Hot Topics in International Listings

1
Hot Topics in International Listings

• ABA Section of International Law
• April 5, 2006

2
Speakers

• 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

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?

4
Outline

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

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

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

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

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

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

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)

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

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.

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.

16
Rule 144A
Source, Dealogic, Bloomberg, Exchanges
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.

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
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.

20
Listing Competition
Sources WFE, Exchanges
21
25 Largest IPOs in 2005
22
Listings Competition
Sources NYSE, Dealogic, Exchanges
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.

24
An EU regulators perspective

• Crispin WaymouthEuropean Commission

25
An EU regulators perspective

• Three issues
• The Financial Services Action Plan 1999-2004
• Financial Services Policy 2005-2010
• The EU-US Financial Markets Regulatory Dialogue

26
An EU regulators 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

27
An EU regulators perspective
Commission makes formal proposal
European Parliament
Council of Ministers
Agreement reached on Directive/Regulation
28
An EU regulators 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

29
An EU regulators perspective
Lamfalussy Approach
30
An EU regulators 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.

31
An EU regulators perspective

• III. EU-US Financial Markets RegulatoryDialogue
• Key EU-US issues for issuers
• Accounting Standards
• Deregistration
• Sarbanes-Oxley/8th Company Law Directive

32
SECs Approach to Cross-Border Listings

• Paul DudekSecurities and Exchange Commission

33
SECs Approach to Cross-Border Listings

• Until 1970s / 1980s, 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

34
SECs Approach to Cross-Border Listings
35
SECs Approach to Cross-Border Listings

• 1970s 1980s
• Growing Internationalization of the Securities
  Markets
• Nasdaq Exclusion
• FPI Forms and Integrated Disclosure
• U.K. Privatizations
• 1988 SEC Study

36
SECs 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.

37
SECs 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.

38
SECs Approach to Cross-Border Listings

• 1990s
• 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

39
SECs Approach to Cross-Border Listings

• Where Are We Today?
• Deregistration
• IFRS

40
SECs 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

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 5050 (USCdn 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

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

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

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

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

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

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 MDA reporting
• Business Acquisition reporting
• Proxy and proxy solicitation requirements

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

51
Practical challenges for issuers

• Corporate governance
• Trading by corporate insiders
• Trading policies
• Trade reporting

52
Practical challenges for issuers

• Share repurchase programs
• Corporate control transactions
• Offerings
• Employee share programs
• Rights offers
• Fixed-incometwilight of the Luxembourg listing?
• Single-regulator model vs. multiple-regulator
  model
• Equity case studiesBrazilian, Russian and
  Chinese IPO booms