Legal aspects of IPOs in Russia

by Alexander Klochkov, Partner, DLARiper, Moscow (MT Conferences)

An initial public offering includes the following key stages: obtaining public status; offering and distributing shares among a wide range of investors; and obtaining the listing and commencement of public trading of shares on a stock exchange. The modern IPO is not just about selling shares to raise money from investors. In exchange for the investors’ money, the issuers as public companies are supposed to disclose financial results and all other information that is material to an investor’s decision to invest or is necessary to prevent disclosures from being misleading or deceptive. Although some of the disclosure principles are not currently legally binding in Russia, investors expect issuers to comply with generally accepted standards and reward those which meet their expectations.

Legal aspects are very important at all stages, from preparing the issuer for the IPO to conducting the offering and post-IPO compliances. An IPO is usually preceded by meticulous and considerable legal restructuring, legal separation of major shareholders’ transactions from the company’s business, implementation of appropriate corporate governance principles and the bringing of financial statements into compliance with international standards. At the preparation stage, legal aspects are one of the decisive factors which determine the jurisdiction and the stock exchange for the listing. When choosing the market, consideration should be given as to whether this market is litigious, reasonably regulated and how costly post-IPO compliance will be.

As part of the IPO process, in Russia, as in countries with developed capital markets, the best practice is to conduct a legal due diligence review of the issuer’s activities in order to discover and mitigate potential risks. If the risks are material and cannot be cured, this can lead to either the offering being postponed or even cancelled, or the disclosure of such risks to investors, which can affect the price of the securities. The threat of law suits is one of the causes why an initial public offering may be underpriced as this helps to mitigate the risk of a drop in the price, which could give investors grounds to litigate.

The trend in recent years is that companies are increasingly making IPOs in their local market. The offering’s structure usually depends on the aims of the controlling shareholders and the company, the size of the offering, tax considerations and the shareholding structure. The following are the main IPO structures used by Russian companies:

· pure open subscriptions, which are still subject to some legal concerns and uncertainties and may require prefunding by underwriters;

· closed subscription in favor of a GDR Depositary combined with offering the GDRs outside of Russia (in most cases on the London Stock Exchange);

· offering by majority shareholders to the public;

· “top-up” offering structure where the offering to investors is combined with a closed subscription in favor of existing shareholders who sell preexisting shares and use the proceeds to purchase newly issued shares; and

· “top-up” offering structure where the offering to investors is combined with an open subscription, whereby majority shareholders sell pre-existing shares to investors and exercise preemptive rights, using the proceeds to purchase newly issued shares.

Reverse takeover, when a public company is acquired in exchange for control over a private company as a method to become public, is still quite rare in the Russian market.

Many companies apply a “dual-tracking” or even a “multipath” approach: they prepare an IPO and in parallel consider a sale to strategic investors, a sale to private equity or venture capital, a sale to or a merger with a competitor or a private placement to a group of professional investors.

Most Russian offerings are structured as Regulation S offerings and as private placements in European and other countries. Some issuers access U.S. capital without a listing in the United States using Rule 144 A deals which offer stocks on a resale basis only to “Qualified Institutional Buyers”, or QIBs, which are exempt from SEC registration.

The modern capital market is global and includes the Russian market. Therefore, as part of the IPO process, an issuer is being introduced and promoted to the international investment community. Fair and reliable information about operations of public companies helps to correctly assess the issuer’s business, its competitors, the industry and eventually it allows an assessment of the economy, the country and its place in the world. That is why each new IPO represents for the Russian economy a step out of the shadows and why it is important for every Russian company that has made an IPO to strive to meet the investors’ disclosure expectations. For Russia, the wave of IPOs means more investments in the economy, the redistribution of financial resources in favor of public companies and eventually a new stage of social development.

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