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Hot Topics in International Listings

Hot Topics in International Listings. ABA Section of International Law April 5, 2006. Georges Ugeux Galileo Global Advisors Annemarie Tierney New York Stock Exchange Crispin Waymouth European Commission. Paul Dudek Securities and Exchange Commission Michael Gans

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Hot Topics in International Listings

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  1. Hot Topics in International Listings ABA Section of International Law April 5, 2006

  2. Georges Ugeux Galileo Global Advisors Annemarie Tierney New York Stock Exchange Crispin Waymouth European Commission Paul Dudek Securities and Exchange Commission Michael Gans Blake, Cassels & Graydon Nicolas Grabar Cleary Gottlieb Steen & Hamilton Speakers 2

  3. The Hot Topics • How real are the business advantages of multiple listing? • How serious are the practical challenges for multi-listed companies? • Will regulators act to foster multiple listings? • Easing deregistration: does it work? Will it lead to more or less multiple listing? • Is multiple listing on its way out? 3

  4. Outline • Costs and benefits of U.S. listing for foreign issuers • The U.S. exchanges and international listings • EU regulator’s perspective • The SEC approach to cross-border listings • A Canadian perspective • Practical challenges for issuers 4

  5. Cost/benefits of U.S. listing Georges UgeuxGalileo Global Advisors

  6. Cost/benefits of U.S. listing: the initial benefits • Financial considerations • Access to the largest pool of capital • Increasing liquidity of the stock • Strategic considerations • Acquisition currency • Credibility with customers • US labor force • Branding considerations • Seal of Approval • Visibility on the US markets 6

  7. Costs/benefits of U.S. listing: financial considerations • The globalization of the US equity markets happened on the wheel of the European privatizations: foreign private issuers needed the US capital market to place their shares • Two things happened • The trading volume was disappointing • The European and Asian markets improved their liquidity and most IPOs could be placed in Europe, Japan or Hong Kong • While the pool of capital is still the largest in the world, the interest of US investors has been limited to some sectors and some countries 7

  8. Costs/benefits of U.S. listing: strategic considerations • The acquisition currency remains a key attraction but • It is limited to companies acquisitive in the US • It is limited to stock acquisitions rather than cash • US investors are increasingly accepting non registered shares (Reg S, 144A…) • A US listing is still of great commercial use • Only companies with large workforce in the US do it for stock options and share programs 8

  9. Costs/benefits of U.S. listing: branding considerations • The seal of approval • US corporate scandals have seriously tarnished the value of that seal of approval • US GAAP are no longer considered a better system as IFRS becomes the international norm • The visibility • A US listing remains an exceptional PR operation • It sends a message of global ambitions 9

  10. Cost/benefits of U.S. listing: the costs • The application of Sarbanes Oxley to foreign private issuers completely changed the legal framework • The costs associated with the formalistic approach to accounting and controls of the PCAOB are unbearable for medium sized companies • The post 9/11 “anti terrorist” measures increased the compliance costs • The advantage of foreign listings for acquisitions have been seriously challenged by protectionist attitudes in the United States 10

  11. Costs/benefits of U.S. listing: what needs to be done? • The Exchanges need to rethink their trading model for foreign private issuers • Get rid of the ADR fragmentation • Improve the trading volume by reviewing the trading system applied to foreign private issuers • The regulation must be amended in two directions • A clear and reasonably easy exit strategy (in process) • Accepting the equivalency of some foreign practices for the purpose of US listing • Conflicts of law must favor domestic laws and regulations • Nothing will happen unless IFRS is recognized in the US as acceptable (2009) 11

  12. Costs/benefits of U.S. listing: conclusion • The cost/benefit analysis has substantially weakened the advantage of a US listing for a non-strategic issuer with a well developed domestic capital market • The US market will continue to be attractive to companies whose domestic markets are underdeveloped • Most actively traded and strategic companies will remain listed 12

  13. Cross Border Listings: The Perfect Storm Anne Marie TierneyNew York Stock Exchange

  14. Foreign Private Issuers are Increasingly Choosing Not to Register in the United States • From 2000-2002, NYSE averaged 48 international listings per year. • From 2003-2005, that average declined to 18. • In 2005, only one of the 25 largest IPOs in the world chose to register and list in the United States. 14

  15. Capital Raising Developments • In 2005, 224 non-US IPOs raised US$ 86 billion in the U.S. capital markets. • 94% of these offerings ($80.5 billion) included a Rule144A tranche. 75% ($60.5 billion) of the proceeds were raised outside the home market. • 153 of the 189 companies that had a Rule 144A tranche listed on their home market, 11 listed on LSE and 20 listed on HSE. 15

  16. Rule 144A $Billions (Global Value Raised) % Total number of IPOs 173 263 53 52 57 142 224 Source:, Dealogic, Bloomberg, Exchanges 16

  17. Trading • In 2005, US investment in non-U.S. equities reached a record $2.8 trillion (18%) up from $1.2 trillion (10%) in 1997. • During the same period, the NYSE share of non-U.S. listed global trading fell to 14%, down from 30% in 1997. 17

  18. Trading • In 2005, NYSE non-U.S. trading reached a record volume of 40.877 million shares representing 10.3% of the NYSE average daily volume. • NYSE share of global trading was flat since 2002 but has declined significantly since 1996. Source: NYSE 18

  19. Listings Competition • A recent survey published by the LSE indicates that 90% of foreign companies that considered listing on a US exchange felt that the demands of SOX made listing on the LSE more attractive. • The NYSE is increasingly competing with the LSE and HSE for emerging market listings (in Russia and China particularly), while local exchanges are increasingly listing domestic global IPOs. 19

  20. Listing Competition Sources: WFE, Exchanges 20

  21. 25 Largest IPOs in 2005 21

  22. Listings Competition Sources: NYSE, Dealogic, Exchanges 22

  23. The Perfect Storm • Sarbanes-Oxley internal control compliance costs. • Perceived increased liability. • Lack of accounting convergence. • Significant increase in Rule 144A offerings. • Increased depth of home markets. • Heightened delisting/deregistration interest. • Foreign companies increasingly do not need the • US public markets to satisfy their capital needs. 23

  24. An EU regulator’s perspective Crispin WaymouthEuropean Commission

  25. An EU regulator’s perspective Three issues • The Financial Services Action Plan 1999-2004 • Financial Services Policy 2005-2010 • The EU-US Financial Markets Regulatory Dialogue 25

  26. An EU regulator’s perspective The EU Single Market • EU passport • Right of establishment (branching) • Freedom to provide services • Harmonisation of rules • Prudential requirements • Consumer/investor protection • Cooperation/Information sharing 26

  27. An EU regulator’s perspective Commission makes formal proposal European Parliament Council of Ministers Agreement reached on Directive/Regulation 27

  28. An EU regulator’s perspective I. Financial Services Action Plan • Tackling barriers to cross-border investment: • UCITS, Pension Funds, Collateral, Clearing and Settlement, Take Over Bids • Giving investors adequate information: • International Accounting Standards, Prospectuses, Disclosure Requirements • Strengthening the supervision of companies and markets: • Corporate Governance Codes, Auditor Independence Recommendation, IAS, Capital Adequacy Framework, Market Abuse, Financial Conglomerates • Tackling all three: MIFID 28

  29. An EU regulator’s perspective Level 1: Broad Framework Principles in Directive/Regulation Level 2: Implementing Rules delegated to Commission, assisted by ESC and CESR Level 3: Strengthened Co-operation between Regulators to Improve Implementation Level 4: Strengthened Enforcement of Community Law Lamfalussy Approach 29

  30. An EU regulator’s perspective II. Financial Services White Paper December 2005 • “Dynamic Consolidation” based on: • Removing remaining economically significant barriers; • Implementing, enforcing and continuously evaluating existing legislation; • Enhancing supervisory cooperation and convergence, deepening financial relations with other global financial marketplaces. 30

  31. An EU regulator’s perspective III. EU-US Financial Markets RegulatoryDialogue • Key EU-US issues for issuers: • Accounting Standards; • Deregistration; • Sarbanes-Oxley/8th Company Law Directive 31

  32. SEC’s Approach to Cross-Border Listings Paul DudekSecurities and Exchange Commission

  33. SEC’s Approach to Cross-Border Listings • Until 1970’s / 1980’s, no distinction • But, exceptions from proxy rules and Section 16 • Exchange Act registration exemptions • Rule 12g3-2(a) – 300 US holders • Rule 12g3-2(b) – information submission • Case-by-case approach on disclosure and accounting 33

  34. SEC’s Approach to Cross-Border Listings 34

  35. SEC’s Approach to Cross-Border Listings 1970’s & 1980’s – • Growing Internationalization of the Securities Markets • Nasdaq Exclusion • FPI Forms and Integrated Disclosure • U.K. Privatizations • 1988 SEC Study 35

  36. SEC’s Approach to Cross-Border Listings • “The legislative history of the Securities Act indicates an intent to treat foreign private issuers … the same as domestic issuers.” • “The Commission has generally perceived its function as neither discriminating against nor encouraging foreign investment in the United States or investments in foreign securities.” 36

  37. SEC’s Approach to Cross-Border Listings Two competing policies: • Investing public needs same type of basic information for an investment decision, whether the issuer is foreign or domestic. • Interests of the public are served by an opportunity to invest in a variety of securities, including foreign securities. 37

  38. SEC’s Approach to Cross-Border Listings 1990’s: • Increased issuer interest in the U.S. capital markets • SEC accommodations to facilitate access • Choice of currency, some IAS accepted, reduced reconciliation, MJDS • But core disclosure and financial statement requirements remain 38

  39. SEC’s Approach to Cross-Border Listings Where Are We Today? • Deregistration • IFRS 39

  40. SEC’s Approach to Cross-Border Listings • Internet Bubble • U.S. Scandals and Sarbanes Oxley Act of 2002 • Apply letter and spirit of the law to foreign issuers • But with targeted accommodations 40

  41. Canadian Perspective Michael GansBlake, Cassels & Graydon

  42. Canadian Perspective • Access of U.S. capital markets by Canadian issuers strong since implementation of MJDS in 1991 • Approximately 200 Cdn based inter-listed issuers • Trading is roughly 50:50 (US:Cdn exchanges, volume and value) • Also Exxon AB offerings • More recently, U.S. issuers accessing Canadian capital markets • still relatively few • removal of foreign property limits in Canada • strong demand for yield product in Canada • resource-based issuers looking at TSX • Quebec translation requirement remains problematic • Regulation S also problematic 42

  43. Canadian perspective: MJDS southbound • Effectively allows eligible Canadian issuers to prepare and file registration statements and offer and sell securities in the U.S. on basis of Canadian regulatory regime • Must be a foreign private issuer with $75 m market cap • Remains subject to SEC review, but unusual • Remains subject to civil liability and anti-fraud provisions of 1933 Act and 1934 Act • Periodic reporting also on basis of Canadian forms under cover of 6-K and 40-F • Reconciliation to U.S. GAAP when using F-10 43

  44. Canadian perspective: U.S. issues for Canadian issuers • Litigation environment always a concern, additional divergences with SOX • Section 404 • becomes applicable to foreign private issuers that are accelerated filers for financial years ending after July 15, 2006 (remaining foreign private issuers for financial years ending after July 15, 2007) • Canadian regulators have adopted CEO and CFO certification of effectiveness of internal controls and disclosure of conclusions (financial years ending on or after December 31, 2007) but will not require internal control audit opinions • Prohibition of issuer loans 44

  45. Canadian perspective: U.S. issues for Canadian issuers • Corporate Governance • Canadian regulators have adopted corporate governance guidelines and disclosure requirements • Where an issuer does not comply with a particular recommended practice, the issuer must explain how it addresses the objective of the recommended practice • Audit committee independence • narrower range of relationships to be considered when evaluating independence than comparable NYSE rule 45

  46. Canadian perspective: U.S. issues for Canadian issuers • Securities Offering Reform • Only eligible issuers reporting under 10K or 20F (not 40F) eligible for WKSI status • Canadian regime quite responsive, so lack of automatic registration not overly harmful • Shelf system remains available • Use of electronic roadshows requires relief in Canada • Canadians starting to look at AIM 46

  47. Canadian perspective: foreign issuers in Canada • Broad reporting exemptions generally available if reporting in another major jurisdiction • Generally used for debt offerings, including guaranteed debt of subsidiary finance companies, and exchangeable share companies • Foreign reporting issuer • incorporated outside Canada, unless more than 50% of shares are held in Canada and one or more of: • more than 50% of assets in Canada, or • business principally administered in Canada • SEC Foreign Issuers • foreign reporting issuer • Class of securities registered under section 12 of the 1934 Act or reporting under section 15 of the 1934 Act • not an investment company 47

  48. Canadian perspective: foreign issuers in Canada • Designated Foreign Issuers • Reporting in Australia, France, Germany, Hong Kong, Italy, Japan, Mexico, Netherlands, New Zealand, Singapore, South Africa, Spain, Sweden, Switzerland, UK or Northern Ireland • Canadian shareholding cannot exceed 10% • Exemptions • Material change reporting • Financial statement reporting • Annual Information Form and MD&A reporting • Business Acquisition reporting • Proxy and proxy solicitation requirements 48

  49. Practical challenges for issuers Nicolas GrabarCleary Gottlieb Steen & Hamilton LLP

  50. Practical challenges for issuers • Financial reporting issues • GAAP • Non-GAAP financial measures • Periodic reporting • Communication with analysts and the market • Disclosure of material developments 50

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