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 regulator’s perspective

The SEC approach to cross-border listings

A Canadian perspective

Practical challenges for issuers

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

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

0

10

20

30

40

50

60

70

80

90

100

1999 2000 2001 2002 2003 2004 2005

40

50

60

70

80

90

100

144A IPO Value SEC Registered IPO Value 144A as % of Total Value Raised

Total number of IPOs173 263 53 52 57 142 224

$Billions(Global Value

Raised)%

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

Source: NYSE

0

5

10

15

20

25

30

35

40

45

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0%

5%

10%

15%

20%

25%

30%

35%

Volume (bn) ADRs Outs. (bn) % of w/w 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.

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

0

100

200

300

400

500

600

1997 1998 1999 2000 2001 2002 2003 2004 2005

NYSE LSE NASDAQ Hong Kong

Sources: WFE, Exchanges

21

25 Largest IPOs in 2005Company Total Value Exchange

China Construction Bank Corp - CCB 9,226,737,293 Hong KongElectricite de France SA - EDF 9,031,958,079 ParisGaz de France 5,465,451,630 ParisChina Shenhua Energy Co Ltd 3,271,726,748 Hong KongBank of Communications 2,160,872,439 Hong KongPartyGaming plc 1,658,300,000 LondonGoodman Fielder Ltd 1,593,933,743 Australian Stock Exchange;New Zealand (Wellington & Auckland)Premiere AG 1,560,953,642 FrankfurtSistema 1,556,828,550 London; Moscow; PortalRaiffeisen International Bank-Holding AG 1,455,154,168 ViennaHuntsman Corporation 1,385,227,302 NYSEKazakhmys plc 1,351,673,386 LondonSUMCO Corp 1,339,534,884 TokyoVakifbank 1,286,094,675 IstanbulChina Cosco Holdings Co Ltd 1,225,425,950 Hong KongSociete des Autoroutes du Nord et de l'Est de la France - SANEF 1,222,013,291 ParisSpark Infrastructure Fund 1,197,277,318 Australian Stock ExchangeRHM plc 1,179,272,497 LondonTelenet NV 1,125,847,967 BrusselsEFG International 1,096,608,169 GenevaSP AusNet Ltd 1,062,365,032 Australian Stock Exchange; SingaporeTrygVesta AS 1,024,851,334 CopenhagenEutelsat SA 1,009,034,382 ParisJupiter Telecommunications Co Ltd 1,007,526,650 Tokyo OTCNovatek 966,304,150 London; Moscow

22

Listings CompetitionLSE (Main Market) 2005

Company Country Wwide Mkt Cap ($mm) IPO Value ($mm) 144ATelecom Egypt Egypt 5,053 591 XFrutarom Industries Israel 460 57 XEvraz Group SA Russia 6,711 422 XPyaterochka Hldg N.V. Russia 2,570 585 XAmtel Vredestein NV Netherlands 684 223 XBank Muscat Oman 1,942 161 Sistema JSFC Russia 11,290 1,354 XNovatek OAO Russia 7,894 927 XNovolipetsk Iron and Steel Corp Russia 9,529 624 XInvestcom LLC Un.Emirates 4,610 759 UTI Bank India 1,979 237 XKumho Tire Co Inc So.Korea 1,215 266

Hong Kong SE 2005Company Country Wwide Mkt Cap ($mm) IPO Value ($mm) 144A

Shanghai Electric Group Company Limited China 4,525 648 XChina Shenhua Energy Company Limited China 21,819 3,279 XBank of Communications Co., Ltd China 24,079 2,166 XChina COSCO Holdings Company Limited China 2,891 1,227 XGuangzhou R&F Properties Co., Ltd China 2,954 294 XAAC Acoustic Technologies Holdings Inc China 837 126 XChina Yurun Food Group Limited China 838 224 XChina Paradise Electronics Retail Limited China 846 152 XChina Construction Bank Corporation China 85,508 9,231 XShenzhou International Group Holdings Limited China 470 117 XParkson Retail Group Limited China 1,022 241 XDongfeng Motor Group Company Limited China 2,501 589 X

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.

An EU regulator’s perspective

Crispin WaymouthEuropean Commission

25

An EU regulator’s perspective

Three issues

I. The Financial Services Action Plan 1999-2004

II. Financial Services Policy 2005-2010

III. The EU-US Financial Markets Regulatory Dialogue

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

27

Commission makes formal proposal

European Parliament

Council of Ministers

Agreement reached on Directive/Regulation

An EU regulator’s perspective

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

29

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

An EU regulator’s perspective

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.

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

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

34

SEC’s Approach to Cross-Border Listings

SEC Registered Foreign Companies

0200400600800

1000120014001600

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

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

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.”

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.

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

39

SEC’s Approach to Cross-Border Listings

Where Are We Today?

Deregistration

IFRS

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

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

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 MD&A reporting– Business Acquisition reporting– Proxy and proxy solicitation requirements

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-income—twilight of the Luxembourg listing?

– Single-regulator model vs. multiple-regulator model

– Equity case studies—Brazilian, Russian and Chinese IPO booms