Companies who have migrated from GDRs to Premium Listing Preliminary structuring Issues
Premium listing considerations Retain GDR listing or delist – points to consider Eligibility for FTSE indexation Russian regulatory regime Tax considerations for choice of jurisdiction for incorporation and tax residency Re-domiciliation
Some differences between a GDR Listing and a Premium Listing Additional continuing obligations
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Benefits of migrating from a GDR listing to a Premium listing
Higher profile with international and institutional investors Better access to funding Improved trading and liquidity Enhanced acquisition currency Eligibility for FTSE inclusion
FTSE UK Index Series where ListCo is a plc
Stricter corporate governance and disclosure rules
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Companies that have migrated from GDR to Premium Listing – An emerging trend...?
AFI Development plc (Cypriot incorporated company) Retains a GDR Listing as well
Polymetal International plc (English incorporated company) Delisted its GDRs
Evraz plc – (English incorporated company) Given notice to delist its GDRs
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Preliminary structuring issues – Premium Listing considerations
Free float and independence Minimum free float of 25% of share capital
Shares held by EEA holders unconnected with ListCo Excludes shareholdings in excess of 5%
UKLA must be satisfied that ListCo is able to operate independently of its controlling shareholders
Track record – 3-year revenue earning track record for 75% of ListCo’s business
Sponsor ListCo must have a “sponsor”, which makes various confirmations to the UKLA so will
seek comfort on these items
Responsibility for the prospectus
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Premium Listing considerations (cont’d)
Additional continuing obligations Compliance with the UK Corporate Governance Code on a “comply or
explain” basis Consideration of board structure
Majority of board to comprise INEDs to be compliant with the UK Corporate Governance Code
Identification of INED candidates and Chairman candidate with Sponsor and underwriters (can be a time consuming process)
Chairman to be independent Separation of roles of chairman and the CEO
Board committees
Application of UK Takeover Code Mandatory takeover offer rules
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Premium Listing considerations (cont’d)
Working capital 12 months working capital statement required in prospectus Detailed working process with reporting accountants
Employee related New employee incentive schemes to be adopted? D&O insurance and prospectus related insurance
Offer structure Mechanism to switch GDR listing to Premium Listing Consider whether to undertake a capital raising exercise at the same time
Domicile and country of incorporation of ListCo: UK vs. other countries (such as Jersey) No formal requirement for ListCo to be incorporated in the UK Decision primarily driven by indexation requirements and tax considerations
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Retain GDRs or delist – points to consider
Deposit Agreement Delisting GDRs prior to expiry of the agreed duration of the facility may trigger
termination payment to the Depositary. Check the terms of the engagement letter!
If so, a company with GDRs listed on the LSE may seek a premium listing of shares and retain its listing of GDR programme in place so as to avoid paying termination fees to the Depositary
Usually need to give 90 days notice of termination of the facility
Consents Delisting of GDRs does not need approval of GDR holders under the Listing Rules,
but will need implicit approval as part of any securities exchange If a GDR issuer has issued high yield bonds, bond holder consent to the GDR
delisting may be required General change of control provisions in contracts need to be checked
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Retain GDRs or delist – points to consider (cont’d)
Free float 25% free float requirement – the UKLA will not consider shares beneficially held by
GDR holders but registered in the name of the Depositary to count towards the free float
Therefore if a GDR listing is retained it is most likely that shares to be listed on the Premium Listing segment of the offered list will need to be a separate class of share unless a free float (i.e. > 25%) can be achieved for the shares underlying the GDRs
Market class test If ListCo lists a separate class of share, the UKLA may consider that only the class of
shares which are the subject of a premium listing should be included in any class tests
This reduces the market cap of ListCo for class test purposes (more likley that class tests are triggered)
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Retain GDRs or delist – points to consider (cont’d)
Voting If a different class of share is listed, the UKLA will require that only holders of shares
subject to the premium listing are eligible to vote on matters included in the Listing Rules and that such shareholders exclusively enjoy the benefit of other rights set out in the Listing Rules
Holders of non-premium listed shares will, however, be able to vote on matters subject to the Listing Rules if required by applicable law
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Eligibility for FTSE indexation
Requires a Premium Listing of equity shares Nationality tests will apply
Companies incorporated in the UK with a sole listing in the UK Companies incorporated in the UK with a listing in the UK and other developed
countries (as classified within the FTSE Global Equity Index Series) – subject to a decision of the FTSE Nationality Committee
Companies incorporated in other developed countries or countries internationally recognised as having a low taxation status and approved by the FTSE Nationality Committee (such as Channel Islands, Republic of the Marshall Islands, Bermuda Isles, BVI) – subject to a decision of the FTSE Nationality Committee, but in any event must: publicly acknowledge adherence to the principles of the UK Corporate
Governance Code, pre-emption rights and the UK Takeover Code; and have a free float greater than 50% (double the UKLA premium listing requirement)
Other Price - a sterling denominated price must exist for a company Liquidity test in 3 months prior to indexation
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Development of Russian regulatory regime
Restrictive regulations by the FSFM – since 2001 Main conditions and restrictions for Russian issuers to obtain the FSFM
permission for foreign listing: Listing on a Russian stock exchange General limitation on the number of shares that may be placed/circulated abroad
(75% - since 2001, 40% - since 2003, 35% - since 2006, 30% - since 2008, 25% - since January 2010 till present)
Limitation on the number of shares of “strategic” entities that may be placed/circulated abroad (25% - all “strategic” companies, 5% - “strategic” subsoil companies)
Requirement to offer shares in Russia together with the foreign offering
Consequence of restrictions – use of offshore vehicles for foreign listing
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Recent initiatives for liberalisation
Draft FSFM regulation of 14 November 2011 No limitation on the number of shares that may be placed/circulated abroad,
except for “strategic” entities (25% - all “strategic” companies, 5% - “strategic” subsoil companies)
No requirement to offer shares in Russia Law on Central Depositary Amendments to the Law on Foreign Investments in Entities of
Strategic Importance for State Defence and Security Made on 16 November 2011; effective from 18 December 2011
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Tax considerations for choice of jurisdiction for incorporation
Issues to consider There is usually a tension between choosing to incorporate ListCo in a jurisdiction
(e.g. the UK) to facilitate eligibility to FTSE inclusion and having a tax advantageous structure (e.g. Jersey or Isle of Man)
Tax analysis of competing jurisdictions of incorporation is required Taxation of dividends Taxation of capital gains Stamp duty / stamp duty reserve tax/capital tax Withholding Tax
This tax analysis will be impacted by Residency of management and principal operating companies Considerations of controlling shareholders – what is tax efficient for them?
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Re-domiciliation – possible structures
Share exchange offer (Polymetal and Evraz) New ListCo makes an offer to acquire the entire issued share capital of the existing
company (including any shares represented by GDRs) Offer of new shares does not need to be on a one for one basis (e.g. Evraz used
1 for 9 basis) Want to obtain irrevocable undertakings to accept offer by certain shareholders Acceptance level may be impacted by squeeze out rules (if any)
Termination of Deposit Agreement will be conditional upon offer being declared unconditional after which application is made to cancel GDR listing on Official List and on the London Stock Exchange Liquidity in and market value of existing shares and GDRs will be reduced so
investors have an incentive to participate
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Re-domiciliation – possible structures (cont’d)
Dual Premium Listing of shares and GDR Listing (AFI Developments) ListCo does not change, but makes a bonus issue/distribution of a new class of
shares to existing holders of shares / GDRs May need to have distributable reserves for bonus issue/distribution Complication of dual listings and inability to convert GDRs into shares Avoids termination of deposit agreement and cancellation fees
Restructuring of existing ListCo Requires ListCo to be able to re-register and/or re-domicile in the UK (e.g. Societe
Europa) Would involve cancellation of GDRs and underlying shares being able to be settled
via CREST Consider use of depositary interests
Limited application in practice
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Some differences between a Premium Listing and a GDR Listing
Prospectus ListCo and directors will need to accept responsibility for an equity prospectus More extensive disclosure than on a GDR listing
Sponsor/Underwriting agreement Warranties and indemnities will need to be provided by the ListCo, the selling
shareholder(s) (if any) and the directors
Increased scope of comfort package Working capital report Financial reporting procedures memorandum “Long form report” from the reporting accountants Comfort letters to the sponsor from ListCo and its advisers
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Some differences between a Premium Listing and a GDR Listing (cont’d)
Is a relationship agreement needed? Ensures independence of ListCo from major shareholder (30%+)
Contains provisions relating to non-interference, non-competition, and dealing with conflicts of interest and information rights
Terminates at a certain shareholding threshold (usually 30%) or if the ListCo ceases to be listed Major shareholder usually requires board seat to remain in place above
certain voting threshold even if terminated
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Additional continuing obligations
Numerous sources of additional continuing obligations for premium listed companies
Increased corporate governance UK Corporate Governance Code
Compliance with on a “comply or explain” basis (i.e. non-compliance will need to be explained on an ongoing basis in ListCo’s annual report)
Model Code on share dealings Applies to persons discharging managerial responsibility (prevents trading of
shares, options etc. in periods adjacent to financial reporting) Institutional investor guidelines
Rules governing executive compensation and share based remuneration, shares issues on a non pre-emptive basis, board effectiveness etc.
Takeover Code Rules on takeover offers for ListCo, including mandatory takeover rules if acquire
more than 30%
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Additional continuing obligations (cont’d)
Listing Rules Must comply with Listing Principles
General principles applying the “spirit” of the Listing Rules Increased reporting in annual report Significant transactions
Transactions to be class tested (against size of ListCo) Class 1 transactions (over 25% of certain ratios) will need shareholder approval
and the publication of a UKLA approved circular Related party transactions
Related party transactions over 5% (including amendments) require the publication of a circular and shareholder approval (where the related party cannot vote)
Purchase of own shares and contents of circulars
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Additional continuing obligations (cont’d)
Disclosure requirements Disclosure of all share dealings by directors (DTR 3) Disclosure of dealings by significant shareholders (3%+) (DTR 5) Disclosure on corporate governance (DTR 7 and LR 9)
Periodic financial reporting (DTR 4) Must half-year (un-audited) financial reports within 2 months of period end
Less extensive disclosure than annual financial statements, but prepared on the same basis
Need to provide quarterly trading updates (interim management statements) Do not need to contain quarterly accounts, but must describe material events and
transactions and financial position and performance of ListCo
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