Dealing with securities is a highly regulated business (for obvious reasons, the money of common people is at stake) – as an investment banker in an execution group such as equity capital markets, mergers and acquisitions and debt capital markets, being able to understand the various regulatory hurdles, requirements and timelines in a process is just as important as being able to make a sale.

An investment banker needs to be trusted to be able to hold the client’s hand the entire way and execute flawlessly (hence why they are paid such large deal commissions).

If you sit in a meeting with battle hardened M&A investment bankers and the senior management of a company while they are discussing a merger, the senior bankers will strategize around what you can do at t+15 or t+30 when a certain offer expires. They will know these dates cold as well as what documentation needs to be released at certain times.

Corporate Finance Listing Rules

One of the major departments in the corporate finance arm of an investment bank is equity capital markets. While they are also in charge of following the stock markets and indices, giving equity capital markets updates and maintaining buy side relationships (ECM syndicate), they are also giving prospective issuers views and comparisons in terms of what they can and can’t do for IPOs.

The C-suite of a large corporate will ask whether they want to issue on the NYSE or the NASDAQ. A mining company may contemplate listing on the TSX or ASX. A large multinational may consider dual listing in London and New York.

Corporates will also go exchange shopping to see what the best place is to list. Exchanges will market their attractiveness to certain corporates with certain goals, and investment bankers will usually put slides together on what the differences are between the various exchanges contemplated.

These can include price and prestige, but also rules around who can list and whether or not they allow dual shareholder classes with different voting rights.

Alibaba famously listed in New York instead of Hong Kong initially due to keeping the control in the hands of insiders. GOOGL, FB and SNAP are well known for dual or more voting class structures.

Here are some dated examples using a typical global exchange with developed capital markets to illustrate commonplace securities and corporate finance rules which would have similar investor protections in place across New York, London, Toronto, Sydney, Singapore and Frankfurt:

Equity Listing Requirements

• Ensures suitable applicants for listing
• Fair and orderly issuance process – no enriching friends and cronies and giving favorable allocations
• Sufficient disclosures and financial reporting – financial statements, a full prospectus with potential risk factors – these are more robust and long in the U.S. owing to the more litigious culture there
• Fair and equal treatment of shareholders (Directors to act in their interests) – this is an important distinction because in many less developed capital markets, there are vested interests for directors to act opposite to what maximizes shareholder value such as selling certain assets below fair market value to a related party
• Existing shareholders have right of first refusal on all new equity issues (i.e. rights issues) – Also known as a ROFO in corporate lingo, so a third party cannot come in and snap up shares at favorable prices

New listing applicants must appoint at least one sponsor who declares that:

• Director declarations are true and complete
• New applicant is in compliance with basis listing conditions
• Listing document contains enough disclosure
• Basis and assumptions for the expert sections of the listing docs are fair, reasonable, and complete

Equity Issuance Tests

Exchanges have to find a balance between protecting investors and being competitive for the hottest and biggest IPOs.

In the past, this has been straightforward – companies that have solid cash flows list on the primary exchanges while speculative vehicles that are in earlier stages (or outright frauds) go on speculative boards or are traded over-the-counter. This keeps most bad companies outside of major indices and outside the portfolios of mom and pop investors. Some exchanges can be very strict – even profitable companies can be prohibited if they are trading at what is perceived to be sky-high valuations.

However, it has become apparent that many companies are excellent investments despite trading at huge multiples of sales and earnings (or without earnings) – especially high ARR software companies. Exchanges are accordingly looking to relax regulations so that high growth technology companies do not always have to list in outside markets. An exchange could demand that one of the following criteria are met:

• Profit test
  • Minimum profit of HK$20mm in previous fiscal year, HK$30mm in last 2 years
  • Minimum 300 shareholders at time of listing
• Market cap/revenue/cash flow test
  • HK2billion market cap at time of listing
  • 500mm revenue last fiscal year
  • 100mm aggregate cash flow in last 3 years
  • Minimum 300 shareholders
• Market Cap/Shareholder Test
  • Market cap 4 billion
  • Revenue 500 mm
  • 1,000 shareholders

Derivatives / Warrants Issuance Conditions

Investment banks may want to develop an options market after a stock begins trading. This allows for more market participants to be involved in the underlying security, with many investors looking to purchase shares only if exposures can be hedged or as part of another structured product. Rules for the exchange could include:

• Issuer of derivatives not the same company that issues the stock
• Issuer (and guarantor, if any) has to be a publicly listed company and not private
• Minimum NAV of $2bn if issuing naked (non-collateralized) warrants and also one of:
  • Top 3 credit rating
  • Regulated by Hong Kong Monetary Authority
  • Regulated by Securities and Futures Commission
  • Government or State Entity

These are to make sure that counterparty risk is minimized and that there are no conflicts of interest.

Corporate Governance Protections for Share Options

Remember when Elon Musk put together his recent compensation package? Shareholder proxy firms advised against it – with the argument that it offered unfair dilution to shareholders. This same logic can apply for listing rules, which may be outlined in a similar structure:

• Share option scheme
  • Cannot issue more than 10% of the number of outstanding relevant class of securities – a cap on dilution to common, independent shareholders
  • Share options granted to directors, substantial shareholders, CEO and associates must be approved by independent non-executive directors
    • However, cronyism exists and in less developed markets with more opaque legal systems, this can be abused

Suspension of Listing on Exchange

Stock exchanges will generally want to keep unattractive corporates off. So when companies start to lose money and approach bankruptcy, you will see them doing reverse stock splits to get away from being penny stocks. There can be a number of criteria that stocks have to maintain every year to continue listing. They can get delisted if:

• Not enough free float
• No compliance with listing rules
• No assets/operations to warrant a listing
• Issuer considered no longer suitable

M&A Exchange Rules

Notifiable Transactions Rules

• Shareholders need to be told (by Circular) and sometimes asked to vote when M&A activity exceeds certain thresholds
  • Connected transactions that may not be perceived as arms length may be subject to independent shareholder approval
  • Substantial disposals (% of assets) may be subject to shareholder approval after a certain threshold (for example: 75%)
  • Minority shareholder protections may be in play if there is a majority owner of a listed company who in theory is able to get a majority vote on every decision
    • This may include an independent fairness opinion and sufficient premium
    • This may include a majority of the minority vote passing

Mandatory Offer Rules

Most regimes will have a mandatory offer rule once a certain threshold is exceeded for shares outstanding held. An example may be:

• Mandatory offer trigger at 30% of voting rights, acquired by 1 or 2 people in concert
• Acquiring an additional 2%+ within a 12 month period if already own 30-50%
• Minimum price is not less than paid by acquirer or concert party 6 months prior to offer period

Share Repurchase Rules

Corporates will generally have to file to repurchase shares throughout the year up to a certain threshold. A larger purchase for a material or substantial number of shares that can change the capital structure will require filing a circular (for example a substantial issuer bid or SIB).

Extends to all classes of shares, including warrants and convertible bonds purchased by the issuer.