listing in london: guide for cis companies

Listing in London: CIS Practice

Published by White Page Ltd in association with the London Stock Exchange, with contributions from:

CLYDE&CO


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Contents

4 Listing in London: CIS Practice The London Stock Exchange

14 Role of the investment bank in a Main Market listing Nomura International plc

34 Role of the law firm in a Main Market listingAshurst

44 Role of the accountant in a Main Market listing PricewaterhouseCoopers LLP

58 Role of the financial PR/IR company in a Main Market listing and AIM flotationCitigate Dewe Rogerson

68 Role of the nominated adviser in an AIM flotationGrant Thornton UK LLP

84 Role of the law firm in an AIM flotationClyde & Co

98 The Professional Securities Market explainedAshurst


Since Gazprom became the first company from

Russia to list its depositary receipts (DRs) on the

London Stock Exchange in 1996, many other CIS

companies have joined our markets. On 22nd April

2008, Magnit, one of the largest food retail chains

in Russia, became the 100th company from the

region to list its global depositary receipts (GDRs)

on the Main Market.

At the time of writing, there are 105 companies

from the CIS countries on the markets of the

4 L i s t i n g i n L o n d o n : C I S P r a c t i c e

An introduction: Companies from Russia and theCIS on the Main Market and AIMBy Jon Edwards, Senior Manager and Maria Aleksandrova, BusinessDevelopment Executive, Russia & CIS, Equity Primary Markets, the LondonStock ExchangeThe London Stock Exchange is committed to supporting the aspirations ofCIS and the international companies seeking access to capital, liquidityand profile on our markets.

London Stock Exchange with the trading volumes

in CIS securities on the Exchange’s IOB platform

alone accounting for about US$477 billion in 2008

(91% of all trades on IOB).

In 2007, there were 269 IPOs at the Exchange

with a total sum of raised capital of more than

US$52 billion. CIS companies were a major

contributor to this total, raising more than US$19

billion in 24 IPOs in 2007.

The Main Market of the London Stock Exchange

2005 2006 2007

2,000

4,000

6,000

8,000

10,000

3,086

7,197

9,880

Graph 1. Money Raised by CIS companies on the Main Market of the London Stock Exchange, £m

5L i s t i n g i n L o n d o n : C I S P r a c t i c e

is the Exchange’s flagship international market for

established companies across all sectors.

Currently there are 57 companies from Russia and

the CIS on the Main Market of the London Stock

Exchange. Among these companies there are

some which have listed shares (such as

Kazakhmys, ENRC and Ferrexpo), and others

which have listed depositary receipts.

FTSE 100 and primary listingsKazakhmys and ENRC are two companies with

assets in the CIS that are currently in the FTSE

100. Both Kazakhmys and ENRC established PLC

structures and conducted primary listings of their

shares on the London Stock Exchange. Becoming

a constituent of the FTSE UK Index Series helps

to build greater liquidity for Main Market

companies by providing investors with clear and

independent benchmarking of stocks, sectors and

the market as a whole. It also creates the basis

for portfolio trading by both active and passive

investors. Institutional investors offering retail

funds, which explicitly benchmark the FTSE 100,

FTSE 250, FTSE SmallCap and FTSE All-Share

indices, account for almost £50 billion of

investment - over 60% of which are held in tracker

funds that are obliged to purchase exposure to

the constituents of those indices.

IOBMost of the Main Market companies from the CIS

have come to market by listing GDRs under

Chapter 18 of the Listing Rules and admitting

them to trading on the London Stock Exchange’s

International Order Book (IOB). As this market is

intended for professional investors, not all the

provisions applying to their primary listed peers

attach to DR issuers. A comparison checklist of

share and DR listing and continuing obligations

requirements is available in Russian and English

on the London Stock Exchange’s corporate

website.

2530

36

4964

50

80

51207

83375

63

477

46

49% 42%56%

61%

71%

86%

91%

100

200

300

400

500

600

Total IOB Trading Value ($b

n)

CIS Trading Value ($bn)Other countries IOB Trading Value ($bn)

Graph 2: IOB: Seven years of growth

2002 2003 2004 2005 2006 2007 2008

The IOB, originally conceived along the lines of the

SETS platform for UK securities, has developed

into one of the most liquid trading platforms for

international securities in the world. CIS securities

on the IOB have been among the most actively

traded and accounted for over 91% of dollar

volume traded in 2008 on the IOB (US$477

billion).

One of the key drivers behind the liquidity of

Russian and other CIS GDRs on the IOB is the

active participation of the 10 London Stock

Exchange member brokers whose parent

organisations were founded in Russia. Together

these brokers (listed below) accounted for US$57

billion in trades in 2008:

• Alfa Capital Holdings (Cyprus) Ltd

• AS KIT Finance Europe

• Metropol (UK) Ltd

• Otkritie Securities Ltd

• Renaissance Capital Ltd

• Troika Dialog (UK) Ltd

• Unicredit Aton International Ltd

• URALSIB Securities Ltd

• VTB Bank Europe Ltd

• Broker Credit Service.

EDX In December 2006, the London Stock Exchange’s

EDX group launched its Russian derivatives

service. Since launch, there has been

£40,613,522,060 (US$50 billion) in notional value


traded on EDX Russian derivatives. Futures and

options contracts on GDRs of Gazprom, Lukoil

and Rosneft are among the most liquid of the EDX

Russian derivatives. The EDX Russian derivatives

service is another example of the services the

London Stock Exchange has developed to

promote a liquid market in GDR trading.

Table 1. Top five most active contracts based onnotional value

No Company Notional value (in US$)

1 Gazprom 28,210,533,173

2 Lukoil 11,427,455,460

3 Rosneft 7,660,582,353

4 Norilsk Nickel 4,865,117,066

5 Surgutneftegaz 2,398,028,737

CCP IOBOne of the most important developments on the

IOB is the introduction of the Central

Counterparty Clearing (CCP) service for the

International Order Book (IOB). This service was

launched at the end of the first quarter 2009.

Recent market events have highlighted the value

of central clearing services in helping to mitigate

counterparty risk, increase market efficiency and

in turn provide participants with a greater level of

confidence in their transactions. The introduction

of a CCP model, initially to the 50 most liquid

securities by value that trade on the IOB, will

deliver appreciable benefits to both issuers and


investors. Market participants will gain full

counterparty risk protection, enjoy post-trade

anonymity and experience improvements in

straight-through processing. Firms will also have

access to an optional netting facility to reduce

transaction management costs and financial

exposure at the settlement level.

AIMSmall and mid-cap companies from the CIS have

also found a home on AIM, the London Stock

Exchange’s growth market, where there are

currently 48 companies with assets and

operations across the CIS (see

www.londonstockexchange.com/rus). The CIS

companies quoted on AIM have come to market

to access the deep pool of funds available for

fast-growth companies, from a variety of different

sectors. Companies from the CIS region have

been able to raise considerable amounts of

growth capital at IPO (£1.7 billion cumulatively)

and in further financing rounds (£2.1 billion

cumulatively). It is the ability to raise further capital

for growth companies to continue to develop their

businesses that really sets AIM apart from other

growth markets. Businesses from all over the

world are attracted to AIM because it enables

them to raise relatively small amounts of capital,

from knowledgeable, predominantly institutional

investors.

AIM – investing in a diversified base ofcompaniesInvestors who buy shares in companies quoted on

AIM are participating in the world's leading stock

market for smaller growing companies. AIM

companies come from 26 different countries and

range across 39 industry sectors and 90 sub-

sectors, providing all types of investors with a

vast range of choice in investing in businesses to

2005 2006 2007

424446

Graph 3. Money raised by CIS AIM companies at IPO, £m

656

0

700

100

200

300

400

500

600

suit their investment profile. In 2006 and 2007,

AIM companies raised a combined £31 billion from

investors (see Table 2), many of whom were large

institutional fund managers such as BlackRock,

Invesco, Fidelity International, Prudential Group,

AVIVA, Artemis Investment Management and QVT

Financial.

Investors also benefit from the FTSE AIM Index

Series. This series – part of FTSE’s global range


of world-class market indices – provides investors

with greater transparency, and helps them identify

AIM companies based on their inclusion in the

FTSE AIM Index Series or the FTSE AIM All-Share

Supersector Indices.

The diversity of AIM’s constituents, demonstrated

by the 39 sectors represented, is supported by

the in-depth and broad experience of the UK’s

financial advisory community who really

2005 2006 2007

118

646

Graph 4: Further money raised by CIS companies, £m

542

Year IPOs (£m) Further issues (£m) Total money raised (£m)

2003 1,095 1,000 2,095

2004 2,776 1,880 4,656

2005 6,461 2,481 8,942

2006 9,944 5,734 15,678

2007 6,581 9,603 16,206

2008 1,108 3,204 4,312

Total 27,965 23,902 51,890

* Data for the above table is taken from the statistics section of the Exchange’s website.

Table 2: Total investment made- 2003 -2008

0

700

100

200

300

400

500

600


SECTOR No. of companies Market cap. (£m) % of AIM market cap.

1999 – Software on topSoftware & Computer Services 37 3,973 30%

Speciality & Other Finance 27 2,114 16%

Support Services 43 1,175 9%

Leisure & Hotels 28 978 7%

Media & Entertainment 32 816 6%

Health 9 479 4%

Restaurants, Pubs & Breweries 16 414 3%

Real Estate 22 413 3%

Oil & Gas 13 350 3%

Engineering & Machinery 6 335 3%

2002 – Balanced sector growthSupport Services 74 1,191 12%

Real Estate 27 1,074 10%

Leisure & Hotels 73 1,044 10%

Mining 41 1,005 10%

Speciality & Other Finance 82 953 9%

Oil & Gas 23 621 6%

Software & Computer Services 74 609 6%

Pharmaceuticals & Biotechnology 19 563 5%

Media & Entertainment 75 539 5%

Food Producers & Processors 8 295 3%

2004 – Resources lead the marketOil & Gas 46 5,645 18%

Mining 90 4,928 16%

Speciality & Other Finance 143 2,780 9%

Leisure & Hotels 62 2,504 8%


Software & Computer Services 110 2,137 7%

Pharmaceuticals & Biotechnology 38 1,490 5%

Media & Entertainment 84 1,459 5%

General Retailers 22 995 3%

Real Estate 33 840 3%

2006 – Real Estate joins Resources at the topMining 180 14,428 16%

Oil & Gas Producers 98 10,280 11%

Real Estate 86 9,545 11%

General Financial 185 9,461 10%


Travel & Leisure 89 4,222 5%

Software & Computer Services 153 4,037 4%

Media 121 4,013 4%

Equity Investment Instruments 56 3,924 4%

Industrial Metals 9 3,385 4%

Table 3: Top 10 companies by market capitalisation on AIM by sector

understand the needs of smaller growth

companies. AIM is supported by a wide

community of expert advisers, ranging from

Nominated Advisers (Nomads) and brokers to

accountants, lawyers and PR/IR firms.

The sectoral diversity on AIM remains one of the

market’s core strengths and has helped AIM avoid

reliance on one particular industry, even when

another sector goes through a relative period of

slow growth. In Table 3, several distinct periods

are highlighted to show how AIM has developed

over the years, where certain sectors experienced

a significant increase in investor interest. With the

exception of 1999 during the ‘dot.com’ boom, no

one sector has accounted for more than 20% of

AIM’s total market capitalisation. Since 2004,

sectors such as natural resources, financial

services and real estate have all experienced peak

periods of growth while leaving the market

relatively balanced and diverse. Owing to the large

number of advisers and sector specialists working

with the AIM market, AIM has always been able to

serve as a platform to attract companies from new

sectors and new investment opportunities.

AIM introductionsWhile, on average, CIS companies have raised

£35 million at IPO, several have come to market

raising small amounts of capital. Teleset, the

telecommunications operator from Tartarstan,

admitted its shares to AIM without raising initial

capital. Once on market, it then raised US$14.987

million, the major investors being Templeton Asset

Management Limited, the Black Sea Trade

1 0 L i s t i n g i n L o n d o n : C I S P r a c t i c e

Development Bank and Deutsche Bank. A further

US$9.8 million was raised the following year in a

pro rata offer to existing shareholders. Companies

such as Teleset, which have chosen to undertake

an introduction of shares to market, are looking to

gain access to a platform where they will trade

alongside peer companies of a similar size and

profile. Once on AIM, these companies have an

opportunity to demonstrate their strengths and

position themselves for future fund-raisings by

ensuring that they adhere to disclosure best

practices.

AIM regulation & the role of NomadsEach company applying to AIM must appoint a

Nomad to guide it through the admission process

and its subsequent life as a publicly-quoted

company. Firms that wish to seek approval to act

as Nomads must satisfy strict criteria set by the

London Stock Exchange. To be granted

authorisation they must demonstrate that they

have the relevant experience to assess whether a

company is appropriate to be admitted to AIM and

that they can support the company once admitted

to the market. By ensuring that AIM companies

are properly regulated, investors benefit from

increased certainty and security. Over the last five

years, the number of AIM Nomads working with

international companies has grown significantly.

Their continued work with the companies that they

act for has helped to raise the level of

understanding in the UK of the risks and

opportunities in overseas markets.

The unique solid principles-based regulatory

1 1L i s t i n g i n L o n d o n : C I S P r a c t i c e

system, combined with the Exchange’s robust and

sophisticated trading platforms, provides both

private and institutional investors with the

confidence that AIM is a secure market that

enables them to participate in these companies’

success and support the companies of tomorrow.

Funds on AIM and SFMHedge funds and private equity are an increasingly

important asset class to which pension funds and

other institutional investors want access, in order

to diversify their overall portfolios and improve

their returns. Through both the Main Market and

AIM, the London Stock Exchange was already

offering investors and issuers a choice of routes

to market, according to the types of investors that

issuers wish to target and the risk premiums

sought by investors. All of the real estate and

development companies listed in Table 4 are

examples of fund structures that are quoted on

AIM.

In 2007, the London Stock Exchange further

enhanced the range of available options,

introducing the Specialist Fund Market (SFM), a

separate, clearly-labelled market for alternative

assets such as single-strategy hedge funds and

private equity vehicles. It enables the London

markets to continue to meet what is a strong

demand among issuers and investors for a

regulated market quotation suitable for these

more complex entities, while remaining clearly

delineated as a professional market.

The Specialist Fund Market is open to both UK

and international funds, and will be complementary

to the FSA’s Unitary Regime for investment

entities listing on the Main Market. Issuers that

wish to market funds to a wider audience,

including retail investors, will continue to have

access to the Main Market, which offers the

potential for inclusion in index tracker funds in

addition to AIM, and has been very successful in

attracting investment entities, primarily property

funds or other conventional investment funds.

The Specialist Fund Market is a Regulated Market

operated in accordance with EU Directives. The

FSA will approve issuers’ prospectuses in line

with the Prospectus Directive and monitor issuers’

conformity on an ongoing basis with the

Transparency Directive, Market Abuse Directive

Company – Real Estate Money raised (in £m)

Aisi Realty Public Ltd 16

Dragon – Ukrainian Properties 103

KDD Group NV 64

Mirland Development Corporation 143

RGI International Ltd 89

Raven Russia Ltd 153

XXI Century Investments 68

Table 4: Real Estate sector review

and other EU requirements. Once approved by the

UKLA, securities must also meet the Exchange’s

Admission and Disclosure Standards in order to

be admitted to trading on dedicated segments of

the Exchange’s next-generation trading services,


Opportunities for CIS companies in London

The London Stock Exchange is committed to supporting the aspirations of the CIS and international

companies seeking access to capital, liquidity and profile on our markets. The significant amounts

raised by CIS companies via IPO and the large volumes traded on IOB are testament to the

confidence investors and advisors have in our markets and the companies profiled there. The highly

successful IPOs of Russian companies in 2006-2007 have helped to attract a critical mass of the

best analysts and investors knowledgeable about the region. In this publication you will have an

opportunity to hear from many of these advisors about the role they play in bringing CIS companies

to London.

English and Russian language information available here:

www.russianipo.com

Please contact the CIS team if you are interested in learning more about this initiative

Jon EdwardsSenior Manager - Russia & CIS Equity Primary Markets London Stock Exchange Direct: +44 (0) 20 7797 1599 Fax: +44 (0) 20 7920 4788 [email protected]

Maria AleksandrovaBusiness Development Executive - Russia & CIS Equity Primary Markets London Stock Exchange Direct: +44 (0) 20 7797 1444 Fax: +44 (0) 20 7959 [email protected]

SETS and SETSqx. Specialist Fund Market

securities will not be included in the FTSE UK

Index Series and will therefore not be included in

index tracker funds.

Copyright © February 2009. London Stock Exchange and the coat of arms device are registered trade marks of London Stock Exchange plc. IOB is a trade mark of London Stock Exchange plc.

International Order BookThe International Order Book (IOB) enables investors to unlock the potential of some of the world’s fastest growing markets.

The service offers easy, cost efficient and direct access to developing markets around the world such as Central and Eastern Europe, Asia, Middle East and Africa via depositary receipts.

More than 270 securities from 46 countries are trading on the service, supported by the quality of our primary markets and global reputation of leading depositary banks.

The IOB benefits from a central counterparty service, providing participants with increased market efficiency and a greater level of confidence in their transactions.

To find out about listing in London or trading on the London Stock Exchange, please visit

www.londonstockexchange.com

There are many reasons for a company to list its

securities on a stock exchange, but the most

common reason to go public is to raise equity

capital. Other objectives may include gaining

access to a highly liquid market and broadening a

company’s investor base. Equity financing is not

only an immediate reinforcement of the capital

base, but also a means of improving the

company’s profile and transparency, as well as

offering an opportunity to raise cheaper debt in

the future as a publicly-listed company. A listing

can also lead to commercial benefits, such as

sales increases in a specific region through added

brand recognition.

Most companies combine a listing on the London

Stock Exchange (the Exchange) with an equity

offering, which can be undertaken by issuing new

shares, selling existing shares or a combination of

both. This process is referred to as an Initial

Public Offering (IPO).

This article will focus on listing on the Main

Market of the Exchange, in the context of Russian

corporates, and on offerings of Global Depositary

Receipts (GDRs).


Role of the investment bank in a Main Market listingMichael Boardman, Myles Evanson and Victor Kuzmenko, Nomura International plc

The investment bank plays a crucial role in listing Russian and CIScompanies on the London Stock Exchange

Key considerations

Benefits of a listing on the LondonStock ExchangeLondon remains the international stock exchange

of choice for foreign companies, reflecting

London’s leading position as an international

financial centre. A significant number of Russian

companies have already chosen to list in London

and, with Russia becoming an increasingly

important source of equity capital market

transactions (37 Russian companies have sought

listings on international stock exchanges since

early 2002), more are expected to do so during

2010/2011 (Source: Dealogic).

The Exchange offers a number of benefits for

companies that complete a listing:

• Flexibility in the choice of securities to be listed:

The Exchange provides listing and trading

platforms for all types of shares, depositary

receipts (DRs), or equity-linked securities

• Access to a vast pool of international capital:

The Exchange offers companies the opportunity

to enlarge their existing investor base and gain

access to capital from the international financial

community


• Enhancement of the company’s profile: listing

on the Exchange encourages broader

recognition of the company, both domestically

and internationally

• Broad analyst coverage: listing on the Exchange

provides access to comprehensive research

coverage by different country and sector

analysts; this plays a vital role in securing

recognition from the international investor

community

• Sector knowledge and depth: an Exchange

listing provides access to investors with in-

depth knowledge of companies and sectors. The

Exchange itself hosts a broader range of

sectors than any other exchange and contains

an extensive depth of peers

• Potentially higher valuation of the company: as

a recognised platform for the international

investor community, an Exchange listing offers

improved valuation potential. Because the

Exchange also offers Russian corporates the

greatest number of peers, this makes the

investors’ task of looking at a new opportunities

easier and provides a wider range of peers to

benchmark against

• Listed securities: listing on the Exchange

creates a liquid currency for future acquisitions,

management remuneration, etc

• Investor confidence: an Exchange listing helps

generate investor confidence via disclosure

requirements

• Flexible approach to regulation and direct

access to regulatory authority: the Exchange’s

regulatory standards are high, but also flexible,

Russian IPOs in London since 2000Figure 1

300

50

100

150

200

250

02000 2001 2002 2003 2004 2005 2006 2007

Al erna ive nves men Marke

ondon

Num

ber

of

PO

s

350

2008 2009

Source:Dealogic

with rules that can be applied on a case-by-case

basis

• Reasonable costs and fees: fees and costs for

the Exchange’s services are competitive in

comparison with other stock exchanges.

The attractiveness of London as a listing venue is

illustrated by the increasing number of foreign

companies on the Exchange: from 49 listed in

2000 to 572 as of 31 December 2009. The

statistics for Russian companies show that 33 out

of 37 (or over 89%) of Russian companies listed

internationally have chosen to list their securities

on the Exchange (Source: London Stock

Exchange, Dealogic).


Increase in investor access at thesmall/mid-cap levelWhen assessing investment opportunities from

emerging markets, international investors have

historically focused on the largest and most

attractive companies – the ’blue chips’. These

companies will normally be market leaders in their

respective industries, with significant growth

potential – on account both of regional

development prospects and of their ability to

outperform the competition.

Although the Russian market is still largely

dominated by large-cap companies, including

Gazprom, Rosneft, Sberbank, LukOil and Norilsk

Nickel, investor focus has been gradually moving

towards mid-cap companies, which potentially

Source:Dealogic

Offerings by foreign companies in London since 2000Figure 2

60

10

20

30

40

50

02000 2001 2002 2003 2004 2005 2006 2007 2009

Amoun raised

Number of offerings

Am

oun

rais

ed

US

$ b

illio

n

70

300

50

100

150

200

250

0

Num

ber

of

offe

rings

350

2008


offer higher returns and stronger growth potential.

Thus, since 2000, there have been 19 mid-cap

Russian companies which have listed in London.

Listing considerations

Listing typesThe listing regime in London has recently been

amended, and the new regime is effective from

April 2010.

Under the new regime, there are two choices of

listing - a "Premium" listing and a "Standard" listing

(which replaces the old "primary" and "secondary"

listings, respectively). Both options are available

to UK and non-UK corporates.

1 Premium listing

Premium listing is available for listing equity (NB:

but not GDRs) and requires compliance with the

super-equivalent regime ie more than the basic

requirements set out by the EU Prospectus

Directive. Examples of additional higher standards

are corporate governance, share dealing and pre-

emption rules (to provide anti-dilution protection),

three year track record and 12 month working

capital statement. The key benefit is that once

the issuer is Premium listed, it will qualify for the

inclusion in the FTSE family of indices.

2 Standard listing

The standard listing requires compliance with EU

Prospectus Directive minimum standards only and

not the additional UK super-equivalent points

required for a Premium listing. So it would have to

comply with Transparency and Disclosure Rules

only, making it less demanding to list on the

Standard platform, but there would be no

qualification for FTSE indices. Russian issuers

listing GDRs on the Exchange are only eligible to

have a Standard listing.

The UKLA is responsible for the vetting and

admission of companies to trading on the

Exchange, and maintains the Official List. The

majority of Russian incorporated companies listing

in London opt for a Standard (previously

secondary) listing of GDRs. (See Figure 1 above

'Russian IPOs in London since 2000' for further

details).

International vs domestic offeringBefore considering listing possibilities on the

Exchange, the company, its shareholders and

management need to be aware of the

requirements placed on Russian corporates by

Russian law.

The regulatory body for Russian corporates is the

Federal Financial Markets Service (FFMS). FFMS

places a number of limitations on a company’s

ability to offer its shares to foreign investors.

According to the new FFMS order registered with

the Russian Ministry of Justice on 6 October

2009 and expected to enter into force on 1

January 2010, the maximum amount of shares or

other securities that Russian issuers can place on

foreign markets will be determined, inter alia, by

the listing level of a Russian company on Russian

stock exchange(s) (MICEX and/or RTS). The

maximum limit is set at 25% for companies in

listing category “A” (ie the largest and most liquid

stocks). In addition, the new order specifies that

the maximum percentage of shares that can be

offered abroad by a company or its shareholders

in an equity offering is 50%.

If the company is not incorporated in Russia, it

will not be bound by Russian corporate legislation

and it can seek a sole international listing without

being required to offer the company’s securities

to domestic Russian investors.

Securities to be listedThe Exchange is the largest stock exchange

globally by number of listed companies with 2,792

listed corporates (including those quoted on AIM)

as of the end of December 2009 (Source: the

London Stock Exchange). The cumulative market

capitalisation of these companies was over

US$5.8 trillion as of December 2009 (Source:

London Stock Exchange).

Both shares and DRs can be listed on the


√ Investor familiarity with the product

√ No foreign investment restrictions

√ Enhanced liquidity

√ Ease of trading and settlement

√ Dividends paid in freely convertible currency

√ Easier access to corporate information

√ Flexible GDR nominal value

√ Simple listing requirements

√ No costs involved

√ Wide investor participation

Benefits of GDRs vs sharesTable 1 Exchange. A DR is a negotiable instrument issued

by a Depositary Bank, representing ownership in

shares of a company. The shares are held by the

Depositary Bank’s custodian in the domestic

market of the issuer (ie Russia).

DR methodology is very commonly used by

emerging markets issuers since certain

international investors can be prevented from

trading in Russian securities. Issuing

internationally-recognised DRs may be a

preferable option for most Russian companies.

Indeed, over 90% of foreign issuers listed on the

Main Market of the Exchange have applied a DR

Methodology of a

DR programme in an IPO

Figure 3

The underlying shares for a GDR programmecan be new or existing equity

The lead manager places the GDRs withinternational investors

The depositary issues GDRs to the Glo-Co

The shares are deposited with a depositary


methodology to their listing (Source: Dealogic).

The precedent also shows that since 2000 nearly

all Russian issuers who listed on the main board

of the London Stock Exchange have used a DR

programme. Several types of DRs can be listed

and traded on the London Stock Exchange,

14 Dec 2009 Exillon Energy Oil & Gas Yes 101

30-Apr-08 Globaltrans Investment plc Transportation Yes 470

08-Nov-07 LSR Group Construction/building Yes 772

02-Nov-07 Novorossiysk Commercial Sea Port Transportation Yes 955

02-Nov-07 Eurasia Drilling Co OOO Oil & gas Yes 783

31-May-07 PIK Group OAO Real estate/property Yes 1,929

10-May-07 VTB Group Finance Yes 7,989

03-May-07 Pharmstandard OAO Healthcare Yes 952

02-May-07 AFI Development plc Real estate/property Yes 1,400

22-Feb-07 Integra Group Oil & gas Yes 768

06-Feb-07 Sitronics Concern OAO Professional services Yes 402

06-Feb-07 Polymetal OAO Mining Yes 605

07-Nov-06 Chelyabinsk Zinc Plant OAO Mining Yes 314

02-Nov-06 Sistema-Hals OAO Real estate/property Yes 432

30-Oct-06 TMK Metal & steel Yes 1,069

14-Jul-06 Rosneft Oil & gas Yes 10,656

10-May-06 Cherkizovo Group Food & beverage Yes 251

07-Feb-06 Comstar UTS OAO Telecommunications Yes 1,062

11-Nov-05 Amtel Vredestein NV Auto/truck Yes 202

21-Jul-05 Novatek Oil & gas Yes 966

01-Jun-05 Evraz Group SA Metal & steel Yes 422

05-May-05 Pyaterochka Holding NV Retail Yes 639

09-Feb-05 Sistema Telecommunications Yes 1,557

Russian IPOs in London from 2005 to 2009Table 2

Pricing date Issuer name General industry GDRs Deal valueUS$m

Source: Dealogic

including global depositary receipts (GDRs),

American depositary receipts (ADRs), both

denominated in US dollars and euro depositary

receipts (EDRs), denominated in euros.

Historically, DRs have also, at times, proven to be

a more liquid trading instrument than shares for


international companies.

However, Russian corporates should be aware

that, according to the FFMS order 06-42/PZ-N,

from 18 April 2006, only up to a maximum of 35%

of total outstanding shares of the company can be

deposited into a DR facility. Precedent shows that

0-50 59,256 5.2% 177

50-100 162,296 4.6% 55

100-200 283,100 4.0% 47

200-300 812,513 6.3% 22

300-400 919,559 5.4% 14

400-500 717,462 3.2% 6

500+ 32,162,794 6.5% 44

International securities: common sharesTable 3

Market capitalisation (US$) Average daily traded volume One month trading volume Number of companies(US$) as % of market capitalisation

0-50 47,362 4.9% 54

50-100 293,491 8.3% 40

100-200 348,997 4.6% 49

200-300 1,337,932 12.0% 18

300-400 629,894 3.8% 13

400-500 223,958 1.0% 3

500+ 717,140 1.0% 179

International securities: depositary receiptsTable 4

Market capitalisation (US$) Average daily traded volume One month trading volume Number of companies(US$) as % of market capitalisation

Source: Bloomberg

Source: Bloomberg


most Russian corporates do not utilise the full

threshold.

In addition to this, in May 2008 the Russian

government passed a law which will limit the level

of foreign ownership in 42 industries, which have

been classified as ‘strategic’. For example military,

space technology, nuclear technology, metals and

mining, oil and gas, energy fall into this strategic

category. Foreign investors will need a

government approval before acquiring a majority

(ie over 50%) interest in companies from these

sectors. In certain sectors, including natural

resources companies exploiting subsoil plots of

federal significance, the threshold has been set as

low as 10%. This law will ultimately have impact

on the size of DR programmes of issuers

operating in these sectors.

Listing venueAs mentioned previously, there are two segments

of the London Stock Exchange where Russian

corporates can list:

• Main board of the Exchange; and

• Alternative Investment Market (AIM).

While the main board is an established

international listing venue for large companies,

AIM attracts corporates by offering a more

streamlined, flexible and cost-efficient process for

smaller, high-growth and other younger

companies. Thus, an average market cap for

companies listed on the main board is US$3.9

billion, compared to US$70 million for AIM

(Source: the London Stock Exchange).

Although technically possible, AIM strongly

discourages foreign companies from listing DRs

on AIM due to the insufficient regulatory

framework around this product on AIM. As of

31 December 2009, there are only three GDRs

trading on AIM, as opposed to 190 on the Main

Market. As a result of this, companies

incorporated in Russia generally list on the main

board of the Exchange, whereas companies with

operations in Russia but which are incorporated

outside of Russia have a choice between AIM and

main board listing, depending on the company’s

profile, size, investor base etc.

Requirements for a listing in LondonRegulatory and legal requirements that are

imposed by the regulatory body on all companies

wanting to list on the Exchange (as discussed

above) are a prerequisite for Russian companies

listing their shares on the Exchange. In addition,

corporates need to be sensitive to what would

make their company look more attractive to the

investor community. International investors target

investments on recognised international

exchanges, such as London, because they provide

comfort regarding international standards of

disclosure, accounting and historical performance.

Transparency is also becoming key, especially for

emerging market companies, and precedent has

shown that investors will pay more for companies

with a high commitment to transparency and

disclosure. International investors will also seek

out companies which can demonstrate value,

attractive growth prospects and dedicated

management.

Corporate profileListing on an international stock exchange, such

as the Exchange, is always connected with raising

the profile of the company from the domestic to

international level and may include restructuring,

rebranding etc. This can become crucial for the

marketing of the investment case and therefore

needs to be addressed at the preparatory stage

of the IPO by the company and its advisers (See

‘Company Restructuring’ for further detail).

FinancialsAs Russian Accounting Standards are not

recognised on an international level, IFRS and US-

GAAP accounts have been adopted by Russian

corporates wanting to list on the Exchange. The

financial statements need to be consolidated in the

case of a group structure. High levels of financial

disclosure and transparency are needed to ensure

that the market is comfortable with the company

and a comprehensive annual report, with detailed

notes accompanying any financial statements, will

be expected. Normally the companies are expected

to have a three-year trading record to be eligible to

list on the Exchange; however the rule can be

waived on a case-by-case basis.

If an offering is combined with new capital being

raised, the amount and use of proceeds need to

be consistent with the company’s existing and

planned financial performance and its capital

spending plans. Investors will also pay attention

to the company’s liquidity and indebtedness

ratios, which need to be fairly robust, otherwise

the business model will be perceived as high risk


and investors will demand a higher discount at

pricing, or may simply not participate in the

offering.

Corporate governance

Corporate governance is a set of rules, principles,

customs and policies that define the way a

corporation is managed, administered or

controlled. It regulates the relationship between

all the stakeholders of the company and the

operating management who have immediate and

direct control over the company’s actions. Due to

potential conflicts of interest that can exist

between shareholders and the management of the

company, it is imperative that there are systems

in place that can regulate and ensure the efficient

functioning of the company. Corporate

governance is a particular concern with family-

owned companies, where the management also

tend to be the ultimate shareholders of the

company.

Corporate governance for Exchange-listed

companies is regulated either by the Combined

Code, which is binding for all companies listed on

the premium segment of the Exchange, or by the

‘best practice’ standards for all other companies.

The Combined Code uses the ‘comply or explain’

approach, which means that if a company does

not comply with certain provisions of the Code,

they are obliged to explain to investors the

reasons for this.

Establishing a talented board is the cornerstone

of an effective corporate governance system –

this accountability is highlighted by the opening

statement of the Combined Code: ‘Every

company should be headed by an effective Board,

which is collectively responsible for the success of

the company’. The Board of Directors should

comprise of the executive directors, who perform

operational day-to-day activities; and non-

executive directors, who are the custodians of the

governance process. They are not involved in the

day-to-day running of the business, but monitor

the executive activity and contribute to the

development of strategy.

The Combined Code also requires that at least

half of the Board, excluding the chairman, should

comprise non-executive directors determined by

the Board to be independent. There are many

factors that can challenge the independence of a

director, including their previous or current

relationship with the company and its

management/shareholders, material interests

involved and/or time spent with the company, all

of which are stated in the Combined Code.

The Combined Code also provides that the Board

should establish various committees to ensure a

system of internal controls and safeguards

regarding remuneration and nomination of Board

members, as well as dealing with auditors.

Hence, corporate governance has become

increasingly important for Russian companies

recently, as investors have been demanding

greater transparency and management efficiency.

Although not legally binding for Russian

corporates, any foreign company listing on

theLondon Stock Exchange is advised to reflect


on the Combined Code and offer certain

corporate governance provisions to increase its

appeal to the international investor community.

ManagementThe experience, qualification and constitution of

the management team are all important factors

that international investors will carefully assess

when considering investing in a company. Since

most of them are passive investors (ie they take

no active role in the management of the company

and are not represented on the Board), they need

to ensure that the management team has the

ability and capabilities needed to run the business

efficiently.

The management team must also have a set of

clearly-defined objectives and a strategy on how

to achieve these objectives. In addition, it must be

able to communicate the strategy clearly and to

show evidence of this in the company’s financial

performance.

Special attention should also be paid to

management remuneration packages – investors

are very keen to see compensation structures tied

into the company’s performance, such as, for

instance, an option scheme, as this ensures that

management’s interests are aligned with those of

the shareholders.

Preliminary steps Once a company has formally decided to IPO, it

will need to appoint one or more advisers to

manage the process. The leading role is normally

given to one or several investment banks, often also

referred to as Global Co-ordinator(s) or Bookrunner(s).

These investment banks take the pivotal role in the

structuring and distribution of the transaction, and

ensuring smooth and effective execution.

Syndicate structureIn order to generate demand, the investment

bank, which is normally appointed at the very

start of the process and is also acting as adviser

to the company through all the steps of an IPO,

usually invites a number of international, regional

and local banks to form a syndicate.

This structure will vary depending on several

factors, including:

• size and type of the issue

• geographical targeting of the offering

• company’s preference as to the participation of

certain banks.

The size of the issue is the main reason for a

multiple bookrunner syndicate. The ‘rule of thumb’

is that the larger the offering, the more banks

should be invited. Precedent shows that for

offerings of over US$200m, Russian corporates

usually involved at least two bookrunners.

This syndicate team mobilises the resources

needed to generate the necessary momentum and

demand to ensure a successful placement. The

selection of banks is generally based on a number

of key criteria, including but not limited to the

following:

• track record in relevant offerings

• sector and regional experience


• proposed team and experience

• research capability

• distribution capabilities, and

• relationship with the company.

The experience and commitment of the

syndicate’s members are critical, since this gives

confidence to both the company and institutional

investors.

Other advisersApart from the banks, the issuer should also

appoint certain other advisors, who will help the

company successfully go through all the stages up

to the closing of the transaction. These include:

• Legal advisers normally include issuer’s

counsel and counsel to the underwriter(s), as

well as any other legal advisors for certain

jurisdictions

• Auditors are responsible for the audit of the

produced financial statements of the company

• Technical auditors are responsible for the

production of an independent technical report

(CPR – Competent Party Report), which is

sometimes required to be filed together with the

Offering Circular of the companies operating in

particular sectors and having a substantial asset

base which is important for their business (eg

mining or real estate companies)

• Public relations agency is responsible for all

communications with the press

• Financial pr int ing company is in charge of

printing and distributing the prospectus.

Pre-IPO financingMany companies may find themselves in a

position where they would like to complete some

financing at a time when they are preparing for –

but not yet ready to complete – an IPO. In this

case, the so-called pre-IPO financing can be

arranged, which can be in a variety of forms from

straight debt, pre-IPO convertible bonds to

straight equity.

Straight debt financing, which is commonly

arranged by the investment bank(s) mandated for

the IPO, provides the company with bridge

financing until the IPO has taken place. The

conditions of this agreement are also very often

subject to the completion of the IPO.

A pre-IPO convertible bond issue is an innovative

type of pre-IPO financing. The company issues

bonds, normally with a much lower coupon than

straight debt for a private company, which are

convertible into shares at an agreed conversion

rate upon the completion of the future IPO. The

main benefits of this type of financing include:

Direct benefits

• the coupon is lower on the pre-IPO bond than

on a traditional bank bridge loan because of the

attractiveness of exposure to an upcoming IPO,

either in the form of a convertible or IPO shares

• there are typically none of the performance-

based covenants usually associated with bank

finance

• it delays and/or reduces the dilution associated

with a capital increase


• in many cases, original shareholders can often

enjoy the upside in equity valuation until the

IPO takes place.

Indirect benefits

• introduces new investors who are potentially

‘future shareholders’ in the company

• builds momentum towards an IPO, but removes

near-term pressure to complete an IPO within a

narrow timetable

• sets a clear time-frame for the IPO.

The structuring process for this instrument is not

as straightforward as for straight debt and the

company should involve specialist advisers (ie an

investment bank) who will be experienced in

executing this type of transaction.

Offering processThe investment bank must be committed to

executing the transaction – often within a

challenging time-frame – without compromising

any of its duties. All parts of the offering process,

from the inception of the transaction through to

its execution, must be meticulously planned and

agreed by the company. The due diligence

process, prospectus drafting and roadshows take

up significant amounts of senior management

time and so it will be important to ensure that

there are no disruptions to the company’s ongoing

operations.

Among external factors, local and global market

conditions need to be taken into consideration to

ensure that the company accesses the public

markets during favourable and stable market


Company restructuringIn order to maximise the valuation of the company

and hence the proceeds from the offering, it is

imperative that the structure of the company is

optimised before marketing to investors gets

underway. The structure should be transparent and

it should fully reflect the company’s true value. The

restructuring exercise may involve inclusion or

exclusion of certain company divisions prior to the

offering, registration of a holding company, change

of domicile and restructuring of the Board etc. The

global co-ordinator/bookrunner will typically advise

the company on this during the preparatory phase.

Due diligenceBefore the investment bank can introduce the

Example of typical IPO process for a Russian companyFigure 4

1

Month 1

Kick-off meeting

Due diligence and legaldocumentation

Business plan and financialprojection analysis

Equity story development

Analyst presentation andresearch preparation

Valuation presentation

Research publication andinvestor education

Publication of preliminaryprospectus

Management roadshow

Pricing

Closing and listing

2 432143214321432143

Month 5Month 4Month 3Month 2

Preparation Marketing Pricing

Week

conditions. Of utmost importance, however, is the

strategic reasoning behind the company’s decision

to go public, whether this is the financing of an

acquisition or expansion/growth. This, above all

other considerations, should be seen as the key

driver behind the timing of the whole transaction.

We have provided above (Figure 4) an example of

a typical IPO process for a Russian corporate.

However, timing can vary significantly on a case-

by-case basis. Once the company has met the

basic requirements for a listing and assuming

there are no external factors that are hampering

the process, an international listing and offering

can be executed within three to four months.

The key work-streams in the IPO process include:


company to the international investor community,

it must obtain a detailed understanding of its

operations and activities. It is important to ensure

that these are presented in a transparent,

accurate and objective manner to international

investors.

The due diligence process involves business, legal

and financial due diligence and the timing of it can

vary depending on a number of factors, including the

complexity of the corporate structure and the level of

transparency in disclosure of corporate and financial

information.

The investment bank will undertake and manage the

business due diligence (eg review of strategy and

business plans, financial model and projections,

review of Board structure as well as full legal and

financial due diligence for the company) with the

assistance of the company’s auditors and the legal

advisers to both the company and the investment

bank. During this process, the investment bank will

thoroughly examine all aspects of the company in

order to provide the appropriate levels of comfort for

the lead manager(s), the international investor

community, as well as for the stock exchange where

the company’s securities will be listed and traded.

The due diligence can often raise issues that must be

resolved prior to the offering, in order to satisfy

investor, regulatory and/or investment bank

requirements. The success of the transaction

depends on full and accurate disclosure, which is the

result of a comprehensive and positive due diligence

process.

It is therefore very important to involve all the

relevant parties in the transaction from the outset

and to communicate, promptly and clearly, the tasks

that must be performed.

Drafting and publication of theprospectusA prospectus is the main disclosure and marketing

document that the company publishes in connection

with the IPO and it serves two main purposes:

• as a marketing document, which provides a full and

detailed description of the company and the

securities offered; and

• as a disclosure and risk mitigation document

covering all material disclosure issues relevant to

Key work-streams in an IPO process

Preparation Marketing Pricing• Market analysis • Due diligence• Valuation analysis • Equity story• Financial reporting • Analyst presentation• Offering strategy • Research preparation• Corporate governance • Prospectus• Incentives for management • Transaction documentsand employees • Stock exchange

• Business plan review discussions • Board structure• Timing and timetable

• Research• Investor targeting• Pre-marketing• Roadshow planning• Roadshow• One-on-ones• Group meetings

• Pricing• Bookbuilding and allocation• Closing and payment ofproceeds

• Listing

• Trading• Stabilisation• Investor relations• Research• Financing strategy andadvice

Figure 5

10-12 weeks 4 weeks Ongoing

an investor making a decision on the offering.

Legal counsel to the company will primarily be

responsible for drafting the prospectus with input

from underwriters and their counsel where

necessary. Other parties, including the company,

syndicate banks and accountants will also provide

input and comments on the relevant sections in

the prospectus.

The prospectus will normally include the following

sections:

• Summary of the offering

• Risk factors

• The offering

• Dividend policy

• Capitalisation / share capital

• Selected consolidated financial information

• Operating and financial review

• Industry

• Business description

• Regulation

• Management

• Principal and selling shareholders (if applicable)

• Description of the GDRs (if applicable)

• Taxation

• Subscription and sale

• Settlement and delivery

• Legal matters

• Independent auditors


• Index to financial statements.

The publication of the prospectus normally happens

in two forms:

• one in preliminary form (also called a ‘Red

Herring’) with an indicative price range on the front

cover, on the basis of which investors are

encouraged to place orders with the bookrunner(s)

and

• one in final form upon pricing, outlining the final

price and the final number of shares to be

issued/sold etc.

Research Research production and publication, which is

normally handled by the syndicate banks, is the first

step in marketing the company. Any company would

like to ensure coverage by as many research

analysts as possible to ensure that the maximum

number of investors are educated about the

company’s investment case. The role of research

analysts is of paramount importance to an equity

offering. The main tasks accomplished by research

analysts would normally be as follows:

• independent assessment of the company’s

investment case

• identification and evaluation of comparable

companies

• preparation and publication of independent

research report (including forecasts)

• education of syndicate’s sales force

• co-ordination of investor education effort

• identification of key investor concerns to be


addressed during roadshow

• follow-up calls to institutional investors.

Other documentation Apart from the prospectus, there are a number of

additional documents to be signed/issued during

the IPO process. Key documentation would

normally include:

• Underwriting agreement

The main legal agreement in an international

offering is a subscription or underwriting

agreement. It is entered into by the issuer,

selling shareholders and directors (where

appropriate), the global coordinators and all the

managers. It is normally signed after pricing and

constitutes a firm commitment by the managers

to underwrite the offering subject to certain

conditions precedent and force majeure. The

key provisions of the underwriting agreement

include representations and warranties,

principally dealing with the accuracy and

completeness of the prospectus and compliance

with certain legal matters, undertakings of the

issuer (including lock-up provisions), fees and

expenses, conditions precedent, selling

restrictions and termination events.

• Legal opinions

Typically in international equity offerings

managers receive legal opinions from

transaction counsel covering such areas as the

due incorporation of the issuer, the

enforceability of the legal documents under

their governing law, taxation, US securities law,

and depending on the type of offering, a

disclosure opinion verifying aspects of the

disclosure in the prospectus.

• Auditor’s comfort letters

Comfort letters are letters written to the

issuer and the managers and will typically aim

to achieve two goals:

(i) confirm the accurate extraction of the

financial statements in the prospectus from the

audited accounts; and

(ii) provide comfort on the financial situation of

the issuer in the period from the date of the

disclosed accounts and the offering.

There may be other documents that will need to

be signed at different stages of IPO execution;

however, they are subject to individual

arrangements and are often of a technical nature.

Investor educationOnce the research report has been published, the

investor education period begins (it normally

continues right through to pricing). During this

period, sales people from the syndicate banks will

contact investors and market the company’s

equity story to them. Investors would normally

have received research report(s) by then and will

therefore be able to make initial assessment of

their potential interest and involvement in the

deal. The involvement of the research analyst is

paramount to the success of investor education,

answering investors’ questions with regard to the

research report and providing details to them on

the company’s positioning, as well as key sector

trends. The main aim of investor education is to

get a market view on the company’s investment

case and its valuation.

RoadshowOnce the market has been informed about the

company’s investment case and investors have

had some time to review the research reports and

the prospectus, the roadshow period commences.

The roadshow involves key members of the

management team meeting a number of potential

investors in major financial centres across Europe,

US and Asia, communicating the company’s

investment case to them and addressing any

queries they may have.

Very often, the decision over whether or not to

invest in a certain business will centre on the

calibre of the management involved and so

personal contact plays an important part in this

process (by helping potential investors to feel

more comfortable about their investment, as well

as building up trust and confidence).

Pricing and allocation Pricing is one of the most complex processes in

the IPO as it ultimately defines the market

valuation of the company. Whilst there are many

pricing methodologies that can be utilised in IPOs

by Russian issuers, book-building is the most

common. Under this methodology, the pricing

process is implemented in two stages:

Stage 1: Setting the pr ice range.

Following the investor education period and

usually before the start of the roadshow, the


company and the syndicate agree on a price

range, within which the offering will be marketed

to investors. Even though it is becoming more

common in emerging market IPOs, a price range

may not be set at the end of the investor

education process, but rather at some stage

during the roadshow itself. This is commonly

referred to as a ‘decoupled’ approach. Whether a

decoupled approach is utilised will depend on the

particular circumstances of the offering at the

time.

The width of this price range (usually around

20%) is primarily dependant on the level of

certainty about the valuation of the company, on

market volatility and on received investor

feedback. Once the price range becomes public,

normally via publication of a preliminary

prospectus, investors are allowed to place orders

with bookrunners for the issuer’s shares within

the indicated price range. The price range is

designed to provide guidance to investors as to

the indicative/intended valuation of the company.

Although the price range can be revised upwards

or downwards later in the process, depending on

the demand for the offering, it is not considered

to be best market practice.

Stage 2: Pric ing.

Based on the order book at the end of the book

building, the issuer and the syndicate decide on

the uniform price at which the shares will be

offered to institutional investors, as well as on

how many shares each of the investors will

receive. Key pricing considerations include the

following: maximising the proceeds from the


offering, offering new shareholders an attractive

investment opportunity and achieving a good

share price performance in the aftermarket.

Pricing starts with a fundamental valuation,

based on various methodologies, including

comparison to peers (P/E, EV/EBITDA, P/NAV

etc as applicable), DCF, assets’ value etc. This

is often referred to as ‘fully-distributed value’.

However, IPOs rarely price at this valuation. In

order to account for the primary market risk (ie

that the shares do not yet trade in the liquid

environment), and to attract substantial

investor demand, a discount is applied to the

fully-distributed market value (also known as

IPO discount). This discount is normally in the

range of 5-10%.

The banks often refer to this as ‘leaving money

on the table’ for investors. According to the

IPO under-pricing theory, this should lead to a

small ‘pop’ in the first few days of trading to

keep investors happy and indicate longer-term

outperformance.

AftermarketAfter the completion of the offering, it is

necessary to ensure that the secondary market

performance of the company is positive. In

order to maintain a liquid and active secondary

market, the investment bank will commit

considerable efforts to make a market in the

newly-listed securities. Such aftermarket

support is an unconditional commitment of the

investment bank to both existing and

prospective shareholders of the company. The

support of an investment bank in the

aftermarket includes five main commitments:

1 Stabilisation – minimisation of share price

Factors affecting pricingFigure 6

Results of globalbookbuilding

Pricing relative tocomparable companies

Pricing views of investors

Global equity marketconditions

Other important factors

• Overall level of demand and over-subscription• Quality of demand or institutions in the book atvarious prices

• Pricing levels and valuation relative to comparablecompanies

• Performance of Asian, European and US marketsduring marketing stage

• Relative performance of comparable shoppingsector companies

• Company specific objectives• Quality of bookrunners and the approach totransaction

• Demand and pricing views of investors• Price views and intentions in the aftermarket -buy, hold, sell

IPO price


4 Research coverage – timely and ongoing

research coverage of the company can

consistently raise the company’s profile in the

investor community and keep investors updated

on the recent company’s developments.

5 Support of investor relations programme – an

investment bank will assist its client to set up

and maintain regular investor relations activities

to ensure that all outside existing and potential

investors in the company are well informed

about the company’s recent progress and

developments.

In addition to the aftermarket support roles

outlined, the investment bank will usually monitor

the company’s performance and continuously

offer recommendations to the company on various

matters. This ensures that a long-term

relationship is built up with a view to ongoing

support being provided to the company and its

shareholders.

volatility post-listing and, if applicable, exercise

of the over-allotment option, if granted. The

ability of a bank to do this is strictly regulated.

An over-allotment option is an option granted to

the investment bank lead-managing the offering

to over-allot usually up to 15% of the overall

number of shares in the offering to investors in

case of strong demand. By using the over-

allotment option, the investment bank can

support the share price, but only if it drops

below the offering price.

2 Trading and market making – in order to ensure

the minimum level of liquidity and constant

availability of a market bid/ask price for the

listed securities, the investment bank will

normally commit to market-making in the stock

following the completion of the offering.

3 Capital commitment – if necessary, the

investment bank should use its own capital to

encourage an active secondary aftermarket in

the stock.

Nomura – a changing landscape

o

Moscow, Warsaw, Budapest and Vienna. www.nomura.com

John-Paul Warszewski

Managing Director

Investment Banking

Nomura International plc

Tel: +44 (0) 207 102 2535

[email protected]

Michael Boardman

Managing Director

Global Finance


Tel: +44 (0) 207 103 4660

[email protected]

Myles Evanson

Executive Director

Global Finance


Tel: +44 (0) 207 103 4664

[email protected]

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Despite market volatility, a number of companies,

whose principal operations or assets are based in

one or more of the 12 countries comprising the

Commonwealth of Independent States (CIS),

continue to consider listing their securities on the

London Stock Exchange (the Exchange). Many

have achieved such a listing.

Companies with operations in the CIS may list

their equity securities on the Exchange either (a)

by listing shares; or (b) by listing depositary

receipts (DRs).

This article focuses primarily on the listing of DRs

by a company incorporated in the CIS. However,

we note that there are also a growing number of

companies incorporated outside of the CIS whose

shares are listed on the Exchange but whose

principal operations are in the CIS. This article

does not address in any detail the listing of debt

securities.

The purpose of this article is to summarise the

role which the company’s UK legal counsel will

typically play, and the main legal issues which the

company will encounter on a listing, in

chronological order. Securities are technically

listed on the Official List of the FSA and Admitted


Role of the law firm in a Main Market listingSergei Ostrovsky, Partner, Ashurst and Jonathan Parry, Senior Associate,Ashurst

The company’s lawyers play a central role in the process of representingthe interests of the company and its directors throughout the process ofachieving a listing on the Main Market of the London Stock Exchange.

to trading on the Main Market of the London

Stock Exchange. For ease of reference, this

article will refer to “listing on the `Main Market of

the Exchange”.

Engagement by the company of its UKlegal counselTypically there will be at least two different law

firms acting on a listing. One law firm will

represent the interests of the investment

bank/underwriter. The other law firm will represent

the interests of the company and its directors.

Where the Company is looking to list DRs, the

depository bank will also be represented by

separate legal counsel.

Irrespective of whether the company is

incorporated in one of the CIS jurisdictions (such

as Russia, Kazakhstan or Ukraine), in the

European Union, or elsewhere in the world it is

important that the company understands the

importance of the choice of its UK lawyers.

The team of lawyers based in the UK that will

represent the interests of the company on a listing

is likely to have two principal qualifications:

• an established track record of acting for

companies currently listed on Main Market of


the Exchange or admitted to trading on the

Exchange’s Aim Market; and

• an understanding of the legal background and

business practices in the company’s country of

operations (irrespective of the company’s place

of incorporation) and the ability to communicate

with the company’s directors and local lawyers

in the language they will find the easiest to

understand.

Engagement of other advisersAn applicant company considering a listing on the

Main Market of the Exchange should look to

appoint its team of advisers at an early stage in

the process.

A number of key advisory roles are played by

one or more investment banks. These roles

include acting as financial adviser to provide

advice in relation to the timing, structure and

process of the listing. The financial adviser may

also act as global co-ordinator if the offer of

securities is being made in more than one

jurisdiction (and particularly if the offer of

securities is being made into the United States).

The applicant will also need to appoint a listing

agent to liaise with the Financial Services

authority (FSA) during the listing process on the

applicant’s behalf.

If, as is usual, the applicant is offering new

securities as part of the listing process, the issue

of these securities will usually be underwritten by

an investment bank. In practice, the roles of

financial adviser, global co-ordinator, listing agent

and underwriter are often performed by the same

investment bank, although these roles may be

shared between investment banks depending on

the size and complexity of the transaction.

Reporting accountants should be appointed to

review the financial track record of the applicant

for the benefit of investors. As well as producing

an opinion on the applicant’s financials for

inclusion in the prospectus, the reporting

accountant will often also produce a more detailed

‘long form’ report on the financial and

management history of the applicant as part of the

financial due diligence procedure.

The applicant will be required to sign engagement

letters which will form the basis of the contract

between the applicant and the investment bank

and the reporting accountant. Investment banks

and accountants will usually have standard forms

of engagement letter and these letters should be

reviewed by the applicant’s lawyers before they

are signed. Important points include: ensuring that

the letter properly covers the scope of activities

the bank or accountants will need to perform

during the listing process; restricting the extent to

which the bank/accountants limit their liability to

the applicant; and ensuring that any indemnity

given by the applicant is reasonable and in line

with market practice. The applicant will also enter

into a separate underwriting agreement with the

investment bank(s) acting as underwriter(s).

Further information on this aspect is set out in the

section ‘Underwriting/Placing arrangements’.

Other roles to consider include depositaries (to

hold the company’s shares on behalf of, and to

issue DRs to, the ultimate investors), registrars

(to deal with applications for the securities and

maintain the share register), public relations

consultants (to generate press interest/publicity

for the applicant prior to listing) and other

specialist advisers depending on the type of

applicant seeking a listing (eg an expert consultant

where the applicant is a minerals company). Any

engagement letters with these advisers should

also be reviewed by the applicant’s lawyers prior

to their execution.

Depositary ReceiptsThe eligibility requirements which must be satisfied

by the applicant in order to list DRs are less

onerous than those which apply on a listing of

shares and the continuing obligations regime

applicable to such applicant is also less stringent.

As a result, companies incorporated in the CIS

jurisdictions have historically usually applied to list

DRs rather than shares. DRs are created by

transferring the relevant shares in the company to a

depositary (usually a bank) who acts as custodian

of the shares. The depositary then issues DRs to

investors which represent the underlying shares

held by the depositary. A DR certificate resembles

a share certificate and is traded in much the same

manner. For the purposes of the FSA’s Listing

Rules (the Listing Rules), the company that issues

the underlying shares is considered to be the issuer

rather than the depositary.

There are additional reasons why companies may

choose to list DRs rather than the shares


themselves. These include the fact that shares

issued by companies incorporated in the CIS

jurisdictions cannot settle through CREST (the

electronic settlement system for the United

Kingdom).

It would be poss ble for shares of a company

incorporated in the UK to settle its shares through

CREST, even if the company’s operations and

assets are in the CIS. Prior to listing the UK

company may acquire and hold assets in the CIS

either directly or through intermediary companies.

Upon listing, shares of the UK holding company

would be admitted to trading on the Exchange and

could be settled electronically through CREST.

As mentioned previously, this article will assume

that the applicant is seeking to list DRs rather

than shares on the Main Market of the Exchange.

Applicable regulation/legislationAs detailed below, the Listing Rules set out the

eligibility requirements a company must satisfy if it

wishes to list securities on the Main Market of the

Exchange. The Listing Rules, together with the

FSA’s Disclosure and Transparency Rules, also set

out the continuing obligations that a company must

comply with on an ongoing basis once it is listed.

The FSA’s Prospectus Rules (the Prospectus

Rules) set out the information that must be

included in a prospectus and the circumstances

in which the publication of a prospectus is

required. For the avoidance of doubt, a

prospectus will always be required when a

company applies to have securities listed on the

Main Market of the Exchange for the first time.


Eligibility for listingA company incorporated in a CIS jurisdiction

seeking a listing of its DRs on the Exchange will

need to satisfy the FSA that it complies with the

various eligibility requirements set out in the

Listing Rules. This is achieved by submitting an

eligibility letter (usually drafted by the financial

adviser in conjunction with the applicant’s lawyers)

establishing the applicant’s compliance.

The main eligibility requirements applicable to a

company on a listing of DRs are as follows:

• the company must be duly incorporated under

the laws of the country of its incorporation and

must be operating in conformity with its

constitution

• the underlying shares which the DRs represent

must also conform with local law, be duly

authorised under the company’s constitution

and have the necessary statutory consents

• the underlying shares must also be freely

transferable, fully paid up and free from any

restrictions on the right of transfer

• at least 25% of the DRs must be held by the

public (directors, persons connected with

directors and any person or persons acting in

concert who have an interest in more than 5%

of the DRs are not considered members of the

public for the purpose of this threshold)

• the DRs must conform with the laws of the

depositary’s place of incorporation, be duly

authorised under the depositary’s constitution

and have the necessary statutory consents

• the DRs must be freely transferable, fully paid

up and free from any restrictions on the right of

transfer; and

• the aggregate market value of the DRs must

be at least £700,000 and the whole class must

be listed.

Responsibility/liability on the publicationof a prospectusOnce the FSA has agreed that the applicant is

eligible for listing, the next stage in the process

involves the preparation of a prospectus. The

prospectus is the document pursuant to which the

DRs will be listed and it is also the principal

document used to market the DRs to investors.

Under the provisions of the Financial Services and

Markets Act 2000 (FSMA) and the Prospectus

Rules, a company that publishes a prospectus in

relation to DRs is deemed responsible for its

contents. Consequently, if a prospectus is published

which contains any untrue or misleading statements

(or omits any required information) and an investor

acquires securities to which the prospectus relates

and subsequently suffers loss, the company may be

required to compensate that investor. In addition, the

prospectus will form the basis of a contract between

the company and investors who acquire securities. If

it is inaccurate or misleading, those investors may be

able to rescind the contract (that is, the company

would be obliged to return the money paid by the

investors) and/or sue the company for damages. In

a prospectus relating to shares rather than DRs, the

directors of the company will also be deemed

responsible for its contents.

The prospectus must contain a statement

acknowledging that the applicant accepts

responsibility for all of the information in the

document and that, to the best of its knowledge

and belief (having taken all reasonable care to

ensure that such is the case), the information

contained in the prospectus is in accordance with

the facts and does not omit anything likely to

affect the import of such information. The

responsibility statement in a prospectus relating

to DRs differs from the corresponding statement

in a prospectus relating to shares which must be

made by the directors as well as the applicant

itself.

It is a criminal offence under the provisions of

FSMA for a director to make a statement,

promise or forecast which he knows to be

misleading, false or deceptive or to conceal

dishonestly any material facts or recklessly make

a statement, promise or forecast which is

misleading false or deceptive, where this is done

for the purpose of inducing another person to

enter into a ‘relevant agreement’ (which would

include an agreement to buy securities in the

applicant). It is also a criminal offence to act or

engage in conduct which creates a false or

misleading impression as to the market in, or

price or value of, any relevant investment, if the

act or conduct is carried out for the purpose or

creating that impression and thereby inducing

another person to acquire, dispose of, subscribe

or underwrite those investments, or refrain from

doing so.


Prospectus disclosure requirementsDetails of the information that must be

specifically disclosed in a prospectus are set out

in the Prospectus Rules and the material

information requirements can be summarised as

follows:

• disclosure of the risk factors specific to the

applicant, the industry in which the applicant

operates and the DRs

• details of the applicant’s history and the

structure of its share capital

• an overview of the applicant’s business

• details of the corporate structure of the

applicant’s group

• details of the depositary (name, registered

office, date of incorporation etc)

• an operating and financial review of the

applicant

• details of the applicant’s capital resources

• information on significant trends and prospects

in relation to the applicant

• information on the directors and senior

managers of the applicant

• details on board practices

• a statement as to whether or not the company

complies with the corporate governance regime

applicable to it in its country of incorporation

• details of the applicant’s employees

• details of major shareholders and related party

transactions


• details of directors’ ownership of

shares/options

• financial statements and explanatory notes

covering at least the three years prior to the

publication of the prospectus, produced in

accordance with International Financial

Reporting Standards (IFRS)

• details of the applicant’s dividend policy

• details of material legal and arbitration

procedures involving the applicant

• a statement as to whether or not there has

been any significant change in the applicant’s

trading or financial position since the date of

the most recent financial statements

• summaries of the applicant’s material contracts

• a summary of the applicant’s constitutional

documents

• information on the applicant’s capital structure

• information on the DRs and the terms and

conditions of the offer

• the intended use of the proceeds of the offer;

and

• the expenses of the offer.

Where a company’s principal activity is, or is

planned to be, the extraction of mineral

resources, the prospectus must also contain a

report on such company’s operations, reserves

and resources from a suitably qualified and

experienced independent expert. The form of

such report will need to be agreed in advance

with the FSA.

The drafting of the prospectus is a collaborative

effort between the applicant, the investment

bank (and its lawyers), the applicant’s lawyers

and the accountants. The drafting process must

also take into account any comments raised by

the FSA during its review of the prospectus.

While the directors of the applicant may not

necessarily be present at each drafting meeting,

they will need to review regularly drafts of the

prospectus to ensure it is complete and accurate

as they are ultimately responsible for its content.

The due diligence and verification procedures

described below are fundamental to ensuring that

full disclosure is made in the prospectus and that

such disclosure is true and accurate.

Due diligenceIn parallel to the business and financial due

diligence procedures, the applicant’s lawyers will

undertake a comprehensive investigation into the

applicant’s operations, financial position and

major risks associated with its business. The due

diligence investigation will include a review of the

applicant’s board minutes, agreements, financing

arrangements and other significant documents,

as well as attending management presentations

and/or due diligence meetings with the

applicant’s senior management.

As well as ensuring that both the applicant and

its advisers are satisfied that the applicant is

suitable for listing, the information collated by the

applicant’s lawyers during the due diligence

investigation will enable the advisers to produce

a high-quality prospectus from a marketing

perspective and one that satisfies the disclosure

requirements of the Prospectus Rules.

The due diligence procedure is key to ensuring

that the prospectus is complete, accurate, not

misleading and does not omit any material

information. The investigation therefore plays an

important role in protecting the applicant’s

directors as persons responsible for the

prospectus. A comprehensive due diligence

procedure can also help to establish a defence of

reasonable care/investigation to allegations of

liability resulting from incomplete or inaccurate

disclosure.

VerificationVerification is the process by which the

information contained in the prospectus and


other related documents is checked to ensure it

is true, accurate and not misleading. The

verification process will include the preparation of

verification notes. These take the form of a

series of questions, answers and details of

supporting information which identify and record

the source of and evidence for a large number of

statements, whether of fact or opinion, contained

in the prospectus. Verification answers are given

by reference to authoritative sources such as

documents or extracts either from the applicant’s

own records or, where appropriate, from outside

sources.

It is recognised that it is not always practicable,

nor a sensible use of directors’ time, for each

director to verify personally every detail in the

To order additional copies of Listing in London: CIS Practice

Please contact:

Maria Aleksandrova,Business Development Executive - Russia & CIS [email protected]


prospectus. The practice of verification notes is

to permit a director, where appropriate, to

delegate the answering of specific factual

questions to others, or to rely on the detailed

work of others to check particular statements. In

so doing, the director must focus on the

suitability of the relevant person for the specific

checking tasks and must be satisfied that such

delegation is reasonable under the

circumstances.

Together, the due diligence and verification

procedures work to minimise the risk of potential

criminal or civil liability arising in respect of the

publication of the prospectus. Where the

prospectus is concerned, the due diligence

procedure is the means by which the applicant

and advisers ensure that nothing material is

omitted from the document. Verification then

ensures that the information that is included in

the prospectus is true and accurate.

Much of the information/documentation

produced as part of the due diligence procedure

will be used as evidence to support the answers

to the verification questions. In addition,

statements in the prospectus will often be

amended or removed where the due diligence

procedure indicates that they are inaccurate or

untrue.

Underwriting/Placing arrangementsA company seeking to list on the Main Market of

the Exchange may not be certain of the level of

demand within the market for the securities it will

issue pursuant to the listing. In order to be certain

that it will raise the required proceeds of the

listing, companies will often arrange for the issue

of the securities to be underwritten. In return for

an agreed commission (which is usually based on

a percentage of the proceeds raised) an

investment bank (which may or may not be the

financial adviser) will agree to subscribe for, or

purchase, any of the securities not taken up by

investors.

Rather than fully underwriting the issue of

securities, the investment bank may agree to use

‘best reasonable endeavours’ to place the

securities with investors. Where this is the case,

the bank would not be legally obliged to subscribe

for or purchase those securities which it was not

able to place with investors.

The underwriting or placing agreement is almost

always drafted by the underwriter’s lawyers. A key

role played by the applicant’s lawyers will be

commenting on and negotiating this agreement on

behalf of the applicant. The applicant and its

directors typically give a number of

representations and warranties to the underwriter,

and the applicant’s lawyers will need to ensure

that these are reasonable and appropriate given

the particular circumstances of the transaction.

The agreement will usually contain an indemnity,

pursuant to which the applicant will agree to

indemnify the underwriter and its associates for

losses flowing out of the performance of the

underwriter’s obligations under the agreement. As

with the representations and warranties, the

applicant’s lawyer will need to ensure that the

indemnity is reasonable and that it contains

appropriate carve outs (for example, where the

loss suffered by the underwriter is the result of its

own fraud or negligence).

The underwriting agreement may also contain

overallotment and stabilisation provisions which

facilitate the increase in the size of the offer

depending on demand and allow stabilisation of

the price of the DRs by the underwriter following

admission. The applicant’s lawyers would review

these provisions to ensure that they comply with

all applicable laws and regulations.

Conclusion

This article outlines the main legal issues that will

typically arise when a company seeks to list equity

securities by way of DRs on the Main Market of

the Exchange. The role of the company’s UK legal


counsel in this process is integral to (a) satisfying

the FSA that the applicant company is suitable for

such a listing; and (b) ensuring that the

risks/liabilities associated with listing process and

the publication of a prospectus are appropriately

allocated between the parties. A key function of

UK legal counsel is to explain these issues in

detail in the language which directors and

managers of the company find easy to

understand.

The London Stock Exchange (the Exchange) has

responsibility both for maintaining and supervising

the conduct of the market and for admitting

companies and their securities to trading on its

markets. In addition, it is responsible for

overseeing companies admitted to AIM which is

considered separately at the end of this article. In

its role as the UK Listing Authority (UKLA), the

Financial Services Authority has a legal obligation

to oversee the listing process, and to ensure that

its rules are complied with.

The rules governing the admission of securities to

regulated markets and also the continuing

obligations of companies trading on regulated

markets are made and enforced by the UKLA and

are set out in the Prospectus Rules, the Listing

Rules and the Transparency and Disclosure Rules

(the Rules).

A company seeking a listing on the Exchange

prepares a prospectus document which presents

a wide range of information about management

and the business to enable potential investors to

make an informed investment decision. The

company’s directors have the onerous

responsibility of presenting this information in a full

and fair manner and in accordance with the facts.


Role of the accountant in a London listing Clifford Tompsett, Partner, PricewaterhouseCoopers LLP

The accountant’s role in assisting Russian/CIS companies to achieve aLondon listing is broad. It consists of reporting, due diligence, providingprivate reports and comfort letters – in addition to the general task ofpreparing to be a public company.

The company’s financial adviser, accountants and

lawyers (and other experts) assist them in meeting

their responsibilities.

The Rules also require a company seeking a

primary listing of equity securities to appoint a

sponsor to make an assessment of the company’s

suitability for listing and of the quality of the

prospectus. The directors and their advisers carry

out procedures to satisfy the directors and

sponsor that any information for which the

directors and sponsor have a responsibility meets

the required standard, a process known as ‘due

diligence’.

Changes in European capital marketlegislation Companies raising capital and/or listing their

securities on an EU-regulated market are subject

to EU regulations and directives aimed at

facilitating access to capital on a pan-European

basis. In conjunction with the adoption of IFRS as

the standard financial reporting framework, the

Prospectus and Transparency Directives set out

the principal rules for issuers.

The Prospectus Directive sets out the basis for

providing a pan-European regime for offering


securities to the public, or admitting securities to

trading on an EU-regulated exchange. It provides a

framework for a consistent approach to when a

prospectus is required and sets a common

standard for disclosure. Non-EU issuers were

permitted to continue to provide financial

information prior to 2009 using a GAAP other than

IFRS, provided that the GAAP was deemed to be

equivalent to IFRS and certain conditions are met.

The Transparency Directive focuses on the

availability of information to investors: the

frequency with which companies report, and the

information they provide on matters such as major

shareholdings. This directive has the effect of

introducing new requirements concerning the

annual report into securities law. These

requirements are summarised in Table 1 above.

Member states are permitted to exempt non-EU

issuers from any of the requirements, where the

requirements in their domestic market are

equivalent to the provisions of the directive.

Russian/CIS companies: the route toLondon Requirements for a company seeking a listing in

London vary depending on the market and the

type of security to be listed, impacting the extent

and nature of financial information disclosures and

the scope of the due diligence process. The

routes most commonly adopted by Russian/CIS

companies are discussed below:

Primary listing of equityA primary listing of equity is the most onerous of

the alternatives. In order to obtain a primary

listing, an issuer must meet the eligibility

Annual financialstatements

Half-year report* Intermediate quarters*

Level of in formation Full IFRS financialstatements

Interim financial informationin accordance with IAS 34

Narrative managementstatements – materialevents, general descriptionof financial position

A ud i t or rev iew AuditNot required but disclosedif either audit or reviewcarried out

Not required

F i l ing dead l i ne 4 months 2 months

Between 10 weeks afterthe beginning, and 6 weeksbefore the end of each 6-month period

Table 1

*Interim information is not required for companies with listed GDRs

requirements and continuing obligations set out in

the Listing Rules. The main eligibility requirements

are set out below:

• appointment of a sponsor

• production of a prospectus

• a financial track record covering three years with

unqualified audit opinions (the information must

not be more than six months old)

• at least 75% of the company’s business must be

supported by a revenue-earning track record for

the three-year period


• control over the majority of the company’s

assets for the three-year period

• sufficient working capital for at least 12 months

from the date of the prospectus

• compliance with the Listing Principles, and in

particular, the establishment and maintenance of

adequate financial reporting procedures, and

• at least 25% of shares must be in public hands.

The level of due diligence requested by the

sponsor is normally of a high standard and can be

related to specialist areas, for example,

Sponsor Required for certain transactions

Inside information Must be disclosed to the market as soon as possible

Significant transactionsTransactions which are material in size (classified as a reverse takeover or a class 1

transaction) require prior shareholder approval and the preparation of a circular

Related-party transactions Require prior shareholder approval and preparation of a circular

Preliminary statement of

annual results Must be approved and published within 120 days of the year end

Annual accounts Must be approved and published within 4 months of the year end

Half-yearly reports Must be approved and published within 2 months of the year end

Quarterly trading statementsBetween 10 weeks after the beginning, and 6 weeks before the end of each 6-month

period

The Model Code Dealing restrictions on certain persons in possession of inside information

The Combined Code on

Corporate Governance

Non-UK companies must disclose whether or not the company complies with the corporate

governance regime of its country of incorporation, and the ways in which its actual

practices differ from those set out in the Combined Code

Table 2


environmental risk analysis. The main continuing

obligations are set out in Table 2 opposite.

Although overseas companies listed in London are

not required to comply with the detailed corporate

governance requirements in the Combined Code,

a company seeking a listing in London will find that

investors will expect it to have established

effective corporate governance procedures. In

addition, non-UK companies must disclose

whether a company complies with the corporate

governance regime of its country of incorporation,

and the ways in which its actual practices differ

from those set out in the Combined Code.

Secondary listing of equityA Russian/CIS company with a listing in its

country of incorporation may seek a further listing

of its shares in London. In such circumstances,

the more onerous eligibility and continuing

obligations of a primary listing do not apply. The

company needs only to prepare a prospectus for

approval by the UKLA. The main continuing

obligations are set out in Table 3 below.

In certain circumstances, the UKLA has the

authority to allow a company to obtain a

secondary listing without having its securities

listed on its domestic exchange.

The Professional Securities Market(PSM)On 1 July 2005, the London Stock Exchange

introduced the PSM for the listing of debt,

depositary receipts and convertible securities.

The PSM provides a flexible alternative to the

requirements regarding denomination and

financial information which apply to EU-regulated

markets.

Global Depositary Receipts (GDRs)The most common international stock exchange

for Russian/CIS companies to list on is the

London Stock Exchange. Russian/CIS

companies seeking an equity listing on the

Exchange typically do so by way of a listing of

GDRs.

Inside information Must be disclosed to the market as soon as possible

Corporate governanceDisclosure of whether or not the company complies with the domestic corporate

governance regime. Non-compliance requires a statement to that effect and an explanation

Annual report and accounts Must be approved and published within 4 months of the year end

Half-yearly reports Must be approved and published within 2 months of the year end

Table 3

The following companies with operations in

Russia/CIS have listed DRs on the Exchange:

• Acron

• AFI Development

• Amtel-Vredestein

• JSC Alliance Bank

• AO Tatneft

• Bank of Georgia

• Chagala

• Chelyabinsk Zinc

• Cherkizovo Group

• Comstar-United Telesystems

• Efes Breweries International

• Eurasia Drilling Company

• Evraz

• Gazprom

• Globaltrans

• Halyk Bank

• Integra

• Kazakhgold Group

• Kazakhstan Kagazy

• Kazkommertsbank

• Kazmunaigas

• LSR

• Lukoil OAO

• Magnit

• MHP


• MMK

• Novatek

• Novolipetsk Steel

• Novorossiysk Commercial Sea Port

• OGK-2

• OMZ

• PIK

• Polymetal

• Polyus Gold

• Pharmstandard

• Rosneft

• RusHydro

• Severstal

• Shalkiya Zinc

• Sistema

• Sistema-Hals

• Sitronics

• TMK

• Trader Media East

• Uralkali

• VTB

• X-Five Retail; and

• Zhaikmunai.

It seems likely that the GDR route will continue to

be the most popular route for Russian companies.

All issuers applying for a listing of GDRs must


publish a prospectus, unless the application is for

a further issue of GDRs of the same class as are

already listed and there is no increase in the

nominal value of the company’s share capital as a

result. The key information required for a GDR

prospectus, similar to a primary listing, is as

follows:

• details of the persons responsible for the

prospectus, including a declaration by the issuer

(or its directors) that it takes responsibility for

the document, and details of the auditors and

other advisers

• a statement that the issuer’s annual accounts have

been audited for the last three financial years. If

audit reports on any of those accounts have been

qualified, the qualification must be reproduced in

full and the reasons for the qualification given

• information about the business, its financial

position and results of operations, description of

the group’s principal activities, including a

breakdown of revenues during the last three

years by categories of activities and geographical

markets, analysis of costs and profitability,

information about land or buildings owned or

leased, summary information on the extent to

which the group is dependent on patents or

licenses, information concerning policy on

research and development, details of any legal or

arbitration proceedings which may have or have

had in the recent past a significant effect on the

group’s financial position, information concerning

investments, including new plant, factories and

research and development

• the financial information should be derived from

audited financial statements which have been

prepared in accordance with IFRS or equivalent

accounting standards. Similarly, the accounts

need to have been audited in accordance with

International Standards on Auditing, or

equivalent standards

• a description of any significant change in the

financial or trading position of the group that has

occurred since the end of the last financial

period for which financial information has been

published, or an appropriate negative statement

• pro forma information can be provided voluntarily

– if so, then a statement must accompany it that

gives the purpose for which the information has

been prepared, and declares that it has been

prepared for illustrative purposes only and that,

because of its nature, it may not give a true

picture of the issuer’s financial position or results

• in the unusual circumstances that a profit

forecast is included in the prospectus, the

principal assumptions upon which the issuer has

based its forecast must be stated. This is not

required to be reported on by the reporting

accountant

• full details relating to the securities for which the

application is being made, including the rights

relating to them as regards voting and dividends

• full details of the issuer, including the amount of

its authorised and issued capital and the amount

of any capital agreed to be issued, a summary of

the events or transactions during the preceding

three years which have changed the amount of

the issued share capital, the name of persons

who exercise or could exercise control over the

issuer and the name of any person interested in

three per cent or more of the issuer’s capital

• details of the principal contents of each contract

directly concerning the issue and of any other

material contract entered into by any member of

the issuer’s group within the two years

immediately preceding the publication of the

prospectus

• details of certain documents made available

for inspection. These include the issuer’s

memorandum and articles of association, any

material contracts, directors’ service

contracts and the audited accounts of the

issuer. Where these are not in English,

translations into English must also be available

for inspection

• certain details of management and controlling

shareholder(s)

• information on the depositary bank – including

full name, country of incorporation and

legislation under which it operates, amount of

its issued capital and an indication of the

principal holders of the capital, a summary of

the annual accounts relating to the last

completed financial year and a description of

any significant change which has occurred

since the end of the last financial year; and

• information on the certificates – including

voting, dividend and liquidation rights.


Continuing obligations of an issuer ofGDRsThe key obligations are that the issuer must:

• notify the Company Announcements Office of

new developments, changes in capital structure

and significant share holdings and decisions to

pay dividends on the shares represented by the

GDRs

• ensure equality of treatment for all holders of

shares, including making equivalent information

available to the holders of the UK-listed GDRs

and to the holders of any securities listed

• issue an annual report and IFRS (or equivalent

accounting standards) audited accounts that

are published within four months of the period

end

• disclose whether or not the issuer complies

with the corporate governance regime of its

country of incorporation, or provide explanation

for any non-compliance.

EurobondsFor eurobonds, the requirements are less

stringent compared to those for GDRs. The key

differences include:

• audited accounts must cover the last two years

(compared to three for GDRs), the latest

information being not more than 18 months old;

and

• no requirements to disclose certain information

on the group activities (eg segmental analysis,

research and development activities, material

contracts) in the prospectus.


The role of the reporting accountantThe scope of the accountant’s role in assisting

Russian/CIS companies to achieve a London

listing is generally broad, consisting of: reporting

on the financial information presented in the

prospectus; undertaking business and financial

due diligence; and providing certain private reports

and ‘comfort letters’. In addition, it can involve

assisting the company in the general task of

preparing itself to be a public company.

Public company readinessThe Exchange, and investors generally, are

becoming increasingly focused on the importance

of best practice corporate governance and the

ability of companies to come to the market as a

running public company. Accountants (sometimes

independent from the auditors) are often engaged

to assist the company in the following areas:

• diagnostic reviews of the issuer’s IPO readiness

• corporate structure

• legal housekeeping

• corporate governance, and financial and non-

financial reporting systems; and

• advice on the preparation of financial

information.

Historical financial informationThe Prospectus Rules allow issuers to:

• include their audited financial statements (as

originally provided to shareholders) in the

prospectus

• prepare special purpose financial information for

the purposes of the prospectus (dated the date

of the prospectus)

• incorporate financial information by reference.

The last option is available only in situations where

the financial information has been previously filed

with the UKLA. In situations where the issuer has

a complex financial history, special purpose

financial information is often the only method

available to present the information in a

comparable and useful form for investors.

In addition, the reporting accountant may be asked

to provide public and/or private reports and

‘comfort letters’ in relation to the following:

• pro forma financial information

• profit forecasts; and

• extraction and significant change comfort.

Business and financial due diligenceThe extent and scope of due diligence carried

out by the reporting accountant varies depending

upon the needs of those to whom the accountant

is reporting and the listing route adopted. There

are usually two key areas of focus.

First, the provision of high level extraction and

significant change comfort to support financial

disclosures made in the prospectus. The

reporting accountant checks the extraction of

financial data from appropriate sources and also

considers and reports on changes in the financial

position and trading performance of the company

in the period subsequent to that covered by the

historical financial information. These matters are

normally dealt with in a ‘comfort letter’.

Secondly, a more detailed business and financial

due diligence exercise is usually performed. This is

to assist the sponsor’s assessment of the issuer’s

suitability to be a public company, and to provide

support for disclosures of the issuer’s business,

risk factors and other matters in the prospectus.

These due diligence reports address the following

areas:

• business and financial due diligence – the nature

and scope of the business and trends in its

performance and finances, management and

employees, and taxation (usually called a ‘long

form report’)

• financial (and non-financial) reporting procedures

– a detailed commentary on the company’s

systems and controls; and

• working capital analysis – detailed consideration

of forecasts of working capital requirements by

the company.

These reports are generally commissioned for a

London primary listing. In other listings, the scope

of due diligence may be reduced.

The sponsor may also request other private

comfort letters from the reporting accountants to

assist in meeting their responsibilities under the

Listing Rules.

Common issues arising for Russian/CIScompaniesAs the most common route for Russian/CIS

companies seeking a London listing is a GDR

listing, the following comments address mainly

issues associated with GDRs:

Historical financial informationThe reporting accountant can advise companies


on the best way to present the historical financial

information.

For a GDR listing, the current market practice (on

the basis that the company is not a carve-out and

audited accounts exist) is that historical financial

information is presented in accordance with IFRS

or US GAAP and audited in accordance with

International Standards on Auditing or US

generally accepted auditing standards.

It is common for Russian/CIS companies to have

complex financial histories, involving major group

restructurings, carve-outs, and significant

acquisitions as part of their growth story. This may

involve a substantial amount of work restating, or

supplementing, the financial track record to reflect

the business of the issuer, perhaps including

separate audited historical financial information on

acquired companies. In this case, the reporting

accountant will give an audit opinion on this

special purpose financial information, prepared for

the purposes of the prospectus.

Quality of financial reporting proceduresand controlsInvestors expect a company seeking a public

listing in London to have established and effective

financial reporting procedures. The ability to

produce quality financial information on a timely

basis has been one of the key issues for

Russian/CIS companies. The timing of listing is

usually tied to the availability of financial

information. A company listed in London will need

to comply with the continuing reporting

requirements of the Transparency Directive.


Furthermore, the investing public will expect

regular communications with analysts to discuss

business developments, including providing timely

and reliable financial information.

US capital market access (privateplacements under Rule 144A)Most Russian/CIS companies listed in London

have also offered their securities to US qualified

institutional buyers in reliance on Rule 144A of the

US 1933 Securities Act. Although registration with

the SEC is not required, market practice for US

offerings, as well as the expectations of US

investors, impose additional prospectus disclosure

requirements and due diligence procedures.

Operational independenceSome Russian/CIS companies may have a

shareholder that would be considered to be a

‘controlling shareholder’ by the UKLA (a 30%-plus

shareholder is considered a controlling

shareholder). When a controlling shareholder

exists, contractual arrangements must be put in

place between the company and the shareholder,

ensuring that the shareholder is bound not to

interfere in the operation of the company, which

must be left to the directors and management.

Related-party transactionsIt is market practice to provide extensive

disclosure in the prospectus of related-party

transactions, even if those transactions were not

considered related party under Russian/CIS law.

For example, Russian/CIS companies may have

transactions with the conglomerate which they are

part of, or were demerged from, or with other

companies with which they are under common

control. Such relationships may not be

documented formally. Once related parties have

been identified, the time and effort required to

identify and quantify disclosable transactions can

be considerable, particularly in respect of

comparative information and the need to consider

whether the transactions are on normal

commercial terms.

Unfamiliarity with the London marketThere are onerous responsibilities laid upon the

directors of a company listing on the Exchange,

even via a GDR issue. Typically, the directors of

Russian companies will have little familiarity with

those responsibilities and the listing process. The

length and complexity of the process and the

nature of some of the information disclosure

requirements can be surprising to those unfamiliar

with the London market. There is a clear need for

companies to have experienced advisers to guide

them through this process.

Continuing obligationsAfter successfully listing securities in London, a

company has various continuing obligations. A

company with listed GDRs is required to publish

audited financial statements within four months from

year end. In addition, any insider or ‘price-sensitive’

information announced to the company’s domestic

stock exchange must be announced on the

Exchange, in English, at the same time. In addition,

listed companies need to be able to continuously

communicate timely and reliable information

(particularly financial information) to the investing

public, to help maintain a liquid market for the GDRs.

Commitment by allThe volume of work and commitment of

management time cannot be underestimated and

are essential for a successful listing. The

company’s finance team will have additional


pressures at the same time as maintaining their

existing workload. The most successful listings, in

our experience, are well-planned, have adequate

resources allocated and are those on which senior

management provides clear leadership and

ownership of the project. Accountants and other

advisers should work together as a team to bring

their experience and skills to bear in assisting a

Eurobonds Secondary listing and GDRs Primary listing

Financial information presentation

lMinimum period

lAge

lAccounting standards

lAuditing standards

lForm of opinion

2 years

18 months (with audited interims);15 months (with unaudited interims)

IFRS or equivalent standards

International Standards of Auditing

Accountants’ report prepared forthe prospectus or attach historicalaccounts with audit opinion(s)

3 years (or since incorporation)

18 months (with audited interims); 15 months (with unaudited interims)



Accountants’ report prepared forthe prospectus or attach historical accounts with audit opinion(s)

3 years

6 months

IFRS or equivalentstandards


Accountants’ reportprepared for theprospectus or attachhistorical accounts withaudit opinion(s)

Pro-forma information Not required. If presented, notpublicly reported on by theaccountant

Required when there has been asignificant change in the businessprior to listing. Must be reported onpublicly by the accountant whereincluded. Not required fordepositary receipts

If required, accountants’report included inprospectus

Profit forecastinformation

Not required. If presented, notpublicly reported on by theaccountant

Not required. If presented, must bereported on publicly by theaccountant

Not required. Ifpresented, accountants’report included inprospectus

Working capitalstatement

Statement by issuer Statement by issuer required for asecondary listing. Not required forGDRs

Statement by issuer;sponsor declaration letterrequired by UKLA

Financial reportingprocedures

Not required Not required Sponsor declaration letterrequired by UKLA

Business & financialdue diligence (long-form report)

Not required Not required Market practice

Summary of key disclosure differences


AIM Primary listing

Financial information presentation

lMinimum period

lAge

lAccounting standards

lAuditing standards

lForm of opinion

3 years (or since incorporation)

18 months (with audited interims);15 months (with unaudited interims)



Accountants’ report prepared forthe prospectus or attach historicalaccounts with audit opinion(s)

3 years

6 months



Accountants’ report prepared forthe prospectus or attach historical accounts with audit opinion(s)

Pro-forma information Not required. If presented, notpublicly reported by the accountant– market practice is for a privatereport to the issuer and NominatedAdviser

If required, accountants’ reportincluded in the prospectus

Profit forecastinformation

Not required. If presented, notpublicly reported by the accountant– market practice is for a privatereport to the issuer and NominatedAdviser

If required, accountants’ reportincluded in the prospectus

Working capitalstatement

Statement by issuer – marketpractice is for equivalent duediligence to that on the MainMarket

Statement by issuer; sponsordeclaration letter required by UKLA

Financial reportingprocedures

Declaration to the Exchange onapplication by the issuers – marketpractice is for equivalent duediligence to that on the MainMarket

Sponsor declaration letter requiredby UKLA

Business & financialdue diligence (long-form report)

Market practice Market practice

Summary of key differences between AIM and Primary Listing

company through the process and helping it

achieve a successful listing.

AIMAIM is the Exchange’s market for smaller growing

companies and is operated and regulated by the

Exchange. AIM companies are governed by the AIM

Rules for Companies which set out the requirements

and guidance for companies wishing to be quoted on

AIM. The admission document requirements are

based upon the Prospectus Rules requirements with

certain optional exclusions.

A company wishing to gain admission to AIM must

appoint and retain a Nominated Adviser whose initial

role is to ensure the company is appropriate to be

quoted on AIM and that the AIM Rules are complied

with on flotation. In the same way that the Sponsor’s


due diligence procedures drive much of the work of

the Reporting Accountant on a Main Market listing,

the Nominated Adviser’s due diligence requirements

drive much of the work of the Reporting Accountant

on an AIM flotation. The main similarities and

differences are summarised in the table above.

Changes to the listing regime

Restructuring of the regimeIn October 2009 the FSA introduced amendments

to restructure the UK Listing Regime into two

segments, Premium and Standard. Companies in

the Premium segment will have to meet the super-

equivalent standards (London’s world-class

standard of regulation based on the requirements

of the UKLA). The Standard segment denotes EU

minimum standards. All securities will be allocated

to the relevant listing category as shown in the

table below.

This approach will ensure that all listed companies

within the same segment, irrespective of their

country of incorporation receive broadly equal

treatment.

A premium listing of equity will replace a primary

listing of equity.

A standard listing of equity will replace a

secondary listing of equity.


Corporate governance implications An overseas company with securities that have a

premium listing on 5 April 2010 is required to

‘comply or explain’ against the UK Combined

Code in financial years beginning after 31

December 2009.

An overseas company with securities that have a

standard listing on 5 April 2010 will be required to

comply with the EU Company Reporting Directive

which requires them to provide a corporate

governance statement and to describe the main

features of their internal control and risk

management systems in financial years beginning

after 31 December 2009.

The UK Listing Regime

Issuer Segment Premium Listed Securities Standard Listed Securities

Securities CategoryEquity LR6

ClosedEndedFunds LR 15

OpenEndedFundsLR16

Equity Debt GDRs SecuritisedDerivatives

MiscSecurities

© 2008 PricewaterhouseCoopers LLP. All rights reserved. ‘PricewaterhouseCoopers’ refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.

Your gateway to London.

IPOs have many advantages; attracting capital boosting company recognition, and opening doors to new opportunities. There are, however, additional obligations and responsibilities, which are integral aspects of public life.

The PricewaterhouseCoopers Capital Markets Group is a team of experienced professionals who provide a broad range of services to companies and investment banks in relation to the capital markets transactions. These include supporting a company’s preparation to go public; helping to select the right market and advisory team; reviewing accounting practices and financial reporting procedures; advising on the corporate governance arrangements; and undertaking financial and business due diligence investigations.

To find out more contact one of our experts:

UK

Clifford Tompsett, PartnerTel. +44 (0) 207 [email protected]

Katya Kuznetsova, DirectorTel. +44 (0) 207 [email protected]

Russia

Macy Coffey, PartnerTel. +7 (495) [email protected]

22922 - BW.indd 1 16/12/2009 15:40:14

To order additional copies of Listing in London: CIS Practice

Please contact:

Maria Aleksandrova,Business Development Executive - Russia & CIS [email protected]

Communications and public relations are at the

heart of successful listings and, in a period of

unprecedented uncertainty for investors, effective

marketing and public relations (PR) are essential.

The continuing major upheavals in the global

financial system mean that international investors

have more difficult judgements to make about the

opportunities before them and will use every

available piece of information in decision-making.

Now, more than ever, uncontrolled communication

at the time of an IPO can have very damaging

results in undermining the credibility of the offering

and so reducing levels of demand and potential

valuations. It is therefore essential that IPO

companies take the initiative in managing their

communications. Effective PR ensures that the

volume and content of available information about

an IPO reinforces the investment case for a

company and builds confidence in its potential.

Perceptions of the quality of the company to be

listed, and the attractiveness of the share offering,

can be as, if not more, important than the

underlying reality. Any PR programme will seek to

ensure both the success of the listing and the

recognition of its success.


Role of the financial PR/IR company in a MainMarket listing and an AIM flotationDavid Westover, Director, Citigate Dewe Rogerson

A company from Russia or the CIS intending either to list on the MainMarket of the London Stock Exchange or to join AIM, should look for a PRfirm that has advised not only domestic companies on their IPOs, but alsointernational companies on successful primary, secondary or dual listingsin London.

Responsibilities of the PR companyThe PR company will work alongside the company

and the other advisers on the listing (particularly

the investment bank and the lawyers) in designing,

managing and implementing a communications

strategy so that it is executed in a timely manner

and in accordance with local and international legal

guidelines.

The responsibilities of the PR company in any

London listing will include the following:

• co-ordinating the overall communications

programme

• raising the profile of the company amongst the

target investor audiences (including international

media, domestic media, potential retail

investors, potential institutional investors,

analysts and other opinion formers)

• managing media expectations and momentum

• ‘packaging’ the equity story for media audiences

• drafting press releases, speeches, Q&As etc

• co-ordinating media interviews, briefings, press

conferences etc.

A proven track record advising on IPOs should be

the first prerequisite when choosing a PR agency.


A company looking to join the Main Market or AIM

should look for a PR firm that has advised not only

domestic companies on their IPOs, but also

international companies on successful primary,

secondary or dual listings in London and on a wide

number of flotations on both AIM and the Main

Market. The PR agency should also be able to

demonstrate a solid understanding of the sector

within which the company operates. This

knowledge should extend not only to the technical

and operational aspects of the industry, but also

to the challenges and intricacies of communicating

the business model and strategy to the

investment community.

PR companies are successful for the most part

because of their relationships with the financial

media and the wider investment community. These

relationships are fundamental to ensuring that a

company effectively positions and markets itself to

those audiences which will ultimately determine

the success of its flotation. When selecting a PR

adviser, a company should look for strong

evidence of such relationships, including client

references.

A PR agency should also be able to demonstrate

a varied and diverse skill-set, drawn from a variety

of backgrounds, ensuring that any potential

obstacles or issues that surface can be managed

and dealt with effectively. Ideally, the PR firm will

also be well-resourced to ensure that it can

provide the changing levels of tactical and

strategic advice that are required by a company

during the flotation process and beyond.

Co-ordinationEffective co-ordination of communications enables

the release of information to take place in a

controlled and strategic manner; this reinforces

the perception that the listing is being

professionally managed by the company and its

advisers. The communications timetable therefore

has to be integrated into the overall timetable of

the listing.

PR issues for a London listing Russian companies seeking a London listing may

do so as a secondary listing (the primary listing

taking place on a Russian exchange). As a result,

a significant part of the PR and marketing of the

offer will take place in Russia. The success of

these communications programmes will contribute

to the listing being a success within Russia, a fact

which will be noticed by the London investment

community and which will allow the London listing

to be perceived as a success. It is important,

therefore, to consider all aspects of listing

communications from the marketing of shares that

are marketed to Russian investors, to the role of

management interviews with the media (for

example, the Financial Times newspaper in

London).

Russian companies have faced many particular

communications challenges in listing in London in

recent years. First, the Russian market was initially

very unfamiliar to London investors, meaning that

education about the Russian economy and its

potential has been and remains one of the key

components of marketing any flotation.

After the initial wave of listings in the mid 1990s,

confidence in Russian offerings was badly shaken

by the crash of 1998, meaning that Russian

companies had to work hard at their

communications for a long time to show that they

were credible as businesses. This has been

achieved in part through greater transparency and

openness with international media audiences.

Management had to be prepared to talk to media in

a responsive and positive way.

In recent years the situation had evolved and

investors showed a greater willingness to take part

in Russian company IPOs. However, the global

market crisis has thoroughly changed the

environment and Russian companies now have to

re-establish themselves as IPO investments for

international institutions. Investors will have to be

reintroduced to the Russian market and will be

uncertain about its prospects.

In their IPO communications, companies will not

only have to re-educate investors about Russia’s

potential, but also make a distinctive case about

their qualities. Many investors will have seen their

holdings in Russian companies lose significant

amounts of value, so each IPO candidate has to

demonstrate what is outstanding about themselves

as an investment opportunity.

This means that companies will have to be much

clearer about their qualities and about the basis for

the valuation that they are seeking from the market.

Furthermore, investor uncertainty will lead to

questions being asked about standards of

corporate governance. These questions must be


addressed directly and it is important that

companies seeking listings do not seek to evade

questions about their ownership or history. Many

companies will never experience the same degree

of intense international media attention that they will

encounter during the IPO process and they must be

fully ready to deal with it.

From a communications viewpoint, the primary

benefit of a London listing to a company is the

increased exposure it will have to the London

investment community, and the fact that the

Exchange’s high level of disclosure requirement

means that corporate information is widely and

immediately available. Whether a company lists

through a GDR issue or a share issue, the

communications objectives and methods will remain

the same.

Communications objectivesThe fundamental marketing objective is to create a

perception of scarcity. Unless both investors and

investment influencers alike believe, in advance,

that the offer will be over-subscribed and that the

shares will trade at a premium in the aftermarket,

the offer will be unsuccessful. The principle at work

here is a very simple one, namely that no-one buys

a financial asset today if they believe it will be

cheaper tomorrow.

Creating this perception of value and scarcity is

dependent on two factors, the first being to

generate competitive demand from each of the

potential sources of investment – domestic and

international. This is a delicate balancing act. The

strength (or weakness) of one market has a direct


and powerful impact on the state of the other.

The second factor is the need to secure strong

endorsement for the offer from opinion influencers

and other commentators, in particular sell-side

analysts and the financial media. Only third-party

comment can recommend a share offer, carrying

the weight of independent endorsement.

These core communications objectives should

support the overall goals of the flotation, namely:

• to position the company as a ‘must-have’

investment opportunity

• to achieve the best and most accurate valuation

• to attract a diverse, high-quality and supportive

investor base

• to ensure the company is well-placed for the next

stage in its development.

At no point should the communications objectives

in a flotation process (or afterwards) adversely

affect the commercial and strategic goals of the

business. Too often, communications surrounding a

flotation are not taken in context and the IPO is

wrongly viewed as an end in itself rather than a

stage, albeit a very important one, in the company’s

development. The communications strategy in the

run-up to the flotation should, therefore, reflect the

long-term strategic goals of the company.

Consequently, considerable time and effort needs

to be devoted to ensuring that the financial media

understand and are supportive of the company and

its management. It is also necessary that they

consider the offer to be well-structured and

realistically priced.

Communications timetable

PhasesListing communications campaigns can typically be

divided into two phases: (i) the corporate or pre-

offer phase and (ii) the offer phase. In the

corporate phase the objective is to raise

awareness and understanding of a company as a

potential investment opportunity. In the offer

phase, the emphasis is on the details of the offer,

the timetable, the subscription period and so forth.

DurationThe length of the phases is variable: the duration

of the corporate phase will vary depending on

such factors as whether it is an Initial Public

Offering (IPO) or secondary offering, the image of

the company concerned and experience of the

investor base.

Momentum managementRegardless of the duration of the communication

campaign, it is essential that the timing and

sequence of messages – ‘the dynamics’ of the

deal – are carefully managed and the momentum

of the campaign maintained. It is vital that the

messages are released across all domestic and

international media at the same time and in a

timely manner. Additionally, all spokespeople must

be briefed simultaneously, so that the information

they disseminate to sometimes disparate

audiences is consistent.

One of the key elements in momentum

management is releasing the right information at

the right time. This particularly applies to details of

the size, timing and valuation of the offer. Early or

speculative release can create misleading

expectations, which will affect perceptions of the

success of the offering if they are not met.

Typically the major announcement positioning a

Russian company with international financial media

is the ‘Intention to Proceed’ announcement, when

it first declares its intention to seek a London

Stock Exchange listing. For many companies, this

is the first time that they will have communicated

with the financial media and so a strong impact is

vital.

Whereas it is important that all audiences should

be provided with consistent information

simultaneously, the tone of voice and style of the

information should be tailored to match the

sophistication of the particular audience. This point


is very important in laying the foundations for

future attitudes. If possible, management should

meet key media, so that the journalists feel they

know the personalities behind the business.

The timing of the ‘Intention to Proceed’

announcement usually coincides with the

distribution of detailed research reports on the

company, written by analysts from the

investment banks which are advising the

company on its IPO.

This pre-flotation research on the company

gives potential institutional investors access to

a large amount of previously unavailable

information on the company. The research is

only intended for professional investors, but can

sometimes find its way into the Russian and

international media and consequently

Potential audiencesThe communications programmes will need to target three broad audience groups: investors,commentators and commercial audiences. The listing may need to be communicated to a wide rangeof audiences:

Primary• international institutional investors

• domestic institutional investors

• domestic retail investors

• employees.

Commentators• analysts

• international financial media

• domestic financial media

• media specialists and sector-specific media

• ratings agencies.

Commercial• customers

• suppliers.


management should be well rehearsed and

prepared to answer any questions on the subject

of both the ‘Intention to Proceed’ announcement

and the research. The next major announcement is

usually the price range for the offering; the

objective is that by this time the media

understands the company’s business and

interprets the price range in that context. In this

way, momentum has been established, so that all

audiences perceive the process to be moving

forward as planned, with a clear understanding of

the investment case.

When the pricing is announced, financial

audiences should recognise the successful

completion of the process, which can be given

additional emphasis through a Listing Day event at

the London Stock Exchange.

Approval of marketing materialsThe most important document that the company

will produce in connection with its share offering is

its ‘Offering Circular’, or ‘Prospectus’. This is the

‘official’ document pertaining to the company’s

business, the competitive environment, its

financial performance, and its prospects. It will

take many months to produce, as each statement

contained in the document will be subject to a

rigorous verification process, called ‘due

diligence’. Once completed, it forms the basis of

an investment decision, for both institutional and

retail investors alike.

Any marketing materials (press releases,

brochures or website content) must strictly adhere

to the information contained in the prospectus. If

any ‘new’ information is circulated in the public

domain, the prospectus may need to be withdrawn

and amended in order to incorporate this new

information, with a consequent delay to the share

offering timetable.

Thus the marketing restrictions surrounding a

share offer relate mainly to the integrity of the

information that is released, and the regulatory

authorities of the exchanges on which the shares

are to be listed will monitor marketing materials

for their accuracy. The PR company will liaise with

the investment bank and legal adviser in order to

secure approval of marketing materials.

Not only from a regulatory perspective, but also in

terms of communications, it is important that what

is said to the media is consistent with what is said

to investors. Consistency of information will tend

to heighten its credibility and impact, supporting

the listing process.

Media relationsA strong media relations campaign is central to

any listing PR campaign. The press must have

good access to the company and its financial

advisers to ensure information is accurate and that

any issues can be quickly addressed as they arise.

Communication of key information about the offer

through press releases, briefings and set-piece

conferences must be clear, comprehensively

prepared and consistent with the planned

timetable.

The international and domestic financial media can

be of crucial importance to any listing. For this

reason, commanding good relationships with the

key international financial media, as well as the

domestic media, can be vital, not just to support

the listing internationally, but also to influence

domestic commentators. On a regular basis,

articles (both supportive and critical) from the

Financial Times and the Wall Street Journal

Europe are picked up and these will heavily

influence the flavour of reporting in domestic

markets.

Conversely, poor publicity can destroy investor

interest. It takes much effort and good publicity to

counter the impact of one bad article in an

important publication. Companies considering

listing in London should not underestimate the role

the British media plays in influencing investor

opinion. Fundamentally there are three types of

media to be considered. First the newswires (eg

Reuters, Bloomberg and Dow Jones) write articles

in short time-periods that are immediately and

widely disseminated throughout the financial

community; company news published on a

newswire has many times had a rapid impact on a

company’s share price or the success of its IPO.

Second, the key daily and Sunday newspapers are

influential in reporting news and providing more

background on stories (such as the Financial

Times and the Sunday Times). Third, comment on

investment opportunities is provided in the Lex

column of the Financial Times or specialist online

services such as Breaking Views.

The role of the financial public relations firm is to

construct a programme for its client that seeks to


ensure that the financial media has the best

possible understanding of its business. It will

advise on the most appropriate journalists to meet

and the timing and format of the interviews. In

some cases, it will help the company to prepare

for the programme by carrying out media training

with senior management, so that they are familiar

with the approach taken by international media.

The agency will also draft ‘Questions and

Answers’ and other papers to guide management

on the best response to questioning.

Internal communicationsAn audience that is often neglected during the IPO

process is the company’s own employees. It is

absolutely imperative to communicate with them

during the IPO process, explaining the IPO rationale

and reassuring them about their future. Following a

successful admission, there will also be an

opportunity to speak with employees about the

company’s new status and obligations as a public

company. A well-planned and informative internal

communications programme may also encourage

employees to support the offer directly if the IPO

structure permits this. Any employee

communications must strictly adhere to the agreed

public relations strategy to ensure consistency of

messages, both internally and externally.

Furthermore, the timing of such communications is

very important: too early and the story could leak

into the public domain, too late and employees may

resent the lack of communication.

Investor relationsOnce a company has achieved its listing


ambitions, its transition to being a public company

is complete. However, its new responsibilities to

its shareholders are many, and it is important that

public companies should go beyond the minimum

level of communication demanded by regulatory

requirements and should take the initiative in their

relationships with shareholders. An effective

investor relations programme will be critical to

achieve a share price which is a true reflection of

the company’s value.

A PR company can continue to provide assistance

in the important field of investor relations. This will

include providing advice and guidance on such

areas as:

• the regulatory obligations of a listed company to

its shareholders

• the timely release of financial and corporate

information

• preparation of communications and marketing

materials in accordance with best-practice

disclosure requirements of the institutional

investment community

• review of the company’s share register in an

effort to identify key holders and whether their

holdings are proportionate to the size of the

company (the findings would then be used for

ongoing targeting)

• promoting the company and its management to

the fund management community through

specific roadshows and events such as site

visits and capital markets days (the latter can

include a number of activities, but usually

involves a half to full day of presentations from

the Board and possibly other senior directors,

for example, heads of particular divisions and

product demonstrations, if appropriate)

• regular institutional investor research to refine

messages and address misconceptions and

potential issues in all written and verbal

communications

• management of expectations (to build

confidence and avoid surprises)

• benchmarking the company’s performance,

materials and guidance levels against its peer

group

• advice on corporate governance issues,

corporate social responsibility and other

developing interest areas for investors.

• developing relations with unconnected analysts

Clearly, the most appropriate time for a company

to start its investor relations programme is

immediately after the listing, when investor

confidence is considerable and the profile of the

company is already high following the listing. In

order to capitalise on this situation, the company

will need to have put in place an Investor

Relations Department to manage its ongoing

investor commitments.

Post-flotation: ongoing PR strategyAs well as an active investor relations programme,

continuing media relations activities can help to

manage interest in the company post-flotation.

The company should go beyond the minimum level

of disclosure required and should take the

initiative in its communications with the financial

markets and the media. Maintaining the interest

achieved during the IPO is vital in an ever more

crowded market. The PR firm will work with the

company to implement a comprehensive

programme incorporating the following areas:

• regulatory reporting requirements

• financial calendar (quarterly, interim, preliminary

results and AGM announcements)

• trading updates

• M&A, restructurings and disposals

• future equity or capital raisings

• board and senior management changes

• significant ad hoc news-flow (eg key contract

wins)

• ongoing media and analyst relations

• strengthening and broadening the company and

management’s profile

• market intelligence

• management of expectations

• crisis and issues management

• market research.


ConclusionSeeking admission to trading on the London

Stock Exchange is obviously a very significant

decision for any company. On its own, a PR firm

cannot guarantee a successful flotation, nor

guarantee that the best value is achieved for the

vendor. However, good PR advisers can help

ensure that the process is effectively managed

and that the company’s management is given the

very best opportunity to effectively communicate

its story and strategy for the business, giving

crucial support to the overall IPO marketing.

In the current environment investors and financial

commentators will demand clear and professional

communications from public companies listed in

London. A PR firm that has a successful track

record in advising on IPOs will help ensure that a

company’s management is in the best possible

position to make the planned flotation a great

success.

It’s all about trust…With today’s financial markets demanding the very best

in disclosure, engagement and communications you need public

relations advisers you can trust.

Whether it’s for an IPO, M&A transaction or for implementing an

ongoing communications programme, leading companies around

the world trust Citigate to give them the very best independent

strategic and practical advice.

Who do you trust?

Citigate Dewe Rogerson Tel: +44 (0) 20 7638 9571 www.citigatedr.co.uk

Jonathan Clare email: [email protected]

David Westover email: [email protected]

Marina Zakharova email: [email protected]

Citigate offices based in: AMSTERDAM • BEIJING • BRUSSELS • BUDAPEST • CHICAGO • FRANKFURT

GENEVA • HONG KONG • LISBON • LONDON • MADRID • MILAN • MOSCOW • MUMBAI

NEW YORK • PARIS • SAN FRANCISCO • SHANGHAI • SINGAPORE • STOCKHOLM • WARSAW

When the London Stock Exchange created AIM in

1995, it sought to establish a sensible and

practical method of regulation that would be

appropriate for the younger, smaller companies

that it wanted to attract. Realising that many

smaller companies would not have a management

team with experience of running public companies,

the Exchange chose to devolve the responsibility

for ongoing regulation of its AIM companies. It

achieved this by creating a new type of financial

adviser, the Nominated Adviser (Nomad), with

authority and responsibility to decide whether a

company was suitable for admission to AIM and to

provide ongoing advice to AIM-quoted companies.

Such is the importance of the role of the Nomad

to AIM that a company is required to retain one at

all times. Without a Nomad, a company is

effectively unregulated and under the AIM Rules it

will have its shares suspended and eventually will

have its admission to AIM cancelled.

Who can be a Nomad?The AIM Rules are short and considerably less

prescriptive than, for example, the Listing Rules

(which apply to companies on the London Stock

Exchange’s Main Market). A Nomad must be able

to interpret the AIM Rules and advise an AIM


Role of the Nominated Adviser in an AIM flotationColin Aaronson, Director, Grant Thornton UK LLP

The Nominated Adviser (‘Nomad’) has authority and responsibility todecide whether a company is suitable for admission to AIM and to provideongoing advice to AIM-quoted companies.

company on its obligations under those rules. This

requires an understanding of best practice in

public company management and corporate

governance, and the ability and experience to

apply this knowledge in the light of the AIM

company’s particular circumstances.

In order to be a Nomad, a firm of advisers must

be authorised by the London Stock Exchange to

act in that capacity, a selection made on the basis

of the firm’s previous experience of dealing with

publicly-quoted companies. Nomads include

accounting firms, investment banks, corporate

finance firms and stockbrokers, all of which

employ a sufficient number (at least four) of

suitably qualified individuals. The Exchange

maintains a register on its website of firms

authorised to act as Nominated Advisers.

The Nomad’s three principal tasksThe Nomad has three principal tasks: determining

if the company is appropriate for admission;

managing the flotation process; and after flotation,

advising the AIM company in respect of its

compliance with the AIM Rules and general

corporate governance.


Determining suitability for admission Unlike the Main Market, where a company’s

suitability for listing is assessed by the United

Kingdom Listing Authority (‘UKLA’), the decision

as to whether a company is appropriate for

admission to AIM rests with the Nomad. The

Nomad’s primary responsibility and duty of care

are owed to the London Stock Exchange and it

must ensure that the admission and conduct of a

company do not impact adversely on the

reputation or integrity of the Exchange.

Sometimes a company may be appropriate for

flotation on AIM, but joining AIM may not

necessarily be in the company’s best interests.

The costs and ongoing obligations of an AIM

quotation may well outweigh the benefits that

admission brings, particularly where there are

other fundraising methods that may be more

appropriate. As a general corporate finance

adviser, the Nomad should also ensure that an

AIM flotation is actually in the best interests of the

company and its shareholders.

Project managing the flotation processOnce a Nomad has agreed that a company is

suitable for admission to AIM and a broker has

agreed to raise the necessary funds, the Nomad’s

task is to bring together a full team of advisers, set

a timetable, allocate responsibilities and ensure that

all parties adhere to the programme that has been

agreed.

Advising on regulatory matters An AIM company is under an obligation to comply

with the AIM Rules. The Nomad will ensure that its

client has appropriate systems in place to enable it

to comply with those rules and it is becoming

increasingly common for AIM companies to

document those systems and procedures in the form

of an AIM Rules compliance policy that has been

formally adopted by the board of the AIM company.

Beyond ensuring compliance with the AIM Rules, the

Nomad will sometimes need to advise on the

interpretation of those rules. The Nomad is also

expected to give guidance on the appropriate level of

corporate governance for the company.

The City CodeThe City Code on Takeovers and Mergers (‘City

Code’) is a set of rules and principles that governs

the way takeovers and mergers of public limited

companies are carried out in the UK. As such, it

applies to all UK, Channel Island and Isle of Man

resident AIM companies. Although companies

registered or managed outside these geographic

areas are not themselves subject to the City Code,

companies seeking to merge with or take over a

UK public limited company will need to comply with

its rules.

The City Code does not specifically concern itself

with commercial aspects of a takeover or merger,

or with the way a business is run. Rather, it is

concerned broadly to ensure the protection and

equal treatment of shareholders in certain takeover

and merger situations and where there are changes

in the individuals and groups that control that

company. In simple terms, ‘control’ is defined as a

30 per cent (or greater) shareholding in a

company.

Although a Nomad’s principal role is to advise a

company on its compliance with the AIM Rules, in

practice, as the company’s financial adviser, the

Nomad will also need to advise the company on

any obligations under the City Code. Sometimes,

certain aspects of an AIM admission itself will

require the Nomad to advise on the City Code and

to liaise with the Panel on Takeovers and Mergers

on the company’s behalf, for example where the

company is ‘reversing’ into a quoted cash shell.

The Nomad and the broker The roles of Nomad and broker are often confused,

particularly as both roles are often performed by

the same organisation. In fact, the roles are

completely different and separate. The Nomad’s

role is to provide general corporate finance advice,

project manage the flotation and act as the AIM

company’s regulator. The broker’s principal

responsibilities are to raise funds from its

institutional clients and manage the ‘aftermarket’,

publishing research where necessary and ensuring

that there is both a healthy interest in the

company’s shares and sufficient stock to satisfy

that demand.

The Nomad’s client is the company and its dealings

with the company are private. The broker’s clients

are its institutional investors and it is not privy to

the confidential communications between the

Nomad and the AIM company. Where one firm

(known as an ‘integrated house’) plays both roles,

there must be a clear separation of responsibilities

and a ‘Chinese wall’ must be established between

the two parts of that firm.


Assessing suitabilityUnlike for the Main Market, there are very few

prescriptive pre-conditions for admission to AIM.

An AIM company’s requirements are to appoint

and retain a Nomad and a broker, to prepare an

AIM admission document and to ensure that its

shares are freely transferable, including, in most

cases, in dematerialised form (ie electronically).

This contrasts with the Main Market, where

companies are required to comply with a number

of pre-conditions including, among other things, to

be operated independently and be revenue-

generating for at least three years, have a

minimum market capitalisation and have at least

25 per cent of its shares in public hands.

Since it is quite straightforward to satisfy the

objective requirements for admission set by the

AIM Rules, the greater challenge for the company

seeking admission to AIM is to satisfy a Nomad

that it is appropriate for such admission. Advisers

will consider the following types of questions

before taking a view:

• does the company have a management team

with the skills and experience to run a public

company and can the management team

members demonstrate their integrity and

financial probity?

• does the company have a viable business model

such that it is likely to grow and deliver value to

investors?

• if the AIM admission involves a fundraising, is


there a realistic possibility that the broker will be

able to raise the funds at a valuation acceptable

to existing shareholders?

• does the company have the management and

financial controls and reporting systems

sufficient to enable it to discharge its obligations

under the AIM Rules?

While it is common for UK businesses which

serve, primarily, domestic markets, to seek a

quotation on a London based stock-exchange, the

Nomad will normally require that an overseas

company’s business be international in nature and

not limited to its local market. Certain types of

business, such as natural resources and

biotechnology, are by their nature international.

Other types of overseas companies should at

least have international markets or be seeking to

expand internationally.

For a Nomad, the reputation and integrity of the

market are paramount. A Nomad should only

proceed with the flotation of a company if it is

confident that the company will enhance the

market’s reputation and has a realistic chance of

delivering real value to shareholders. In assessing

a company’s suitability, a Nomad must ultimately

ask itself if it really wishes to be associated with

this company.

ManagementA company will be judged, above all, on the quality

of its management. Some criteria are objective, or

at least fairly obvious. A strong management team

typically has the following characteristics:

• it has a clearly defined structure, with a clearly

identifiable leader

• it has a full set of skills encompassing finance,

operations, marketing and sales. Operations

include procurement, human resources,

production and distribution. In most cases, an

experienced and capable finance director is

essential to the success of a quoted company

• there is strength in depth. A company must have

a sufficiently strong management team such that

the loss of one particular individual will not

cause irreparable damage to the business

(although this can be mitigated to some extent

by keyman insurance). More subjectively, a

business whose leaders are too ‘hands-on’ will

not be able to think strategically. From a more

practical point of view, the flotation process can

be extremely time-consuming for management

and the company must be able to continue its

business during the flotation process without

suffering from the absence of key directors

• its team members can demonstrate relevant

experience in business generally and specifically

in the sector in which the company operates

• its members work well together. A strong

managing director should have colleagues who

are able to stand up to and not be dominated by

him or her

• it is able to provide accurate, reliable and

comprehensive management information in a

timely manner – otherwise, the company cannot

be said to have the appropriate systems

necessary to run the business. Indeed, as part

of its due diligence on the prospective AIM

company, a reporting accountant will review and

comment on the company’s financial control

systems

• the accounting policies selected by the

management team should err on the

conservative and should be consistently applied

• it should have strong non-executive directors

who are experienced in City practices and are

able to impose proper public company practices

on their colleagues.

As part of its procedures for determining whether

a company has suitable management, the Nomad

will conduct due diligence on the directors and

sometimes on key managers. Directors will be

asked to complete a questionnaire that gives

information such as past and present directorships

and details of any personal bankruptcies or

business insolvencies. This information must be

disclosed in the AIM admission document. Proof of

identity (such as the photograph page of a

passport) and proof of address (for example, a

driver’s licence) will be required as part of the

Nomad’s due diligence.

The Nomad will review each director’s curriculum

vitae, from which information will also be taken and

included in the AIM admission document.

References will be taken and detailed background

searches will be made using either publicly-available


information or specialist agencies where

appropriate. Past financial performance will provide

a strong indication of management’s ability.

Although a company’s commercial success would

suggest that its managers are capable, the reality

could be that they are running an underperforming

company in a successful sector. It is therefore

important to benchmark the company against other

companies in the sector. Management may also be

reacting to events rather than driving the business

forward, while erratic or declining profits should ring

alarm bells. Ultimately, assessment of management

is highly subjective. Different advisers have

different criteria, but experience has shown that:

• successful companies usually have a strong,

proactive leader who is passionate about the

business

• directors of a successful company have detailed

knowledge of markets, competition and

developments in their sector. It is particularly

important that they understand and can explain

the reasons for their success and how that

success can be built upon

• directors of a successful company have quiet

confidence or cautious enthusiasm, grounded in

reality

• directors of a successful company should be calm

and must be able to deal with strategic matters.

The business must be able to function

during their absence, demonstrating that

underlying management is adequate


• successful companies have managers who deliver

on their promises. Otherwise, why should

investors trust them?

Finally, a Nomad will want to ensure that the

directors of a company are fully aware of (and are

prepared to accept) the costs and obligations of

being an AIM company, that they have considered

and have rejected the alternatives and that they

are seeking admission to AIM for the right

reasons. AIM is not an immediate exit route for

owner-managers and, rather, should be seen as a

source of development capital. AIM companies

often have a narrow shareholder base, and

liquidity in a company’s stock may initially be

limited. Institutional shareholders often have a

comparatively long-term investment horizon and

expect to provide follow-on funding provided

milestones have been met. AIM, therefore,

displays several of the characteristics of private

equity.

While for most companies their admission to AIM

forms part of a fundraising exercise, there are

other good reasons for a company to float on

AIM. These include expanding its ability to acquire

other businesses by issuing quoted shares,

establishing a value for the business and

enhancing the attractiveness of its employee

incentive programmes and share option schemes.

Corporate governance A private company with a single or small number

of shareholders may not have given much thought

to the way the company (as distinct from the

business) is managed. For any company, and

particularly for quoted companies, it is essential to

ensure that the interests of all shareholders are

protected and that the interests of management

and shareholders are closely aligned. A quoted

company, for example, will need to ensure that

there is a remuneration package (which might

include suitably-designed share option schemes)

that will incentivise management to work for the

benefit of the business as a whole, and that there is

a method of determining whether that package is

appropriate to the business (this usually involves a

remuneration committee). The company will need

independent non-executive directors on the board

to represent the interests of outside shareholders.

Some private companies will lack an appropriate

level of corporate governance at the outset. What

is essential, however, is that there is a basic

minimum level of corporate governance and a

willingness on the part of management to adopt the

necessary procedures to steer the company

towards best practice.

Business viabilityIrrespective of their ability, in the long run managers

cannot make a success of a fundamentally-flawed

business model. In assessing the long-term viability

of the business, Nomads will be asking the same

sort of questions as investors.

A detailed analysis of business strategy is beyond

the scope of this publication, but a Nomad will

consider the long-term viability of a business in

the context of its past financial performance,

products, customers and suppliers.

A company with a history of growing profits in a

growing sector will, on the face of it, be a strong

candidate for admission. Where a business is not

yet profitable, the Nomad needs to be confident

that the company will become profitable within a

reasonable timescale.

A successful business, or a business with

potential to be successful, need not itself be in a

growing sector. Unless the sector is in steep

decline, such a company may still be worth

investing in. What is important is the company’s

position within its particular sector.

Management needs to be able to control the

company’s business to drive it forward. An

insignificant player in a market may be subject to

forces beyond its control. Where possible, a

company’s products and/or services should be

differentiated by quality, innovation or branding.

Ideally, there should be sufficient goodwill in the

brand such that the company can charge a

premium for its products. Where the product or

service is more generic, it is important that the

company is a significant supplier in that product or

service market, is a highly efficient operator within

its sector, or controls a specialist niche.

A technology company, for example, may be

attractive precisely because it owns intellectual

property which is protected by patents, copyright

or know-how that give it a degree of product

exclusivity. Such companies will find that their

intellectual property is the subject of specific due

diligence undertaken by patent agents and by

specialist technology experts. The company


should not be over-reliant on one product. There

should be a family of products and services and a

pipeline of new products under development. With

very few exceptions, the company should not be

reliant on one or even a very small number of

customers (whose business can decline and

whose management can change). Certain

products, components and services may be

available from only a few suppliers or even from

one alone. Management should ideally have the

ability to switch to alternative suppliers or change

components. It is crucial that the company being

considered for flotation can continue trading, even

if a key supplier is unable or unwilling to continue

supplying to it. Different criteria will apply to

natural resource companies, for many of which

AIM has become the market of choice. For such

companies, the track record of its management is

of crucial importance, as is the competent

person’s report into the company’s resource

assets.

The investors’ view A company may have strong management and a

viable business model, but unless investors are

prepared to invest at a price that the company’s

present owners find acceptable, it will not be

possible to complete a fundraising and a flotation

on AIM may be inappropriate. A Nomad must

therefore be confident that there is a realistic

chance of raising the necessary funds at a

valuation acceptable to the existing shareholders.

The Nomad will need to assess whether a

fundraising is likely to be successful through its


knowledge of the market and its contact with

different brokers.

Working capitalA Nomad will only bring a company to market if it

believes the company will be a long-term success,

will deliver value to its investors and has sufficient

working capital to achieve its objectives.

Nevertheless, the AIM Rules specifically require

that the AIM admission document contains a

statement that the company has, in its directors’

opinion, sufficient working capital for at least 12

months from the date of admission. While the age

and size of companies seeking admission to AIM

have increased considerably since 1995, and the

number of genuine trading start-ups has

decreased as a proportion of companies admitted,

this is still one of the most important statements

made in an admission document. Such is the

importance of this statement, that reporting

accountants will be specifically instructed to

conduct detailed due diligence on the company’s

financial forecasts and confirm whether, in their

opinion, the statement has been made after ‘due

and careful enquiry’. For most companies with an

existing business, this means ensuring that the

forecasts are sufficiently robust to cope with any

adverse events or a downturn in trade. For a pre-

revenue business (a start-up), there should be

sufficient working capital to continue operating at

anticipated levels even if there are no sales at all.

Managing the flotationThe two key tasks in any AIM flotation are

preparing an AIM admission document (which can

sometimes be referred to as a prospectus,

depending on the size and nature of any

fundraising) and arranging the fundraising itself.

Fundraisings usually take the form of a placing of

shares to institutions and sometimes to certain

private investors, although a fundraising can also

take place via an offer for subscription to the

public. Whichever route is chosen, arranging the

fundraising is the role of the broker.

Starting the flotation processOnce the company and its advisers have agreed

to proceed with a flotation, and after the key

professionals have been appointed and their terms

of engagement agreed, the Nomad will call all

parties to attend a meeting to agree a timetable,

which must be adhered to if the process is not to

drift. Apart from preparing a detailed timetable,

with responsibilities clearly identified, the Nomad

will also circulate a detailed list of parties with

contact details and a list of documents to be

produced. The Nomad will take as its starting

point the end of the flotation process. The key

date is known as ‘Impact Day’. It is on this day

that the AIM admission document is finalised and

posted to shareholders and potential investors.

Admission to AIM and receipt of funds usually

take place shortly afterwards.

The company will often need or want to secure

funds by a particular date, in which case that date

will determine the Impact Day. The broker will

advise on a good time to introduce the company

to the market, having regard to Christmas, Easter

and summer holidays, market sentiment and the

broker’s own workload. From this point the


Nomad will work backwards, setting dates for the

completion of the final AIM admission document,

the placing proof and the pathfinder (if applicable),

the accountants’ and experts’ reports and the

legal, financial, technical and commercial due

diligence. An illustrative timetable is shown in

Table 1 below.

Central to the Nomad’s work, and indeed to that of

all the professional advisers, is the preparation of

the AIM admission document. A considerable

amount of the professional advisers’ work revolves

around preparing an AIM admission document

that describes accurately and in sufficient detail

the business, activities, financial information and

•

Admission timetableTable 1

1week 2 3 4 5 6 7 8 9 10 11 12 13 14

Test marketing

Long-form report produced

Accountants’ report produced

Working capital review

Drafting of AIM admission document

Legal due diligence report produced

Verification

Pathfinder completion

Marketing

Placing list finalised

Placing proof prepared

Placing proceeds received by broker

Completion meeting

Admission to AIM and dealings commence

Proceeds of the placing paid to company


The very front • cover page including important information for investors in overseas jurisdictions• summarised key information• index• list of directors and advisers• list of definitions and glossary of technical terms• timetable• placing statistics

The front end • history of the business• information about the present-day business

A detailed description of the • key business and market trendsbusiness, in effect, the • summarised information about key personnelinvestment proposition • intellectual property

• information about the placing or offer for subscription• company policy on corporate governance• use of funds• share option arrangements and dividend policy• risk factors relevant to the business• City Code information (if applicable)

Table 2: Principal AIM admission document

Historical financial information • audited historical financial information, covering up to three complete years prior tofloatation. Sometimes it is necessary to include interim accounts to a later date, whichmay or may not be audited.

• an auditor’s or reporting accountant’s opinion as to whether the financial informationshows a true and fair view for the purposes of the AIM admission document

• if appropriate, pro forma financial information

Other reports • experts’ reports (if necessary or desirable)

The back end • directors’ responsibility statements (directors and proposed directors must acceptresponsibility for every statement contained in the AIM admission document)

• details of the incorporation and legal status of the company, its registered office and itsobjects

• information about share capital, including authorities to issue further shares• summarised information about the company’s memorandum and articles of association• directors’ interests in the company and directorships of other companies• substantial shareholders• share option plans• material contracts• related party transactions• summarised tax position• the working capital adequacy statement• terms and conditions of any offer for the sale of shares• sundry information

legal structure of the company. All AIM

admission documents have a common structure,

even if the size, style and contents differ

considerably. The contents of an AIM admission

document are determined by the AIM Rules and

market practice, and are summarised in Table 2

above

Assembling the team

The four key advisers in any flotation are the

Nomad and the broker, together with the

company’s solicitors and the reporting

accountants. The company’s solicitors will

perform three main tasks in relation to an AIM

flotation:

• compiling the statutory and general information

that comprises the back-end of the AIM

admission document

• verifying every statement in the AIM admission

document

• undertaking a legal due diligence review to

confirm title to important assets and to ensure

that there are no matters that might prevent

the company from achieving its business

objectives, or issues such as major outstanding

litigation that might call into question its

suitability for admission.

The solicitors will often also need to do a

considerable amount of work to get the company

ready for flotation, such as ensuring that the

company’s capital structure is properly

organised, that the directors have the necessary


authorities to issue shares, that the company has

articles of association or statutes suitable for a

quoted company and that appropriate contracts

of employment are in place. A company may

already retain a firm of solicitors which can

perform these tasks. If not, the Nomad will

introduce the company to a firm with the

necessary experience of AIM flotations.

The company will prepare the historical financial

information in the AIM admission document,

which the reporting accountant will review and

report on. The reporting accountant will also

review and report on working capital and financial

controls and undertake financial due diligence

into the company. It is important that the firm

acting as reporting accountant is experienced in

working on AIM flotations. The reporting

accountants are often the same firm as the

company’s own auditors, although if they are not

able to act as reporting accountants, the Nomad

will introduce the company to firms who are

sufficiently experienced in AIM work.

The Nomad will set the scope of work for both

the solicitors and reporting accountants. Where

it considers it appropriate to have additional due

diligence, for example on the company’s

technology or on its natural resource assets, the

Nomad will also set the scope of work for the

professionals undertaking such due diligence.

Starting work The order in which work starts will depend on

what information is available. Typically, the first

task will fall on the reporting accountants to


begin work on the long-form (financial due

diligence) report. While their work is underway,

the lawyers will start legal due diligence and

commence drafting the statutory and general

information section of the AIM admission

document. The Nomad and the company will

begin work on the front part of the AIM

admission document and the directors will draft

the historical financial information for inclusion in

the AIM admission document.

If any commercial due diligence has to be

undertaken or any experts’ reports prepared, this

work will commence at a very early stage.

Meanwhile, the company will be required to

prepare working capital forecasts in support of

the statement on the adequacy of working capital

(which the directors have to make in the AIM

admission document). The forecasts should

comprise a pack containing income statements,

cashflow and balance sheet forecasts together

with underlying assumptions. These forecasts will

normally be required to cover a period of at least

18 months from the date of publication of the

AIM admission document.

On completion of the draft long-form report, a full

first draft of the AIM admission document will be

compiled under the Nomad’s supervision. The

reporting accountants will then typically begin

work on reviewing the working capital forecasts.

During this part of the process, the AIM

admission document will go through a number of

drafts. As the AIM admission document takes

shape, the lawyers will begin the verification

process and the broker will start to sound out

the market informally as to who might be

interested in taking the shares to be issued. In

any event, the broker would normally have

undertaken some market testing before it agreed

to act as the company’s AIM broker. The PR

advisers will work on the press coverage to be

sought for the issue.

If a pathfinder (sometimes known in the United

States as a ‘red herring prospectus’) is to be

produced, it is likely to be required some 10–14

days before Impact Day. This is an essentially

complete document (save for agreement as to the

price at which the shares are to be placed) which

can be taken to potential institutional investors to

gauge the level of interest and to determine the

placing price. During this period the company is

often required to make presentations in order to

‘book build’ a list of potential investors.

After the book has been built, the company issues

a ‘placing proof’, sometimes described as a ‘p-

proof’. This is in all material respects a finished

document, except it is marked as a proof. Having

generated interest using presentations or a

pathfinder prospectus, the broker gives the

placing proof to potential investors to secure their

formal commitment to invest prior to completing

and registering the AIM admission document

itself.

Once the brokers know the amount of the funds

that will be raised and know the price at which

the shares will be placed, the company is ready

to complete its AIM admission document and a

completion meeting will be arranged for the day

before Impact Day. At this meeting all documents

will be signed and the directors will formally

approve and take responsibility for the AIM

admission document. Many other documents,

including the verification notes which record the

underlying evidence for statements contained in

the AIM admission document, will be completed

and signed and the order will be given for the

bulk printing of the AIM admission document.

This is then printed overnight and on Impact Day

it is filed with the relevant authorities and

distributed to shareholders, potential investors or

anyone interested in receiving a copy. The AIM

admission document must be made available on

a website that the company is now obliged to

maintain under the AIM Rules revised in February

2007.

With an institutional placing, admission usually

takes place within a fortnight of Impact Day. The

flotation process may continue for up to about a

month after Impact Day, either if there is an offer

for subscription to the general public or if the

company‘s shareholders need to approve any

aspect of the transaction in a general meeting.

Apart from project managing the flotation process

and co-ordinating the work of the various parties,

the Nomad will need to liaise with AIM Regulation

at the London Stock Exchange. An AIM company

will need to issue a statement of its intention to

seek admission to AIM 10 business days before

the proposed admission date (other than a

company transferring from the Main Market or


one of several other ‘AIM-Designated Markets’,

for which 20 business days’ notice are required).

The Nomad will draft and issue that statement. It

will also arrange the formal application, which

must arrive at least three working days before the

proposed date of admission.

Advising the company after flotationA Nomad’s responsibilities continue after

admission and until such time as the company

leaves the market. A Nomad’s principal ongoing

duty is to advise its AIM company clients on their

obligations under the AIM Rules. Much of the

work will involve advising on the need for

announcements and on their form and content.

Announcements that must be made include

interim and final results, share dealings by

directors or significant shareholders, the issue of

new shares, board changes, substantial and

related-party transactions and any price-sensitive

information. Price-sensitive information is defined

as any development in the business which, if

made public, would be likely to lead to a

substantial movement in share price. These

developments involve changes in the company’s

financial condition, sphere of activity, business

performance or performance expectations (ie

profits warnings or adjustments).

While in general more information is better, care

has to be taken to ensure that announcements

are not misleading, as the consequences of

issuing misleading announcements can be severe

under the AIM Rules, as well as under the

Financial Services and Markets Act 2000.


Where the market as a whole is not aware of an

important event or fact relating to the company,

and the share price does not reflect that

information, a ‘disorderly market’ in the shares is

said to exist. The Nomad will maintain close

contact with its clients to ensure that the market

is aware of all information that needs to be in the

public domain. On occasions, the Nomad may

need to agree with the Exchange for a temporary

suspension of trading in a company’s stock in

order to prevent shares trading in a disorderly

market. Companies will often ask their Nomad

for advice on corporate governance or other

issues that are not specifically covered in the

AIM Rules, such as the suitability of share option

arrangements or related-party contracts. The

broker will advise on what investors will find

acceptable; the Nomad must advise on what is

appropriate from the perspective of corporate

governance and what is necessary to protect the

market’s reputation.

When a company enters into a transaction that

might need to be disclosed under the AIM Rules,

the Nomad will advise the company on its

position and may need to clarify certain issues

with AIM Regulation at the London Stock

Exchange.

Identifying a suitable NomadThe Nomad is the single most important adviser

to any prospective AIM company and must be

selected with care. Flotation can be an arduous

process and it is essential that the company’s

directors have confidence in their Nomad and

feel comfortable working with it. The Nomad

must also demonstrate a clear understanding of

the company’s business and its surrounding

issues.

Things to look for when appointing a Nomad

• AIM experience

• sector expertise

• house type – is it an independent Nomad or an integrated house?

• global reach – ability to handle cross-border flotations

• willingness and resources to manage the flotation

• commitment to looking after the company post flotation

• personal chemistry.

Any company looking to float on AIM can obtain

a list of approved Nomads from the London

Stock Exchange’s own website,

www.londonstockexchange.com/aim. Many

companies will already know of Nomads – either

through the directors themselves, or through

contacts such as solicitors or accountants. In the

end, a company’s choice of Nomad often boils

down to personal chemistry and a prospective

AIM company would be well advised to meet more

than one potential Nomad before deciding which

one to appoint.


© 2009 Grant Thornton UK LLP. All rights reserved. ‘Grant Thornton’ means Grant Thornton UK LLP, a limited liability partnership. Grant Thornton UK LLP is a member firm within Grant Thornton International Ltd (‘Grant Thornton International’). Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered by the member firms independently.

www.grant-thornton.co.uk

We’ve always had a great deal of confidence in our AIM.

At Grant Thornton, we meet the needs of our clients by remaining flexible. We treat each client individually, dedicating the right people to the job in hand. It’s been a successful formula. And by investing our time in understanding the needs of AIM companies, we continue to be retained auditor or nominated adviser to over 240 of them. More than any other firm*. That’s why we’re the leading adviser to the AIM.

*Source: Hemscott September 2009

For more information, contact:

Philip Secrett Ivan SapronovT +44 (0)20 7728 2578 T +7 (495) 258-99-90 E [email protected] E [email protected]

An increasing number of companies which are

incorporated in the CIS, or have their main assets

and/or operations in these countries, have been

admitted to the Alternative Investment Market

(AIM). As a result, considerable legal experience

has accumulated in the last few years in relation

to admitting such companies to AIM. Although,

generally, the legal issues relating to the AIM

flotation of a company with interests in the CIS

are the same as those applying to other

companies, there are some specific issues which

do apply. This chapter provides a brief and

practical guide to the legal issues attaching to AIM

flotations in general, as well as highlighting those

issues which are specific to CIS companies.

Main conditions to be satisfied byapplicants to the AIM marketThe rules for trading securities on AIM are set by

the Exchange (the AIM Rules). Accordingly, each

company applying to be admitted to AIM must:

• be a public company limited by shares, and be

able to offer its shares to the public

• appoint and retain a Nomad at all times

• appoint and retain a broker at all times

• have no restrictions on the free transferability of

8 4 L i s t i n g i n L o n d o n : a p r o f e s s i o n a l h a n d b o o k

Role of the law firm in an AIM flotationPhilip Rogers, Partner, and Ildiko Gergely, Senior Associate, Clyde & Co LLP

The company’s lawyers play a central role in the flotation process,advising on the structuring of the company and its subsidiaries, on thedocumentation involved and on the directors’ responsibilities.

shares (which must not be subject to pre-

emption rights)

• ensure that all (and not some) of the shares in

any particular class are admitted

• prepare an admission document

• publish accounts which conform either with

International Accounting Standards (IAS) or with

UK, US, Canadian, Japanese or Australian

Generally Accepted Accounting Practices

(GAAP)

• (where the company has not been independent

and revenue-earning for at least 2 years) any

group companies and the substantial

shareholders (ie holding 10% or more of voting

rights) must enter into a lock-in agreement

preventing them from selling their shares for at

least 12 months following admission

• comply with AIM Market Rules and, where there

is a public offer, the European Prospectus

Directive. Each of the directors of an AIM

company must accept full responsibility,

collectively and individually, for compliance with

the AIM Rules.

Member companies can be incorporated in any

8 5L i s t i n g i n L o n d o n : a p r o f e s s i o n a l h a n d b o o k

country. It is possible to admit all types and

classes of securities (including ordinary and

preference shares and debt securities). The

application process is the same for all types of

companies.

Although companies from the CIS may have their

securities directly admitted to trade on AIM, they

often choose to join AIM by incorporating a

holding company, either in the UK or in an

offshore jurisdiction such as British Virgin

Islands, Jersey, Isle of Man, Bermuda, Cyprus

etc.

Simultaneously with an application for admission

to trading of a company’s securities on AIM, the

company generally also offers new securities to

investors (usually to raise capital for future

development of its business). The offer of

securities is commonly referred to as an ‘IPO’

(initial public offering). Not every admission is

coupled with a placing and companies may offer

securities to the public without being admitted to

trade on AIM. Companies often engage the

services of a broker to procure investment in

their share capital with the specific purpose of

preparing the company for joining AIM. This is

often referred to as ‘pre-IPO fundraising’.

Russian companies must also consider local

legislation to decide whether concurrently with

any shares being offered outside Russia, such

shares must also be offered for placement

domestically through a Russian stock exchange

or a broker. Where a company is listed on more

than one stock exchange, it should take into

account the possibility of a difference in the

settlement facilities available to such stock

exchanges. In the context of Russian securities,

settlement can be facilitated by recently

introduced mechanics, described further in

Admission Process – Company and group

structure below.

It is important to note that The Federal Law of

the Russian Federation No 57-FZ dated 29 April

2008 on Procedures for Foreign Investments in

Companies of Strategic Significance for State

Security and National Defence (the ‘Federal Law’)

imposes restrictions on transactions with

companies involved in any of the 42 types of

activities defined in the law as having strategic

significance to national defence and state security.

This law imposes limits on the number of shares

that can be acquired by a foreign entity in such

companies to no more than 25% of all voting

rights in companies involved in most of the

strategic activities, and no more than 5% of all

voting rights in companies involved in subsoil

operations (including mineral exploration). Any

acquisition of shares over the statutory limits will

require the prior approval of the relevant

governmental body. This poses a practical

obstacle to such companies joining AIM.

In addition, the Russian legislator reduced the

number of shares which Russian companies,

including companies involved in strategic activities,

may place outside Russia. No more than 30% of

the share capital of Russian companies may now

be placed outside of the country.

Admission processThe admission process generally consists of the

following key stages:

1 Planning and preparation

2 Due diligence

3 Negotiating and drafting the admission

document and ancillary documentation

4 Impact and admission.

Each of these stages involves different legal

issues and is subject to various legal

considerations.

Planning and preparationGood preparation is vital to a successful AIM

flotation as it may reduce the time and costs of

the flotation process considerably. This stage

usually includes the following considerations:

Accounting and financial reporting

If the company proactively deals well in advance

with issues relating to accounting and financial

reporting, ownership and group structure and

corporate governance, it will have to spend less

on professional fees during the flotation. Much

time and cost is wasted when the company

records are in bad order and the professional

advisers have to make persistent requests for

information or reconcile conflicting information.

Companies should also ensure the integrity of

their management information systems and

financial controls and, to the extent possible,

address any issues that have arisen in this respect

since the company’s incorporation.


The company’s accounts must generally be

prepared in accordance with IAS. Since accounts

are needed for the last three years (if the

company has been trading that long), the sooner

they are compliant with required standards, the

more time and money will be saved during the

flotation process.

Company and group structure

The key consideration in this respect is to decide

whether the securities of the company seeking

admission are to be admitted to trading directly, or

whether a holding company will be incorporated.

This decision is generally based upon tax

considerations (on which the company’s lawyers

and accountants should provide advice). The

company’s directors should also decide on the

type of securities that will be admitted to trade on

AIM. Companies from the CIS usually choose to

list global depositary receipts (GDRs) when listing

their securities on the Main Board of the

Exchange. There is, however, less precedent for

these on AIM where the shares of non-UK

companies which are registered outside of the UK

and the Channel Islands and are admitted to trade

on AIM are represented by depositary interests

(DIs).

DIs allow non-UK companies to raise funding by

providing for electronic settlement of transactions

through the CREST system (a commonly used

system of real-time electronic settlement for UK

and international securities). A company wishing

to list its shares in the UK will issue those shares

to a specialised entity that, in turn, issues DIs to


investors and will be shown as the shareholder on

the company’s register. DIs can then be traded

and settled via the CREST system. Shareholders

can withdraw their shares from the DI facility and

hold them in certificated form at any time. Since

shares of Russian companies cannot be directly

admitted to CREST, DIs provide an alternative

solution to the settlement issue.

Settlement of DIs has also been facilitated by an

acquisition by one of two leading English

companies specialising in share registration of the

National Registry Company (NRC), Russia’s

largest independent registrar, allowing the English

company to manage settlement of Russian DIs.

This arrangement therefore allows access to AIM

for Russian issuers and at the same time

facilitates oversight by the Federal Financial

Market Service.

Other key issues to consider are as follows:

• when setting up the group structure, it is

essential that the company takes into account

the relevant local securities law and regulations

which might otherwise prohibit or restrict the

offering and listing of its shares overseas

• particular attention should be paid to the

corporate laws of the country in which the

company is registered and especially to those

provisions which protect minority shareholders.

For example, pre-emption rights (as used in the

Russian Federation) in certain instances require

prior consultation with shareholders. In some

countries, such as the Russian Federation,

certain transactions with related parties may be

invalid, even if so approved by a minority of the

company’s shareholders

• the management should carefully consider the

ownership structure of the group to ascertain

the most favourable arrangements from a

taxation perspective. As an efficient tax structure

may take a long time to implement, this must be

an essential part of the planning process

• the company’s articles of association might have

to be amended to ensure that the shares are fully

transferable

• the composition of the board and the directors’

service agreement will have to be assessed.

The ownership and group structure of the company

will have to be fully disclosed during the process.

This will include the full disclosure of the beneficial

owner or owners of the ultimate parent company,

even if they are beneficiaries under a trust and

regardless of the jurisdiction in which any holding

company and or trust is registered.

Corporate governance

Corporate governance refers to and includes a

wide range of principles which aim to enhance the

value of shareholders’ interest in the company. In

its narrowest sense, the principles of corporate

governance set out the way in which companies are

operated and controlled. Although specific rules

applicable in different countries are varied, these

principles apply in most cases. These basic

principles of corporate governance include:

• Disclosure and transparency of the operation

and control of the company.

Companies should make public all material

information to allow investors to make informed

decisions about investing in the company’s

securities and about exercising their rights as

shareholders. The AIM Rules contain provisions

as to specific information which must be made

public without delay, the most important of which

are the financial results, any changes to the

management, major shareholders, voting rights

and major transactions. In many companies, the

requirement for transparency represents a

significant cultural change from being a private

company where secrecy is often the paramount

concern.

• Responsibilities and accountability of the

company’s management to shareholders

Directors of a listed company must fulfil the

following key functions for which they are

collectively and individually responsible:

• provide entrepreneurial leadership by setting

corporate strategy, business plans, annual

budget, performance objectives and risk

policy

• assume responsibility for the executive

management of the company, including the

selection and remuneration of directors

• monitor and manage potential conflicts of

interest of management, board members,

external advisors and shareholders

• ensure the integrity of the accounting and

financial reporting process.

One of the most important principles of a well-


governed company is that the board of directors

must be able to exercise independent judgement

and come to decisions which are in the best

interests of the company, free of any external

influence exerted on any individual director on

the board as a whole. In the UK, the board of

directors consists of executive directors and

non-executive directors as a matter of market

consensus. The executive directors manage the

company’s day-to-day business and operation

and are employed by the company as well as

elected as directors, therefore it is accepted that

by definition they are not considered to be

independent. Non-executive directors, on the

other hand, should retain their independence,

and their livelihood should not be dependent on

the company (so that they can contribute an

impartial view to board decisions). There are no

legally binding rules as to what the ratio of

executive and non-executive directors should be,

but institutional investors will be hesitant to

invest in companies where that ratio is less than

50:50 and the company is unable to provide

justification for the lack of non-executive

directors.

Where a director of a company is also a

significant shareholder, the company is expected

to ensure that it is capable at all times to carry

on its business independently of any controlling

shareholder influence and that all transactions

and relationships between the company and

such shareholder are at arm’s length and carried

out on a normal commercial basis. For these

purposes, companies enter into a so-called


relationship deed with such directors / significant

shareholders (and also separately with any other

significant shareholder in the company) which

sets out rules that would govern certain aspects

of the ongoing relationship between the parties,

including exercise of shareholders’ rights.

Further, in civil law jurisdictions, which include

countries of the CIS, company law often requires

a two-tier board structure for public companies

consisting of the management board and the

supervisory board. Although, it is accepted that

the supervisory board takes on the function of

the UK non-executive directors, it is likely that

amendments to the structure of the board, as

well as the constitution of the company, will have

to be made to bring the two systems of

corporate governance closer together.

• Fair treatment of all shareholders

Although in most jurisdictions company law

includes provisions relating to the fair treatment

of shareholders, it is the directors’ duty to make

sure that the rights of all shareholders (including

minority shareholders) are protected by affording

each of them an equal opportunity to exercise

their rights. These safeguards should include

measures introduced by the board to ensure that

all members can attend and vote at meetings, as

well as being given access to information.

• Rights of shareholders and key ownership

functions

The most important rights of shareholders are

protected by law, such as voting rights, the right

to attend and call a meeting and the right to

appoint and dismiss directors. However, the law

allows certain deviations from the rules. It is,

therefore, important that any diversion from the

key principles, particularly those which grant

power to certain shareholders disproportionate

to their shareholding, should be disclosed and

justified.

Other than some provisions in the AIM Rules in

relation to corporate governance, there are no

mandatory rules in respect of corporate

governance applicable to companies on AIM.

However, there are certain published rules for

institutional investors with which most companies

admitted to trade on AIM choose to comply.

These rules are not suitable for all companies and,

therefore, the UK promotes a ‘comply or explain’

approach. When reporting on their compliance

with corporate governance guidelines, companies

should justify themselves when they depart from

given guidelines. In practice, particularly for larger

companies, many institutional investors will be

deterred from investing in a company if it is unable

to demonstrate a sound and transparent corporate

management and reporting system in operation.

Demonstrating active compliance with good

corporate governance principles is therefore not a

theoretical issue, and can significantly enhance a

company’s valuation.

In view of the differences in the interpretation of

corporate governance principles accepted in the

UK and the CIS, the corporate governance of an

applicant company should be evaluated at the

planning stage. Working on this matter with legal

advisers from the outset will ensure that the

company is better positioned to fulfill its economic

and social responsibilities.

Advisers

At this stage the company will also appoint various

professional advisers, such as a nominated

adviser (‘Nomad’), broker, lawyers and

accountants (see other chapters in the AIM

section of this guide).

The company’s Nomad will also appoint its own

lawyers to obtain an objective opinion on the

contents of the admission document and the

ancillary documents.

Although many terms of the agreements with the

Nomad, broker and reporting accountant are

standard, some can be subject to negotiations.

Therefore, the company’s spend on advisers can

be reduced by seeking legal advice at an early

stage.

Management team

Finally, a company preparing and going through an

AIM flotation will need considerable human

resources to deal with the process itself. Where

the management of the company, instead of a

designated project team, is responsible for the

flotation, the company’s business often suffers. A

dedicated IPO team at the company saves time

and expense and frees up management time to

focus on the business.

Due diligenceAlthough legal and financial due diligence during


the IPO is similar to that carried out during the

acquisition of a company, the purposes of these

two exercises are different. The purpose of the

financial and legal due diligence during the IPO is

to confirm the company’s suitability for being

admitted to AIM and to support the contents of

the admission document.

The due diligence also provides an opportunity

for the company to reveal any shortcomings

which may discourage prospective investors or

have an effect on the price for which the shares

can be placed, allowing for the necessary

corrections to be made.

A carefully and thoroughly conducted due

diligence will also provide invaluable defence in

case anyone involved in the flotation faces legal

action at a later stage.

Legal due diligence usually covers the following

issues:

• corporate structure and history

• capital structure and the history of its

ownership

• constitution (including capital structure and

history and memorandum and articles of

association)

• business activities (including all material

agreements) and details of principal customers

and suppliers

• trading matters

• investigation of title to any major property and

premises


• finance (assuming that financial due diligence

will, in addition, be carried out by the

accountants)

• intellectual property

• computer systems

• employees (including any incentive

arrangements and details of directors’ service

contracts)

• pension schemes

• environmental issues

• litigation

• fixed assets and insurance

• regulatory framework (including compliance

with laws and regulations material to the

group’s business)

• company’s strategy, future plans and

projections.

Some aspects of the due diligence exercise

during the IPO process (such as title to the

company’s assets) play a significant role. This is

because, although the parties can resolve

problems by reducing the purchase price during

the acquisition process, during the IPO process

certain problems might mean that the company

does not comply with the standards set for AIM

companies, thereby making the IPO impossible.

This is, however, unusual and most issues can be

resolved much more easily by disclosing them in

the admission document, which means that the

investors are investing in the company in full

knowledge of these matters.

Negotiating and drafting admissiondocument and ancillary documentationAdmission document

The general rule is that all information which can

be reasonably expected to allow investors to form

a full understanding of the rights attaching to the

shares, the financial position, the assets and

liabilities and the prospects in general of the

company must be disclosed in the admission

document. If there is a ‘public offer’ of shares, the

admission document will have to comply with the

provisions of the European Prospectus Directive

(Commission Regulation (EC) 809/2004,OJ 2004

L149/1) (‘Prospectus Directive’) which are stricter

than those of the AIM Rules.

Under the Prospectus Directive, any company

wishing to seek admission of its securities to

trading on a regulated market or offer securities

to the public in the European Union, must publish

a UK Listing Authority (‘UKLA’)-approved

prospectus relating to those securities . Although

the AIM market is not a ‘regulated’ market, an

application for admission of securities to trading

on AIM might involve an offer of securities to the

public, in which case the publication of a UKLA-

approved prospectus will be required, unless one

of the exemptions set out in the Prospectus

Directive applies. The most frequently relied upon

of these exemptions are where:

• the total consideration for the securities on offer

is less than 2.5 million euros

• the securities are offered only to qualified

investors (such as financial institutions,

insurance companies, banks, large enterprises

or persons who regularly invest and are

registered with the relevant financial regulatory

authority in their country) or to fewer than 100

other persons or

• the offer is of securities whose denomination

per unit is at least 50,000 euros, or requires

payment of a minimum consideration per

investor of euros 50,000 euros.

One of the distinguishing features of AIM is that it

is not reliant on retail investors as in most cases

an AIM IPO is conducted as an institutional placing

rather than as a public offer. Retail investors

generally invest indirectly through private client

stockbrokers who subscribe for shares in the

placing on behalf of their managed or discretionary

portfolios. If compliance with the Prospectus

Directive is necessary and the admission

document will have to be approved by the UKLA,

the timing and costs of the flotation are both likely

to increase. However, as most offerings on AIM

are structured as institutional offerings, the

Prospectus Directive of the European Union does

not apply, which leads to time and cost savings. It

is therefore important to confirm early on in the

process whether there will be a public offer

element to the AIM IPO (otherwise there will be

an impact on timing and costs).

Where an approved prospectus is not required, an

admission document must be published as

required by the AIM Rules. The admission

document must be made available to the public for

at least a month after admission. The content of


both a prospectus and an admission document is

largely similar and usually includes:

• information relating to the persons responsible

for the document, the advisers, the securities to

which the document relates, the terms of the

offer of securities, general information on the

company (including its capital, assets and

liabilities, activities, financial position,

management and supervision, recent

development and prospects)

• financial information which must be presented in

the form of an accountant’s report on the last

three financial years of the company (and its

group)

• risk factors inherent to investing in the company

• directors’ statement that the company’s working

capital is sufficient for at least the next 12

months

• statement in respect of the lock-in agreement (if

any)

• prescribed details with regard to each director

(other directorships, insolvency, possible

convictions and public criticism by regulatory

authorities in the UK and elsewhere)

• contractual arrangements entered into by the

company relating to the payment of fees and

other benefits with a value of £10,000 or more

to a person and the company’s relationship to

such person

• persons interested in 3% or more of the voting

rights in the company’s share capital

• any other information that might be necessary to

enable investors to form a full understanding of

the matters contained in the document.

The content of the admission document must be

agreed by the Nomad. Both the company and its

directors are personally liable for the contents of

the admission document. Therefore, as a final

check (so as to protect the company and the

directors from any claims based on the admission

document), the content of the admission

document is invariably ‘verified’ by the legal

advisers who ensure that every statement in the

admission document is, wherever practicable,

supported by information from external sources. If

the management bears in mind the need to justify

every statement in the admission document by

external evidence from the very outset, much time

and effort will be spared in avoiding attempts to

verify statements which cannot be verified.

For companies not based in the English-speaking

world, the verification of the admission document

(as well as the due diligence) is also likely to take

less time, and hence be cheaper, if the company

has legal advisers who can read documents in the

local language (so that the supporting documents

do not have to be translated into English).

Ancillary documentation

Where the admission of securities to AIM is

coupled with the placing of securities, the key

agreement of the transaction is the placing

agreement, agreed between the company and its

broker, which will have to be carefully negotiated.

In the placing agreement, the broker undertakes


to act as the company’s agent to procure

investment to the agreed value in the company’s

share capital. The broker’s authority as an agent is

clearly defined in the agreement in order to

prevent him from binding the company in an

undesirable manner.

The broker may agree to underwrite the placing in

case he cannot raise sufficient investor interest. In

case of an underwritten placing agreement, the

conditions of the underwriting have to be carefully

considered to ensure that there is a real incentive

for the broker to raise satisfactory investor

interest in the company’s shares. Whereas

underwriting has traditionally been rare in AIM

transactions, it has recently become more

common as larger amounts have been raised

through major investment banks.

The directors of the company (alongside the

company itself) are expected, as a general market

practice, to personally warrant and give indemnity

to the broker that the content of the admission

document is true, accurate and not misleading. It

is possible, however, to negotiate certain

limitations to the directors’ personal

responsibilities.

If the company does not offer securities at the

time of admission, the company and the broker

will enter into an admission agreement which will

cover similar issues to the placing agreement, with

the exception of the provisions relating to the

placing of securities.

Documents prescribed by the AIM Rules, such as

the lock-in agreements (where necessary) and the

directors’ responsibility statements, will also be

drawn up and agreed between the Nomad and the

company prior to admission.

Additionally, some companies enter into relationship

agreements with their major shareholders. In such

agreements, the shareholders undertake not to

abuse their position to the detriment of the

company and other shareholders. Such agreements

(or lack of such agreements) should be disclosed in

the admission document.

Impact and admissionOnce all documentation is agreed and finalised,

the management of the company will present the

business to various potential investors in face-to-

face ‘roadshow’ meetings arranged for them by

the broker. The Nomad and public relations firm

make an invaluable contribution to the success of

the IPO by coaching the management in making

effective roadshow presentations. Whilst the

admission document is the key document from a

legal point of view, the decision of the investors

as to whether to invest is often heavily influenced

by the roadshow meetings and the analysts’

reports.

On impact day, the flotation is announced and the

application for admission is submitted to AIM. By

impact day, the investors will have returned to the

broker the signed placing letters together with the

funds. The funds are paid to the company on the

day of admission. Admission is granted three days

after impact day at 8.00am and trading

commences on that day.


Timing and costsThe whole process – from the planning stage to

admission – usually takes three to four months,

depending on the company’s degree of suitability

and the results of the due diligence exercise.

The costs of the flotation, if expressed as a

percentage of the funds raised, typically vary from

4% to 10% (depending on the amount raised). This

is taken into account when calculating how much is

required by the company.

Continuing obligationsAdmission to a stock exchange is not the end of

the process, but rather the beginning of a new

stage which is governed by new rules. Companies

admitted to AIM (AIM companies) have to comply

with the following rules:

General disclosure obligation

An AIM company must notify the Regulatory

Information Service of the London Stock

Exchange (there are specific agencies authorised

by the Exchange to disseminate information on

AIM companies, as set out in the AIM Rules)

without delay of any new developments which are

not public knowledge concerning a change in its

financial condition, its area of activity, the

performance of its business, or its expectations of

performance, which, if made public, would likely

lead to a substantial movement in the price of its

AIM securities.

It is the company’s responsibility to ensure that

the information it notifies is not misleading, false

or deceptive and does not omit anything likely to

affect the value of such information.

Specific disclosure obligation

The company must notify without delay:

• any transactions by its directors

• any changes to the holding of a significant

shareholder (ie holding 3% or more of the voting

rights of any class of securities)

• resignation, dismissal or appointment of any

director

• change in accounting reference date, name

issue or cancellation of AIM securities

• material change between its actual trading

performance or financial condition and any profit

forecast, estimate or projection included in its

admission document or otherwise made public

on its behalf

• change in the company’s Nomad or broker.

Half-yearly reports

An AIM-quoted company must prepare a half-

yearly report and notify it to the Exchange no later

than three months after the end of the relevant

period. The report must contain a balance sheet,

income statement, cash-flow statement and

comparative figures for the corresponding period

in the previous financial year.

Annual accounts

An AIM-quoted company must publish its annual

audited accounts prepared in accordance with UK,

US, Australian, Japanese or Canadian GAAP or

IAS.

Restriction on deals

An AIM company must ensure that its directors


and applicable employees (ie those who are

interested in 0.5% or more of a class of AIM

securities) do not deal in any of its AIM securities

during certain time periods prior to publication of

results and at times when there is price-sensitive

information concerning the company.

Substantial transactions

An AIM company must notify the Exchange

without delay as soon as the terms of any

substantial transactions are agreed. A substantial

transaction is a deal that exceeds 10% in any of

the class tests specified in the AIM Rules. Each

class test involves a comparison between the size

of the transaction with the size of the AIM

company (gross assets, profits, turnover,

consideration to market capitalisation and gross

capital).

Related-party transactions

Any transaction with a related party which

exceeds 5% in any of the class tests must be

notified. In addition, the directors (often having

committed with the Nomad) need to confirm that

the terms of the transaction are fair and

reasonable.

Reverse takeovers

A reverse takeover is an acquisition (or a series of

acquisitions within 12 months) that for an AIM

company would:

• exceed 100% in any of the class tests

• result in a fundamental change in its business,

board or voting control or

• depart substantially from the investment

strategy stated in the admission document of an

investment company.

Any agreement constituting a reverse takeover

must be approved by the shareholders, notified to

the Exchange and supported by the publication of

an admission document.

Market abuse and insider trading

Regulations governing market abuse also support

the principles of transparency. They state that it is

a criminal offence to make false or misleading

statements relating to investments in order to

induce anyone to deal, or refrain from dealing, in


investments or to exercise or refrain from

exercising rights attached to investments.

Creating a false or misleading impression of the

market or value of any investments is also an

offence.

Insider-trading rules also restrict directors’ rights

to deal with the company’s shares. These

regulations provide that a person is an ‘insider’ if

he deals in securities or encourages another

person to deal in securities while in possession of

inside information relating to those securities.

Directors of AIM companies are insiders for the

purposes of these rules.

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An issuer of debt securities wanting to list on the

London Stock Exchange (the ‘Exchange’) may

choose from two routes to listing: it may have its

securities listed either on the Regulated Market

(the ‘Main Market’) or the Professional Securities

Market (‘PSM’). The PSM was established in July

2005 following the implementation of the

Prospectus Directive (2003/71/EC). In response

to concerns from non-EU issuers, in particular that

the Prospectus Directive regime would require

them to seek listings outside the EU, the London

Stock Exchange established the PSM, an

exchange-regulated market combining detailed

disclosure requirements providing a good level of

information for investors whilst removing some of

the barriers for issuers. This article examines the

reasons behind the creation of the PSM, the

opportunities it offers Russian issuers of debt

securities, and the disclosure regime applicable to

debt securities admitted to trading on the PSM.

The Prospectus DirectiveThe regulatory regime imposed by the Prospectus

Directive created two levels of financial disclosure

obligations for issuers of debt securities wanting

to offer to the public or list on a regulated market

within the EU. The regime distinguishes between


The Professional Securities Market of the LondonStock Exchange Anna Delgado, Partner, Ashurst and Paula Clarke, Senior Associate, Ashurst

The Professional Securities Market is regulated by the London StockExchange and is not a ‘Regulated Market’ for the purposes of theProspectus Directive.

securities with denominations under euros 50,000

(which are designated as being aimed at the

‘retail’ market even if they are intended for

professional investors only) and those with a

minimum denomination of at least euros 50,000

(designated as being aimed at the ‘wholesale’

market).

An issuer wanting to offer or list retail securities is

subject to more stringent financial disclosure

obligations than an issuer wanting to offer or list

wholesale securities. The additional obligations

imposed under the retail regime are summarised

in Table 1 below. The key difference is that an

issuer following the retail regime is required to

prepare its financial information to International

Financial Reporting Standards (‘IFRS’), or an

equivalent standard, for any financial year starting

on or after 1 January 2007. Under the wholesale

regime, an issuer is required to provide a

summary of differences between the accounting

principles used by the issuer and IFRS. Since

2004, commercial banks operating in Russia have

been obliged to prepare financial statements in

accordance with both Russian Accounting

Standards (‘RAS’) and IFRS. The Ministry of

Finance of the Russian Federation recently


announced that RAS would be harmonised with

IFRS effective from 2010, but until such

harmonisation, Russian issuers can list their

securities on PSM where their financial

information is prepared in accordance with RAS.

The disclosure requirements may be of concern

Summary Must be written in non-technical language. May need to be translated into the language of the EEAmember state in which the securities are either offered to the public or listed.

Annual InformationUpdate

Provide a list of all the information the issuer has been obliged to publish or make available to thepublic over the preceding 12 months pursuant to securities laws in any other jurisdiction worldwide.

IFRS Accounts Prepare two years of historical financial information in accordance with IFRS or equivalent.

Interim Financials Interim financials must be included in the prospectus if it is dated more than nine months after theend of the last audited financial year.

Selected FinancialInformation

The prospectus must also contain a summary of selected financial information for the relevantfinancial periods.

Principal Investments Provide a description of principal investments made since the date of the last published financialstatements, plus a description of future principal investments that the issuer has committed to.

Trends and ProfitForecasts

Include information on any known trends, uncertainties, demands, commitments or events that arereasonably likely to have a material effect on the issuer’s prospects for at least the current financialyear. Any profit forecasts must be accompanied by an auditor’s report stating that the profit forecastis consistent with the issuer’s accounting principles.

Board Practices Give details of the issuer’s audit committee as well as a statement as to compliance with the localcorporate governance regime.

ConstitutionalDocuments

Include a description of the issuer’s objects and purposes and detailed information relating to theissuer’s share capital.

Securities SpecificInformation

Give reasons for the offer if different from making a profit and/or hedging certain risks.

Give information on taxes on the income from the securities withheld at source and an indication asto whether the issuer assumes responsibility for the withholding of taxes at source.

Give details of the conditions, offer statistics, expected timetable and any action required to apply forthe offer.

Give details of plans for distribution and allotment along with placing and underwriting arrangements.

Additional obligationsunder the TransparencyObligations Directive

This requires annual and semi-annual financial reports prepared using IFRS or an equivalent standard,including management reports detailing important events that have occurred within the relevantperiod. These reports are designed to help investors take investment decisions and relevant officersof the issuer will have to take responsibility for them. As publication of the reports will be EU-wide,there is potential multi-jurisdictional liability should the reports omit or misrepresent importantinformation.

Table 1: Additional requirements of the Retail Regime

to issuers who might want to list debt securities

denominated below euros 50,000, but which are

not aimed at the retail market. This is particularly

so for Russian issuers, whose accounting

standards are currently not deemed equivalent to

IFRS. The cost of re-stating or providing

additional disclosure under the retail regime

could be prohibitive to such issuers.

Before the introduction of the Professional

Securities Market in 2005, there was

considerable speculation about the potential

damage that the Prospectus Directive would

inflict upon European exchanges. There was an

expectation that non-EEA issuers would seek

alternative listings, outside the EEA.

The London Stock Exchange’s responseThe response of the London Stock Exchange to

the projected impact of the Prospectus Directive

was to create the PSM. The PSM is regulated by

the London Stock Exchange itself (ie it is an

‘exchange-regulated market’), and is therefore

not a ‘Regulated Market’ for the purposes of the

Prospectus Directive. Consequently the

Exchange was able to tailor the listing

requirements of the PSM to circumvent the

difficulties posed by the Prospectus Directive to

potential issuers of debt securities denominated

below euros 50,000, but aimed at the wholesale

market. Principally, the PSM allows issuers to list

debt securities with a denomination of less than

euros 50,000, whilst complying with the

‘wholesale’ standard of disclosure. In particular,

issuers need not restate their accounts to IFRS.

1 0 0 L i s t i n g i n L o n d o n : a p r o f e s s i o n a l h a n d b o o k

In March 2007 (only two years after its

establishment) over 670 issues of securities had

been admitted to trading on the PSM, raising just

over £40 billion since the market opened in July

2005. In August 2009, the total number of issues

of securities admitted to trading on the PSM was

553. The decrease can be explained by the fact

that US GAAP, Canadian GAAP and Japanese

GAAP are now considered equivalent to IFRS and

so the issuers who report in those standards are

able to list on the Main Market.

Reliability and legitimacy of the PSMDespite the fact that the PSM is an exchange-

regulated market and can therefore list debt

securities from issuers that do not produce IFRS

accounts, the disclosure obligations of issuers on the

PSM broadly mirror those of issuers listing their debt

on the Main Market. Issuers intending to have their

debt securities listed on the PSM have to comply

with Chapter 4 of the Listing Rules and produce

listing particulars which have to be approved by the

UKLA. Once a company has its securities admitted

to the PSM, it has to comply with the continuing

obligations set out in the Listing Rules.

By electing the Professional Securities Market

route to listing, issuers are able to list any type of

debt security, including those carrying the right to

convert or acquire equity, of any denomination and

follow the wholesale disclosure regime, without the

requirement for additional equity disclosure for

convertible securities (see Table 2 for a summary of

the disclosure requirements).

1 0 1L i s t i n g i n L o n d o n : a p r o f e s s i o n a l h a n d b o o k

Persons responsible Details of persons responsible for the information in the prospectus and declarations ofresponsibility for such information.

Auditors Details of auditors for the period covered by disclosed financial information. An indication of anyinformation in the prospectus that has been audited or reviewed by auditors and a copy of anyauditor report (or a summary of such report if permitted by the competent authority).

Advisers If mentioned in the prospectus, a statement of the capacity in which the advisers have acted

Risk factors Both in respect of the issuer’s ability to fulfil its obligations under the securities and any factorsmaterial to an assessment of the market risk associated with the type of securities beingissued. These must be given prominent disclosure and a separate heading.

Information about the issuer Including name, history and development, registration and incorporation details, domicile, legalform, details of registered office and/or principal place of business and any recent eventsmaterially relevant to an evaluation of the issuer’s solvency.

Information about thesecurities

Total amount being admitted; description of type, class, form and rank; identification code (egISIN); governing law; currency of the issue; rights attaching to the securities; interestprovisions; maturity date; repayment procedures; indication of yield; form of representation ofholders of the securities; statement of resolutions, authorisations and approvals under whichthe issue is made; issue date; description of any restrictions on free transferability; marketwhere securities will be traded; details of any paying agents and depository agents; estimate ofexpenses relating to admission to trading.

Interests of persons involved in the issue

Disclosure of any interest, of any legal or natural person, that is material to the issue.

Business overview Principal business activities and basis for any statements in the prospectus about the issuer’scompetitive position.

Organisational structure Details of group membership (if any) and disclosure of any dependence upon other entitieswithin the group.

No material adverse change declaration

Declaration of no material adverse change in the issuer’s prospects since the last auditedaccounts were published.

Optional profit forecasts If an issuer chooses to include a profit forecast, it must disclose its principal assumptions uponwhich the forecast has been made and include a statement that they have been properlyprepared.

Administration andmanagement

Details of members of the issuer’s administrative, management and supervisory bodies andtheir activities, plus any potential conflicts of interest.

Major shareholders Details of known direct or indirect ownership or control of the issuer and measures in place toprevent abuse of such control. Any arrangements known to the issuer that may later result in achange in such control.

Table 2: Summary of information to be disclosed in the prospectus for a listing of securities on theProfessional Securities Market

1 0 2 L i s t i n g i n L o n d o n : a p r o f e s s i o n a l h a n d b o o k

Financial information Audited historical financial information covering the latest 2 financial years and auditreport for each year. Where the financial information is not prepared in accordancewith IFRS (or equivalent) a declaration that it has not been so prepared and adescription of the differences between IFRS and the accounting principles adopted bythe issuer is required (although the requirement for such a declaration may in practicebe waived for many issuers admitting to the PSM).

Proceedings Information on any legal or arbitrational proceedings (covering at least the last 12months) that may have or have had a significant effect on the issuer’s financialposition.

Significant change in financialor trading position

Description of any such change affecting the issuers group that has occurred sincethe end of the last financial period covered by published audited or interim financialinformation.

Material contracts Summary of all material contracts not entered into in the ordinary course of theissuer’s business that could affect an issuer’s ability to meet its obligation to securityholders.

Expert information Details of any third party that has submitted information to the prospectus as anexpert and a declaration of any material interest of such a party in the issuer.

Responsibility for third-party information

Declaration that any information sourced from a third party has been accuratelyreproduced and that the issuer is not aware of any omission that would render theinformation inaccurate or misleading, and details of the source of such information.

Credit ratings Details of credit ratings relating to the issuer or its debt securities at the request orwith the co-operation of the issuer in the rating process.

Documents on display An undertaking to keep on display, and details of where the following documents aredisplayed: (i) issuer’s constitutional documents; (ii) documents referred to or includedin the prospectus; and (iii) historical information relating to the issuer and any of itssubsidiaries covering the 2 years preceding the publication of the prospectus.

Table 2: continued

Impact of the implementation of theTransparency Obligations DirectiveThe implementation of the Transparency

Obligations Directive in the UK has imposed new

periodic reporting requirements on issuers of

securities admitted to trading on Regulated

Markets. In light of these requirements the

Professional Securities Market may appear

increasingly attractive to Russian issuers. Should

the continuing obligations under the Transparency

Obligations Directive prove difficult to comply with

because the relevant issuer does not produce

IFRS accounts, issuers can transfer their debt

securities from the Main Market to the PSM. This

is a relatively easy process and incurs no charge

from the Exchange. A number of non-EU issuers

have already transferred their debt securities to

the PSM in order to avoid having to comply with

the Transparency Obligations Directive and other

European directives that apply only to the

Regulated Market.

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listing in london: guide for cis companies

Documents

london stock exchange14

london w1j

russia cis

cis companies

cis countries

authorslondon stock

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