To many, the success of a company is determined by how fast the company can be listed on a major securities exchange. However, stakeholders should not push a company to seek a public listing at all costs without considering whether such a step is the appropriate way forward.
Going Public is not the Inevitable Choice
Going public may not be the best option in some circumstances. The IPO process tends to be expensive and typically takes many months to complete. In addition, many IPOs have failed for a variety of reasons, including a mismatch in pricing expectations, market turbulence and unforeseen regulatory changes. Finally, pre-IPO investors may encounter difficulties in exiting in, or after an IPO, especially when their resale ability is restricted by statutory limitations and/or contractual lock-ups. Hence, pre-IPO investors may get a better and quicker return by selling the company to a strategic buyer (ie, a trade sale).
An IPO may arguably also not be suitable for companies that are undergoing a stage of growth or restructuring. A listed company typically needs to adhere to certain transparency and disclosure requirements, which may create restrictions on management’s ability to make and execute certain decisions. Moreover, there may be impatience on the part of investors with projects that could take years to come to fruition, thereby putting pressure on the company to produce short-term profits at the expense of long-term growth.
Finally, not all founders are suitable to run a listed company. While they might be good businessmen, their approach may diverge from what is typically expected of management in a listed company. If a company in this situation must go public, it may be prudent for the founder to consider divesting some of his/her power to a professional CEO as part of the listing process.
Once a company has decided to go public, the next question is where it should list. Like the decision of going public, the decision on where to list depends on the specific needs and characteristics of the company and its controlling shareholders.
A company is better off in a venue where there are stock analysts willing to cover the stock and investors willing to understand the company’s business. A successful IPO is typically only the first step. Continued investor interest in the stock is essential to the company’s ability to complete follow-on offerings and shareholders’ ability to resell in the secondary market.
The company’s activities also play a part in the decision on where to list. A company active in deal-making may prefer New York to Hong Kong. Chapter 14 (on notifiable transactions) and Chapter 14A (on connected transactions) of the HKSE listing rules impose extensive stockholder approval and disclosure requirements. In contrast, the Nasdaq and NYSE listing rules require stockholder approval only in very limited circumstances and allow “foreign private issuers” (‘FPIs’), a status for which most foreign companies would qualify, to substitute the U.S. requirements with rules of their “home jurisdictions” in many situations. FPIs are also exempt from the proxy rules under US securities laws. Unlike domestic companies, shareholder circulars prepared by an FPI on almost any subject other than privatizations are exempt from review by the US Securities and Exchange Commission (‘SEC’).
A controlling shareholder active in stock trading may not like New York. Under US securities laws, any sale by a controlling shareholder of her shares in the public market would be subject to Rule 144 volume limitations, unless his/her resale has been registered with the SEC. Resale registration of this nature often creates a market overhang. Further, unless the company qualifies as an FPI, the short swing profit rules also require affiliates of a domestic company to surrender their short-term trading profits to the company.
A controlling shareholder who wants flexibility may prefer New York to Hong Kong. There is no counterpart of the Hong Kong Takeovers Code in the United States. She can realize her control premium in off-market sales because the buyer does not need to make a general offer to buy the shares at the same price from the remaining shareholders. She can also privatize the company more easily, because she can vote on a privatization plan she initiated. The approval threshold is also much easier to satisfy.
Other offshore listing options are available and are likewise chosen depending on the needs and characteristics of the company. For example, some companies choose to list their stock in one venue (or not list their stock at all) and their debt securities in another. The more popular choices for the latter include the Singapore Stock Exchange and the Luxembourg Stock Exchange. Some smaller companies choose to list their stock on the OTCBB, one of the over-the-counter markets in the United States, or AIM, a sub-market of the London Stock Exchange, in the United Kingdom. Companies are also not limited to listing at one venue. Some companies are listed in more than one market, often in the form of depositary receipts in the non-primary market. Given the large number of viable alternatives outlined above, clients seeking a “backdoor listing” should be reminded that such alternatives do exist.