Stock Exchange Listings

The Benefits

Expands access to capital
A successful initial public offering (IPO) can immediately bring considerable proceeds to a company, making the public market potentially the single most substantial source of corporate funding. Subsequently, public companies may return to the market for additional capital through secondary equity or offerings. Being public, a company is in a position to consider bond or convertible bond issues, and may enjoy a more favourable balance of equity to debt allowing for greater bank financing and better terms.

Increases employee commitment and recruiting power
By instituting a share ownership scheme for employees, public companies can, in effect, make employees owners of the company where they work. It also may offer them an attractive investment on favourable terms. Such plans tend to elicit a stronger employee commitment to productivity and quality, since they link employees' financial future to the company's success. At the same time, these plans express the company's good will through its offer to share ownership. Similarly, stock option bonus arrangements are attractive compensation to executives, since they link a portion of executive compensation to the company's future.

Complements product marketing
Articles about a public company in local and regional newspapers and magazines resulting from the company's news releases, media relations initiatives, and business journalist inquiries will inevitably report on the company's products and services. National newspapers and magazines are much more likely to cover public companies than private companies and focus on products from a positioning and market share perspective. National radio and television programs focusing on business and finance also contribute to this exposure with coverage of the markets and profiles of newly public companies. Even the daily stock market tables contribute to the general awareness of public companies. Likewise, a company's annual report, quarterly reports, and corporate identity brochures publicise the company's products as much as they define the company, outline strategy, and report on performance.

Expands business relationships
The publicity that a public company generates by meeting its disclosure obligations may bring it to the attention of prospective suppliers and distributors, potential partner companies for joint ventures, or even a research laboratory or inventor with a marketable idea. Such relationships, existing or future, are strengthened by the added confidence that comes from knowing that the company has met stringent MSE reporting requirements, plus stock market, financial, and corporate governance listing standards. The assurance that a company's financial condition is subject to continued scrutiny by the market may even have a favourable effect on various business negotiations.

Provides flexibility in personal financial planning
Stock in a public company is generally more liquid or easier to buy and sell than that of a private enterprise. This benefits shareholders by providing a degree of flexibility in personal financial planning. Owning public shares helps to diversify an individual's portfolio and broadens the eventual disposition of an estate. Shareholders also benefit from the fact that they are exempt from capital gains tax when they sell their shares.

Tax benefits
When a company acquires the status of a quoted company, the rate of income tax chargeable on the gains or profits arising to it shall be reduced in respect of the said gains or profits so arising in the year in which it acquires the status of a quoted company and in the subsequent two years as follows:
- by two percentage points if 20% or more but less than 30% of its issued voting share capital is offered to the public as a listed security;
- by 3.5 percentage points if 30% or more but less than 40% of its issued voting share capital is offered to the public as a listed security;
- by five percentage points if 40% or more of its issued voting share capital is offered to the public as a listed security:

Therefore when for example existing shareholders sell 40% of their shares to the public, the company will be charged at 30% income tax instead of 35%. This beneficial rate of tax is currently applicable until 08/01/2002 but may be extended for period/s of five years each by the responsible Minister.

The above tax benefits are not available for bond issues. However a bond listed on the Malta Stock Exchange is exempt from capital gains tax upon disposal by an investor.

The Responsibilities

Sharing corporate control
By selling stock to shareholders, the original owners of a public company are, in essence, relinquishing exclusive control of the company's future. Once public, most companies need shareholder approval to take certain corporate actions, such as increasing the number of shares outstanding, or creating a new class of stock. Even in decisions where their approval is not required by law, shareholders' interests, opinions, and reactions must be taken into account.

Sharing financial gain
Going public greatly increases the number of company "owners" those entitled to share in the company's profits. Because it can drive up stock prices, a strong company performance offers investors a chance to share financial gain, allowing them to sell shares for a profit in the market.

Managing to maximise shareholder value
Senior management of a public company and its board of directors are ultimately accountable to the shareholders and, therefore, must diligently perform their fiduciary responsibilities. Furthermore, because corporate control of a public company ultimately rests with the shareholders themselves, the objectives of any strategic decision must include enhancing shareholder value. Since shareholder value is often measured in terms of the price-earnings ratio, certain actions, such as stock buy backs, may even be adopted specifically to increase that ratio. Other actions, such as stock splits, will be instituted to price stock so that it is more easily traded in round lots by individual investors. All of these measures, as well as strategic decisions directly affecting operations, need to be communicated to the market within the context of an ongoing investor relations (IR) program.

Sharing strategic information.
Public companies are required by law to disclose certain types of information, both to shareholders and to the Stock Exchange. Prompt, clear disclosures help to build shareholder loyalty and the good will of the general public by keeping these parties informed of the company's activities. Once admitted to listing and as long as they remain on the Official List, quoted companies are required to make all material and price-sensitive information available. The continuing obligations merely acknowledge that there are the investors who would want to be informed about what is happening with their money and are not intended to question how the Directors have been conducting their business. The Shareholders are the people who have trusted the company with their own money and the Directors may well want to invite these same people again to trust them with their money once more. Besides, an informed public about the company has the added benefit that other prospective investors would be looking at the company and recognise its value.

Start up and ongoing costs
The initial and continuous costs involved in going public can be very high. In the beginning, substantial fees are required for various functions of the public offering, such as underwriting discounts and commissions, as well as costs for accountants and lawyers. There are also fees for the maintenance of the company's shareholder's register. After a company goes public, the principals must consider the ongoing expenses of producing information for shareholders and regulatory entities, as well as market listing fees and continuing fees to lawyers and accountants as the company grows.

Relinquishing control over personal assets invested in the company.
While stock in a public company may be more liquid than stock in a private company, the ability of company insiders to buy and sell company securities is subject to certain legal restrictions. Corporate officers and insiders may not trade shares when they are in possession of unpublished price-sensitive information. In addition, there are periods specified by law when shares may not be traded (i.e., two months prior to earnings announcements).

Basic Requirements for a Listing

- Shareholders funds less intangibles of at least Lm250,000;
- Paid-up Capital of at least Lm100,000;
- Twenty percent of the issued, fully paid-up Capital in the hand of the general public;
- Three year trading record;
- Flotation limit of at least Lm100,000 in the case of equities and Lm1,000,000 in the case of bonds (ordinarily a company must list its shares before bening allowed to list its bonds but the Council of the Malta Stock Exchange may grant a derogation from this requirement);
- Adequate profit forecast;
- Shares must be freely transferable;
- Financial information;
- Acceptable level of risk attached;
- Adequate Capital;
- Sufficient management resources;
- Suitable Memorandum and Articles of Association;
- Absence of conflict of interest; and
- Expected to enjoy continuity of dealing.

The Listing Particulars Document (or Prospectus) contains:
- The Directors' Responsibility statement
- Corporate History (business activity, market spread, product/quality control)
- Trading Record (current trading, prospects)
- Risk Factors
- Financial Information (Consolidated Profit and Loss Accounts , Balance Sheets, Source and Application of Funds, Statement regarding Accounting policies, Dividend forecast, Earnings per share)
- Particulars of Directors, Senior Management and Employees including Sponsoring Stockbroker, Financial Adviser, Auditor, Legal Adviser, Bankers
- Additional Information (Subsidiary Companies , Working Capital Statement, Premises,- Directors and other interest, Services Contract/Material Contracts, any issues subject to litigation, Taxation outstanding and forecasted)
- Documents available for inspection (Memorandum and Articles of Association, Services Contracts, Material Contracts, Audited Consolidated Accounts, List of Shareholders and an analysis of holdings)
- Extract from Board Minutes with relevant resolution.

Continuing Listing Obligations

The company must provide the Stock Exchange with:
- Date fixed for any Statutory Board Meeting to announce results and / or dividends;
- What resolutions are going before that Meeting and later whether carried or not;
- Changes to the Memorandum and Articles of Association;
- Changes to the Management Structure;
- Half-yearly report: i.e. Financial in summary form with an indication of trading performance of last six months;
- Preliminary Profit Statement after Audit;
- Annual Report with detailed requirements regarding underlying policies;
- Any Price-sensitive information that the Market must know; and
- Information relating to acquisitions, expansions, disposal and / or restructures.

Listing Fees and Annual Fees

Listing Fees applicable to Equities (Shares)

# Or parts thereof.
When shares are listed, the average of the Trade Weighted Average Prices of the previous quarter is taken into consideration when calculating the Market Capitalisation. The MSE however reserves the right to charge an administration fee should the listing be refused to cover processing costs.

Listing Fees Applicable to Fixed Income Secunties (Bonds)

# or parts thereof
Should the listing he refused, the Initial fee is refunded but the MSE reserves the right to charge an administration fee to cover processing costs.

Transfer of Register of Holders to the MSE

When a security is first admitted to the Official List, the Register of Holders is transferred to the MSE and the issuer is charged the following Initial Fees on take on. A Primary Charge is levied if the Issuer requires that the processing is carried out by the MSE.

Annual Fees

The Annual Fee is payable as at 31 December, in arrears. The first payment shall be pro rata from the day of take on. The final payment will cover the period from 1 January to the date of redemption (where applicable).

Selecting the IPO Team

The company role
Before selecting the team to take their company public, top company executives must be prepared to invest a significant amount of time and effort in going public and, more importantly, in being public. Throughout the process of going public, the company's CEO and other close advisers will need to play a key role in the formation of the team and will need to make complex decisions based on a review of information generated by that team.

Company executives should also have a business plan prepared well in advance of making the decision to go public. This plan should outline the company's strengths and weaknesses and serve to "sell" the company to various entities by demonstrating the viability of the company and its plans to go public.

Act like a public company
In anticipation of going public, it is imperative to begin to think and act like a public company to develop a publicly held attitude and mindset as soon as possible. This includes addressing housekeeping issues such as organising and cleaning up financial records, establishing or reviewing internal controls, and reviewing company bylaws and stock option plans. Prior to going public, a company should consider establishing and reviewing policies for corporate communications, developing an investor and public relations program, and setting aside resources to communicate with new constituents.

Time factor
Because going public takes a great deal of time, designating one or more individuals to lead the IPO may help keep the rest of the company focused on current business objectives. Once public, the CEO will need to dedicate a significant amount of time to managing and communicating to a variety of new constituents, including research analysts, portfolio managers, and individual investors. It is best to prepare for this role in the earliest stages of going public.

Choosing an Investment Banker
Prospective public companies and their IPOs differ first according to size of offering and by age of company and extent of its operations. Similarly, there are many different types of investment banking firms (also referred to as "underwriters"): global, full service firms; smaller, full service national firms with international capabilities; and regional firms with in depth geographic knowledge and varying product offerings. When it comes to choosing an investment banking firm, a company should consider a number of factors, including the firm's IPO experience, industry knowledge, and distribution and research capabilities.

Most IPOs involve a lead banking firm as well as one or two co managers, generally offering the company more service and research coverage at no additional cost. Increasingly, companies are choosing a regional firm and a national or global firm to manage and co manage, respectively, their international IPO.

The investment bankers a company chooses should have experience putting together IPOs and preferably have underwritten equity offerings of the size the company is contemplating. Stock offerings by companies of varying size and age pose their own unique challenges. The investment bankers should be sufficiently knowledgeable and creative to propose effective structural solutions for the company's individual financial and strategic requirements.

The investment bank may also consider guaranteeing the issue. This is possible in bond issues whereby the bank would guarantee that if the issuing company fails to honour its obligation to pay interest on the bond or capital at maturity, the bank would pay the investors instead.

Generally, a company is better served if the investment banking team involved with its IPO has a working knowledge of the company's industry including its markets, business cycles, products, and competitors. Also helpful is a familiarity with the company's common balance sheet structures and financial approaches to operations, and an understanding of investor expectations. Beyond the IPO, the investment banking team should be prepared to assist the company with financing techniques and the selection of potential acquisition targets and joint venture partners.

The ability to sell a company's stock and to target the desired type of investor to buy it can affect the initial success of the offering, its subsequent market performance, and even long range corporate control. An investment banker should be able to place a stock with a desired mix of individual investors and institutions, target a particular region of the country if necessary, and perhaps bring in some international ownership. The underwriter should also be able to arrange the appropriate syndicate to supplement its own placement strengths.

A company's visibility among investors is a key ingredient of market performance. Periodic research reports keep a company before the eyes of institutional investors and brokers, who, in turn, will bring it to the attention of their retail clients. Preferably, an underwriter will have a strong, active research department and will commit to assigning an analyst to follow the company. Companies may want to meet the analyst who will be assigned to them before the IPO in order to become familiar with his or her background, analytical style, and predilections in communicating with companies. Company executives should be careful, however, not to discuss the impending offering or any non public information about the company. Revealing non public information to analysts effectively makes them insiders and prevents them from issuing reports until the company reveals the information publicly.

Choosing a Sponsoring Stockbroker
An applicant for listing must appoint a Stockbroker to sponsor its application. As with an investment bank, in choosing a sponsoring stockbroker regard must be given to IPO experience. The sponsor must ensure that the Council of the Stock Exchange is provided with all the required information and the sponsor is responsible for lodging with the Stock Exchange all the documents required in support of the application. The company will have the comfort of talking to the sponsor about how it should meet the Stock Exchange's requirements and how to provide all the information necessary in the interest of the investor. The Stock Exchange relies on the sponsoring broker to ensure that the company is aware of its obligations.

Choosing a Law Firm
The law firm or attorney a company selects to handle an initial public offering should be familiar with the underwriting process, including the rules, regulations, and protocols that govern it. The IPO law firm should also be accustomed to dealing with the Malta Stock Exchange and drafting of the prospectus. For example, an attorney should know how to co-ordinate correspondence with staff of regulatory agencies, how to handle submission of documentation, and be familiar with the listing process including the review of the prospectus and the listing particulars. Such familiarity not only ensures that proper procedures are observed, it also helps to avoid inordinate delays to the extent that potential issues can be anticipated and addressed before filing.

Knowledge of a company's industry is invaluable in helping the attorney draft the prospectus, specifically as it pertains to the description of the company's business and management's analysis. Industry experience is also valuable in helping counsel identify industry risks and to determine whether the company's disclosure is adequate. While some companies may opt to work with an attorney with less industry knowledge, but with whom they a have close, long term relationship, it is advisable to consider firms with experience in bringing comparable companies to the market.

A full service law firm can generally provide helpful, convenient, and probably cost effective advice to the IPO team in matters of due diligence. Should issues about real estate, intellectual property, patents, labour law, or environment be raised, there should be a specialist in the law firm to provide an opinion.

At CDF Advocates we are fully equipped to guide you through the listing process and beyond. Our partners have accumulated a wealth of experience by working with some of Malta's largest public companies including Bank of Valletta and Maltacom.

Choosing an Accounting Firm
An accounting firm's stature may give a company's audited financial statements more credibility with investors. Also, the accounting firm's "comfort letter" (which serves to assure that unaudited financial data in the prospectus appears to consistently follow International Accounting Standards (IAS) will more readily give other members of the team confidence in the document.

An accountant leading an IPO should be knowledgeable about how revenue is customarily recognised in that industry and be aware of acceptable reporting alternatives. Sales, for instance, are reported differently from one industry to another, and flexibility will be particularly advantageous in cases where the distinction between product and service is not clear. Finally, the accountant should be able to guide a company through the calendar of filing requirements with the Registrar of Companies.

Because emerging growth companies tend to employ incentive compensation arrangements such as stock options, the team accountant should be familiar with the methods used to report them and be able to make a judicious selection based on experience. Also, accountants accustomed to working with companies in the early stages of their development can be particularly helpful in designing and implementing effective financial systems and controls. Accountants can assist with preparing strong financial disclosure statements and can advise companies on corporate and personal tax implications when going public.

Other advisers
Depending on the method of your flotation and the specific circumstances of your company, you might also decide to use a number of other advisers in particular areas. The most likely is a firm of financial public relations consultants, to maximise the degree of positive awareness of your company, and its products or services; insurance brokers to check that all risks are adequately covered; surveyors or valuers to assess property values; security printers for safe, accurate and speedy production of documentation and actuaries to assess the position of company pension schemes.

Working with the IPO Team

Developing the Prospectus
The prospectus is both a disclosure document by law and a selling document by custom, since it is the only information that the law allows to be disseminated about a public offering. The company, its corporate officers, and board of directors are liable for any misstatement or omission of material information in the prospectus; so the narrative and accounting parts of the prospectus must be clear and complete. While all professionals involved will, in their turn, exercise "due diligence," or appropriate care and effort, in ascertaining the accuracy and adequacy of all statements contained in the prospectus, it is important for company executives to be completely truthful in responding to all information requested by the IPO team.

Usually the entire IPO team is involved in developing the prospectus: corporate counsel is primarily responsible for drafting the narrative, while the accounting firm will prepare the financial statements and the investment banker will supply the underwriting details. In addition to a detailed description of the company's business, the prospectus is required to contain a description of the company's management structure, management compensation figures, and details of any transactions between the corporation and management. The names of principal shareholders and their level of ownership should also be included, as well as the company's audited financial statements. Also required is an analysis of the company's operations and financial condition together with information on the use of proceeds, effect of dilution on existing shares, dividend policy, and capitalisation. Finally, the prospectus should describe the underwriting agreement and outline details regarding the investment banking firms involved.

A statement of all risk factors is essential to the prospectus, as is the careful and prudent characterisation of the company's operating condition and competitive position. Factual statements about the company and its historical performance should predominate; any statements about prospects should be carefully qualified. Within these constraints, the prospectus still functions as a sales brochure because all prospectuses observe the same kind of precision and cautionary tone,

MSE Review for Adequate Disclosure
The Malta Stock Exchange's (MSE) role in the regulation of IPOs, as with corporations generally, is primarily in the area of disclosure. The MSE will review the application for listing and the prospectus for the accuracy and adequacy of all "material facts" information that would affect investment decisions. IPOs tend to be scrutinised more closely than secondary offerings because they have not previously been subject to such careful analysis.

The IPO Process
The entire initial public offering process is at once fast moving and highly structured, governed by an interlocking set of laws and regulations. Each member of the IPO team has specific responsibilities to fulfil; however, the company ultimately calls the plays for the team.

Present proposal to the board
The IPO process begins with management making a presentation to the company's board of directors, complete with business plan and financial projections, proposing that the company enter the public market. The board should consider the proposal carefully.

Find an underwriter and execute a letter of intent
At this point, a company should select an underwriter, if it has not already engaged one (see "Choosing an Investment Banker" above). A company's relationship with an underwriter should then be formalised through a mutual letter of intent, outlining fees, ranges for stock price and number of shares, and certain other conditions.

Draft prospectus
After a letter of intent is executed, the IPO attorneys can begin work on the prospectus.

Respond to "due diligence"
The next step is to ask the investment banker and accountants to begin a thorough investigation of the company. The underwriter will examine a company's management, operations, financial condition, performance, competitive position, and business plan. Other factors open to scrutiny are labour force, suppliers, customers, creditors, and any other parties that have a bearing on the viability of the company as a public entity and could affect the proper, truthful, adequate disclosure of its condition in the prospectus. The accounting firm will examine financial information and such specific documents as contracts, billings, and receipts to ensure the accuracy and adequacy of financial statements. A time consuming and demanding process, due diligence is nevertheless a crucial step in the assembly of a thorough and accurate profile of the company.

Select a printer
The company should select an experienced financial printer one who is familiar with MSE regulations governing the graphic presentation of a prospectus and has facilities to print sufficient quantities under severe time constraints.

Submit prospectus (Listing Particulars Document) to MSE
The listing process offers an opportunity to take a good look at the company and perhaps make some adaptations so that maximum benefit of listing may be achieved. The application may seem long and tedious but, if done properly, it is going to be done once and the company comes to the market in a proper fashion. This will set the foundation of what one hopes will be a successful listing. The Listing Particulars Document is a factual document which has to be prepared in order to give full information about the company and what the company does and how successful the company has been. The Accountants Report is an essential part of a listing procedure and it has to be produced to enable the public to decide whether or not to invest in the company. The detailed information will enable the general body of investors to make a fair assessment. A three year trading record has to be presented to give a true and fair view of the performance of the company and the profit forecast has to include a comment on the underlying assumptions that they are at least reasonable.

Pre-placements
After the preliminary prospectus has been filed with the MSE the underwriter is responsible for accumulating "indications of interest," solicited through its efforts from institutions and brokers that have approached their clients. These give assurance that the IPO is viable and help to determine the final number of shares to be offered and the allocations to investors.

Present the "road show".
Next, the company and the investment banking team should design and present the "road show," a series of meetings held with potential investors and analysts in Malta and if appropriate, overseas. The "road show", which consists of a fairly elaborate formal presentation on the company's operations, financial condition, performance, markets, products and services, is delivered by the company's top executives, who are then available for questions. Requiring extensive travel and long hours, the road show can be exhausting for company management; yet, it remains an integral and worthwhile part of the IPO process. By providing management an opportunity to meet with potential investors face to-face, the road show allows the company to communicate key information to investors and to showcase the managerial talent and expertise that will be leading the company.

Prepare, revise, and print the prospectus
In the meantime, the preliminary prospectus should have been prepared and revised according to MSE comments. The Prospectus must then be filed with the Registry of Companies and then the final version of the prospectus can be printed.

Price the offering
Just before the underwriting agreement is signed, on the day before the registration becomes effective and sales begin, the offering is priced. The investment banker should recommend a price per share for management's approval, taking into account the company's financial performance and competitive prospects, the stock price of comparable companies, general stock market conditions, and the success of the road show and ensuing expressions of interest. While the company will want to price the offering as high as possible, an offering that does not sell or sell completely will not be in its best interest or in the interest of investors who find the share price declining in the market immediately after their initial purchase. In fact, investors look for at least a modest increase in the market price to reassure them about their investment decision.

Determine the offering size
The investment banking team should also consult with management regarding the offering size, taking into consideration how much capital the company needs to raise, the desired degree of corporate control, and investor demand. Often, the more shares outstanding, the greater the liquidity of the stock, which will increase institutional interest.

Other Legal Considerations

Before being able to list on the MSE the company has to have the legal status of a public company. If the company is a private company it must therefore change its status, or alternatively a new public company is created as a subsidiary. The latter approach may be preferable in order to create a "clean" financing company as part of a group.

New Public Companies
The minimum share capital of a public company is Lm20,000. The fees payable by a company to the Registrar of Companies upon registration are calculated according to the company's authorised share capital as follows:
- Between Lm20,000 but not exceeding Lm100,000 - Lm118 plus Lm1 for each Lm1,000 or part thereof in excess of Lm5,000
- Over Lm100,000 - Lm213 plus 40 cents for every Lm1000 or part thereof exceeding Lm100,000; provided that a maximum fee does not exceed Lm573.

Conversion of Private Company into Public Company
A private company may change its status to a public company by an extraordinary resolution altering its memorandum or articles and incorporating in such alteration all those changes required by the Companies Act for a company to hold the status of a public company, including the removal of the restrictions on share transfers. Together with the revised memorandum and articles of association, the company must also deliver to the Registrar for registration:-

(a) a copy of a balance sheet prepared as at a date being not more than four months before the date of the registration of the alteration, together with a report of the company's auditors in relation to that balance sheet; and

(b) a written statement by the company's auditors that in their opinion the balance sheet shows that at the balance sheet date the amount of the company's net assets was not less than the aggregate of its called up issued share capital and undistributable reserves; and

(c) a declaration by any director of the company that between the balance sheet date and the date of delivery of the alteration to the Registrar for registration, there has been no change in the company's financial position that has resulted in the amount of its net assets becoming less than the aggregate of its called up issued share capital and undistributable reserves.

A private company which proceeds to change its status to a public company cannot allot or propose to allot shares for a consideration otherwise than in cash at any time between the date of the balance sheet and the date of delivery of the alteration referred to above. The company is also required to redeem the shares held by the dissenting members, if they so request, on such terms as may be agreed or as the Court, on a demand of either the company or the dissenting members, thinks fit to order.