University of Milan Law School Legal English Course

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University of MilanLaw SchoolLegal English Course

LISTING ON THE STOCK EXCHANGE

IPO - INITIAL PUBLIC OFFERINGS

April/May 2011

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DEFINITION OF “LISTING”

• “Listing” means the admission of a company’s shares to theOfficial List of a given stock exchange – whether or not as aresult of an IPO – and thereby their admission to trading.

• As a result of the listing, the shares float and can becontinuously and easily purchased and sold by the publicinvestors.

• Although most of the listings occur as a result of a publicoffering (IPO), a listing may also occur in many othercircumstances.

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DEFINITION OF “IPO”

IPO = Initial Public Offering

Offer of a company’s shares to the public

for the listing on a stock exchange

the flotation that follows the IPO allows the company’s shares to becontinuously and easily purchased and sold by the public investors.

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PURPOSES

THE CAPITAL STRUCTURE OF A COMPANY

Shareholders Lenders

Equity Debt

Company’sresources

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PURPOSES

THE CAPITAL STRUCTURE OF A COMPANY - EQUITY

• Founders’ funds: money provided by the people who startedthe business from scratch.

• Venture capital: money provided by VC firms, i.e. entitiesthat help promising, early-stage businesses to develop andgrow.

• Private equity: money provided by PE firms, i.e. entities thatprovide the company the financial resources to a later andfurther development and growth.

ALL THOSE FORMS MAY COEXIST AT THE VARIOUS STAGES OF THE COMPANY’S HISTORY

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PURPOSES

THE CAPITAL STRUCTURE OF A COMPANY - DEBT

• Bank loans: money provided by banks or other financialinstitutions by virtue of loan agreements.

• Debt securites: money provided by public or private lendersby virtue of the issuance of bonds or other securities.

ALL THOSE FORMS MAY COEXIST AT THE VARIOUS STAGES OF THE COMPANY’S HISTORY

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PURPOSES

An IPO may consist in:

• Share Capital Increase: the company issues new shares tobe subscribed by the public investors; and/or

• Sale: current shareholders sell to the public investors all orpart of their stake in the company.

By going public, the company may:

• Raise money: to finance the company’s expansion plans – orto stay competitive in its current business – without incurringinto any debt; and/or

• Allow its shareholders to realize their investment: byselling (all or part of) their shares to the public investors;and/or

• Optimize its capital structure: by paying off all (or part of) itsdebt.

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PURPOSES

The choice between the different IPO structures depends on:

• Shareholders’ structure: if the company has VC/PE Firms (orthe family founders) among its shareholders, they may sell (apart of) their stake to the public investors as an exit strategy,instead of selling it to another private investor;

• Stage of company’s development: if the company is anearly-stage business in need of money to finance its growth andexpansion, the IPO will contemplate a new issue of shares byvirtue of a capital increase, to gain access to capital withoutincurring into any debt;

• Competitiveness: if the company needs money to staycompetitive in its business, the IPO will contemplate a newissue of shares by virtue of a capital increase as well.

THOSE STRUCTURES MAY COEXIST IN THE SAME IPO

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PURPOSES

Further elements may lead to listing:

• Reputation developement: the process of going public andthe life as a public company require high-standard governanceand management by the company; by going public a companygives a signal of high quality showing its will to take thechallenge to adopt and maintain high standards of governanceand management.

• Core market visibility: going public enhances the value of analready good market reputation because of the increasedcoverage by the market and the media a public companyreceives.

• Labor market visibility: being a public company increases theopportunities to attract (or keep) experienced managers andemployees.

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SETTING UP THE PROCESS

The set up process is aimed at veryfing if the company:

• Needs an IPO to address its capital requirements.

• Has a business plan and a competitive position (or outlook)attractive to potential investors.

• Has a management team ready and capable to withstand theheavy scrutiny it will receive once the company is listed andwilling to commit time and resources to do all the activitiesusually required to a listed company’s management – further torunning the business.

• Satisfies the regulatory requirements set forth by the relevantstock-exchange listing rules.

• Is properly organized to tackle all the abovementioned issuesrelated to being a listed company and, if not, how to get readyfor that.

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PEOPLE INVOLVED

The pre-listing set up process is run by the following people:

• Company’s management: in charge of the whole process.

• Business consultants: provide advice on how to organize thecompany prior to the IPO to make it more attractive to themarket.

• Lawyers: provide advice with reference to all the legal issuesof the IPO/listing (governance, regulatory issues, etc.).

• Auditors: certify the company’s accounting documents andprovide advice on the tax and accounting strategies;

• Other consultants: to advise on specific single issues thatmay arise from time to time.

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PEOPLE INVOLVED

The following people are usually hired once the company hasdecided to go public:

● Sponsor: an investment bank in charge of assessing (under itsown responsibility) if the company is suitable for the listing, aswell as providing advice on the best ways to structure the IPO.

● Corporate broker: is a bank who plays as interface betweenthe company and the market, providing a vital analysis on themarket situation and the likely response the potential investorswill give to the IPO, as well as stimulating the businesscommunity’s interest on the IPO itself.

● PR firm: helps to influence the opinion that the public and thepress will have on the IPO itself and on the companythereafter.

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THE CORE OF THE PROCESS

Once the decision to “go public” and to organize the Companyaccordingly has been made, a “multi-track process” takes place:

Due Diligence

Documents’ Drafting

Valuation

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THE CORE OF THE PROCESS

●Due Diligence: an extensive review of the company aimed atensuring its suitability for the listing - to have a clear andaccurate view of the company to be represented in theIPO/listing documents under the responsibility of the Sponsorand of the company’s directors;

●Documents’ Drafting: preparation of the documents to bepublished for the IPO/listing – the most important of thosedocuments is the prospectus, that sets out a coherent andcomplete description of the business, to allow the potentialinvestors to have a clear view of the company and assess theirinterest in investing in the company;

●Valuation: in the case of an IPO, the company is valued todetermine the IPO price – the results of the valuation activityallow the company’s management to make the strategic andfinancial decisions with reference to the IPO.

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THE PROSPECTUS

● The prospectus is the most important IPO/listing document, itis the document by which the company introduces itself to theinvestors and is the main source of information they have toassess the convenience of investing in the company’s shares.

● The investors must be enabled by the company – under theresponsibility of its directors and of the Sponsor – to make aninformed assessment of the assets and liabilities, financialposition, profit and losses, prospects and of the rightsattaching to the company’s shares.

● Those requirements are set forth by the EC Directive 2003/71and the EC Regulation 809/2004 in order to (i) ensure equalinvestors’ protection standards for the whole European Union,(ii) improve European markets’ efficiency, (iii) broaden therange of the intra-EU investments in listed companies bymaking such companies more easily comparable.

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THE PROSPECTUS

The prospectus consists of three parts:

The share registration document

The pro-forma financial information document

The shares securities note

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THE PROSPECTUS

● The share registration document: contains generalinformation about the company’s structure, business overview,investments and strategic plans, risks, corporate governance,present and future shareholder structure, financial situationand outlook as well as its share capital structure.

● The additional pro-forma financial informationdocument: this document is mandatory only in the event ofsignificant gross change in the situation of the company due toa particular transaction recently occurred.

● The shares securities note: contains information regardinga description of the rights attached to the company’s sharesand the procedure for the exercise of any rights attachedthereto – as well as a description of the IPO price andprocedures.

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THE PROSPECTUS

● The prospectus is prepared by the company with the help of allthe relevant advisors during repeated meetings aimed atensuring that all the statements reported are correct.

● All this cautiousness is for the protection of the personsresponsible for the data and the information reported in theprospectus (i.e. the Sponsor and the company’s directors).

● The prospectus should also represent the company in anappealing fashion to the potential investors.

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AUTHORITIES’ INQUIRY

● Prior to its publication, the prospectus must be approved bythe relevant stock-exchange authority and, in some cases, bythe market on which the company’s shares will be listed.

● Once a draft of the prospectus is ready, it is filed (togetherwith other documents) with the relevant national stock-exchange authorities and with the relevant listing market foran inquiry.

● The inquiry is aimed at ensuring that the prospectus containsall the information and data and complies with the relevantregulation provisions – whose aim is to ensure that theinvestors are able to assess the convenience of investing in thecompany’s shares.

● During the inquiry, the Authorities may ask the companysupplemental information and clarifications.

● The process takes several weeks, with the stock-exchangeauthority usually taking the final 20 working days for itsapproval.

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AUTHORITIES’ INQUIRY

● The national stock-exchange Authority and the market mayapprove or reject the prospectus - thereby authorizing or notthe IPO and/or admitting or not the company to listing – andthe prospectus may be published.

● The stock-exchange Authority’s approval gives the prospectusa “European Passport”, i.e. that the IPO may be carried out inevery EU Country without necessity of further approval,provided that the relevant stock-exchange authorities, as wellas the ESMA, are duly notified.

● The procedures and the issues for the IPO’s/listings on themost important US markets – the New York Stock Exchangeand the NASDAQ – are basically the same, with the Companyhaving to fulfil the requirements of the abovementioned U.S.market regulations, the SEC (the U.S. stock-exchangeAuthority), as well as the provisions of the 2002 Sarbanes-Oxley Act.

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UNDERWRITING AGREEMENT

● In an IPO, the Underwriting Agreement is entered into by thecompany and the Corporate Broker.

● The Corporate Broker is in charge of selling the IPO shares tothe public investors through its sales force.

● The Corporate Broker may also bear the IPO proceeds risk – bybuying the entire offering from the company for a fixed priceand reselling the shares at whatever price it can get.

● In other cases, the Corporate Broker guarantees only a “besteffort” to sell the offering, being paid for what he sells.

● The U.S. investment bank W.R. Hambrecht has developed anInternet-based auction system for the IPO’s it underwrites, butso far, this method has seldom been used.

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IPO MECHANISMS

The IPO mechanisms fit into the following categories:

Book-building

Auction

Fixed price

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IPO MECHANISMS

● Book-building: the Corporate Broker sales force approachespotential investors and compiles (nonbinding) indications ofinterest, assessing institutional and retail demand for the IPOand determining the final size, timing and pricing of the IPOitself - the process is helped by the PR firm, that organizespresentations and road shows with potential investors andhelps putting the company “on the map” of the businesscommunity. Book-building is the dominant mechanismworldwide.

● Auction: the investors submit to the corporate broker theamount of shares they are willing to buy an the price they arewilling to pay the offer price is determined by the intersectionof the demand curve and the fixed supply.

● Fixed price: the company assesses the price and theCorporate broker collects the orders – the process may becombined with a prior book-building.

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SHARE ALLOCATION

● The IPO mechanisms may be run prior to the actual publicationof the prospectus, the Corporate Broker compiles (nonbinding)indications of interest, assessing institutional and retaildemand for the IPO and determining the final size, timing andpricing of the IPO itself.

● After the publication of the prospectus, the Corporate Brokercollects the final (and binding) applications from the investorsas well as the cash to be paid by them as consideration.

● If more shares are requested than are available, the CorporateBroker may be granted the “Greenshoe Option” – by which it isallowed to allocate to the investors additional shares.

● In the opposite case, if less shares are requested than areavailable, the Corporate Broker may pick up the unallocatedshares at the agreed price.

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START OF TRADING

● At the end of the IPO process, once the shares have beenallocated to the investors and the company (and/or the sellingshareholders) has (have) cashed the IPO price, the sharesstart floating and can be continuously traded by the investors.

● In the case of a listing without an IPO, the shares start floatingright after the publication of the prospectus.

A PUBLIC COMPANY IS BORN

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LIFE AS A PUBLIC COMPANY

● In the first days of trading, the company’s shares tradevolumes (i.e. the number of the company’s shares traded on agiven day) are usually high – until the market settles anddiscovers the right price.

● This process may drive the shares’ price excessively down,increase their volatility (i.e. the instability) and, ultimately, therisk of the investment.

● High volatility is not always justified by the company’ssituation and may harm the shares’ performance in the longrun.

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● To expedite the price discovery by the market and to keepvolatility down, the stabilization activity takes place.

● A bank (the Sponsor, the Corporate Broker or a third bank)engages in market transactions (“buy” or “sell” orders) toabsorb the excessive supply/demand - thereby stabilizing theshares’ price at a certain level.

● The provision of the stabilization activity may have a positiveeffect on the IPO value, with the investors knowing in advancethat the price they will pay will not fall too much once thecompany starts floating.

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● Stabilization alters the price discovery process.

● As a general rule, practices that impede the unfettered priceformation are prohibited.

● Nonetheless, stabilization is aimed at reducing the volatility,and is seen as an effective mechanism for fostering an orderlydistribution of the company’s shares and promotes the interestsof both the company and the investors.

● Therefore, stabilization – as long as it follows certain guidelines– is granted a “safe harbor” (EC Directive 2003/6).

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Stabilization can be also achieved by the following pre-IPOprovisions:

● Lock-up undertakings: (some of) the company’s coreshaeholders undertake not to sell their shares, thereby showingthe market their commitment to the company – theseprovisions are mandatory for the listing in some markets.

● Extra shares: after a certain period of time, the most faithfulshareholders are granted extra shares for free – therebyencouraging the shareholders not to sell their shares right afterthe IPO.

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DUTIES AND RULES OF CONDUCT

Once a company is listed, the management must focus on thefollowing issues – the way they are tackled affects the way thewhole company is run as well as the individual manager’sbehavior – at risk of breaking the law or negatively affect thecompany’s share price:

● Loss of control: the management of a listed company musttake into account outside shareholders’ opinion (particularlywhen it comes to make decisions that require the shareholders’approval) – at the risk of being ousted by the shareholders’meeting.

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● Loss of privacy: the way a listed company is run is under aheavy scrutiny by the public, the press and the market,therefore, the company’s results (good or bad) are magnifiedby all the attention the company has from being listed and thatmay have a big impact on the share price.

● Disclosure of information: a listed company has anobligation (EC Directive 2003/6) to timely and accurately notifythe market of any information which is likely to affect the shareprice, to ensure that all the investors trade the company’sshares on the basis of the same information and data.


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● Directors’ behavior: further to running the business, thelisted company’s directors must, on one hand, ensure thecompliance with the rules and the practices placed on a listedcompany and, on the other hand, comply themselves with theirresponsibilities; such responsibilities include (i) a broad set ofdisclosure rules related to their compensation (salaries, stock-options, etc.) and the dealings they conduct in the company’sshares, (ii) bans on dealing in the company’s shares duringmany periods of the year, (iii) monitoring of their fellowdirectors’ behavior, (iv) prohibition from exploiting their insideinformation (EC Directive 2003/6).


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● Financial reporting obligations: listed companies mustprovide the market with periodical financial reports andstatements; such reports must accurately reflect the situationof the company and be fully certified by an Auditing Firm toensure the compliance with the relevant financial reportingstandards (IFRS/U.S. GAAP/2002 Sarbanes-Oxley act).

● Transaction disclosure: extensive information about all themajor strategic transactions the company is involved into.


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● Compliance with the best practices: further to thecompliance with the provisions of law and regulations, listedcompanies abide to a wide range of practices and codes ofconduct to improve their relations with the public and thebusiness community.

● Relationship with investors and media: theabovementioned issues are also tackled by planning and givingan effective message about adopted principles and policies tothe public, the press and the whole business community.


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● Monitoring shareholders activity: the management must beat any time well aware of how the shareholder base isstructured (the balance between institutional investors andprivate individuals, and the amount of the single investor’sshareholding), to better assess the shareholders’ relationshipissue and to spot early any stake-building behind a potentialtake-over threat.

● Dividend policy: choice between an immediate satisfaction ofthe shareholder base (an annual dividend payout) and the long-term management logic (no dividend distribution).


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● Footing the “compliance bill”: all the issues related tofloating are tackled at a substantial cost, the cost of the timethe company’s management devotes to them and the fees tobe paid to the relevant advisors; although, a proper answer toall those issues may enhance the reputation of the companyand of its management as well – to the benefit of the shareperformance in the long run.


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● Analysts are people (usually working for investment banks orother financial institutions) who examine the company to pointout its strenghts and weaknesses to produce useful informationfor the investors.

● The information consists in “buy”, “hold” or “sell”recomendations, as well as forecasts for future earnings andtarget prices.

● Analysts’ recomendations may deeply influence the investors’opinion of the company, thereby driving up or down the shares’price.

ANALYSTS’ COVERAGE

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● The larger a company is, the more attention it draws fromanalysts.

● The more attention the company receives from analysts, themore liquid its shares may become.

● The management of the company has an open-line withanalysts – an effective communication with analysts is anintegral part to a good investor relations policy.


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● Analysts’ independence has become a major issue – particularlywhen they work for the same company that serves asSponsor/Corporate Broker.

● A conflict arises whenever the unbiased analysts’ opinion of thecompany is at odds with the positive opinion theSponsor/Corporate Broker have.

● To grant fair and unbiased recommendations (and to preservetheir reputation after the last investigations and cases),investment banks have created “Chinese walls” betweencorporate finance and equity research departments.


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A listed company has a broader access to capital than aprivately-held one:

●Follow-on offerings: the company may issue additionalshares (“rights issue”) whenever it wants to finance its furthergrowth without incurring into debt.

● Issuance of bonds: a listed company can issue bonds or otherdebt securities more easily.

●Acquisition currency: listed shares may be used to pay forthe consideration of later corporate acquisition deals.

POST-LISTING FINANCING

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●Visiblity: being listed enhances the visibility of the companyand eases its access to “traditional” form of financing.

Furthemore, the existing shareholders may sell part of theirshareholding later if they so choose (in compliance with therelevant market regulations).

POST-LISTING FINANCING

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●Cross (or Dual)-listing: a company is admitted to trading(following an IPO or not) in more than one market, to enhanceits liquidity and visibility.

●Non-IPO listings: every time the company’s shares arealready widely distributed among the public investors and thereis no need to enlarge the shareholder base to meet theregulatory requirements: (i) post merger/LBO listings, (ii) postspinoff listings, (iii) listing of a company whose shares arealready widely distributed.

SPECIAL LISTINGS