Direct listing guide: Part 2 (Team, Preparation and DD)
Part 2 summary
A legal advisor, an accounting firm and a new Share Registrar are generally involved to help with a direct listing. Optionally, an investment bank and a PR team are also involved.
An investment bank can help with carrying out pre-listing capital raises, determining an appropriate initial quotation price and also planning a post-listing sell-down.
Listing expenses – advisor fees and NZX fees – are typically around 1% of the implied market capitalisation.
The key preparation for listing is a due diligence exercise on the company by the due diligence committee. They will be tasked with reviewing the listing profile, a key document to listing, prepared by the management team and the advisors.
It takes 2-5 months to complete the due diligence process and the listing preparation.
Photo by Ishant Mishra on Unsplash.
In Part 1 of the direct listing series, I talked about the decision to list. Once a decision is made, what happens next?
Getting a team together
The first thing to do is to form a team to work through the listing process. External advisors typically involve an investment bank, a legal advisor, an accountant (including tax advisor) and a PR team.
An investment bank is not strictly necessary in a direct listing scenario. Unlike an IPO, there is no public capital raise and so investment banks who typically manage the public offer in an IPO process do not need to be involved. This also helps to keep the listing costs lower and the process faster. However, a company may want to proactively involve an investment bank to carry out a pre-listing capital raise (to increase shareholder spread), to help determine an initial quotation price, or to plan a secondary sell-down or capital raise after listing.
A legal advisor should be engaged from a process and risk management point of view. The legal advisor should help structure the direct listing process and provide comfort that all legal and regulatory requirements will be met. Their role includes assessing the listing and alternative exit options, assessing the company’s existing capital and governance structures, identifying and effecting any pre-listing restructures, assisting in the (legal) due diligence process, assisting with drafting the listing profile, preparing the NZX listing application, and drafting a new listed-entity constitution.
An accounting firm is involved to help the company prepare the financial information required as part of the listing. Financial information concerning the last three accounting periods are generally required, and these will likely need to be accompanied with full financial statements for those periods. Prospective financial information is now not required under the recently amended NZX Listing Rules, which simplifies the financial disclosure requirements. The accounting team can also advise on tax aspects of the listing and for any pre-listing restructures that are needed.
Other advisors include a PR team and the Share Registrar. Computershare Investor Services and Link Market Services are the two main registrars servicing share registry and investor comms functions post-listing.
And what do they charge?
As a rule of thumb, the total listing expenses should be around 1% of the implied market capitalisation. Based on the annual reports of the recently directed listed companies and data from their listing profiles:
Third Age Health Services’ listing expenses were $166,847, or 0.8% of its implied market capitalisation of $20.96 million.
NZ Automotive Investments’ listing costs were $695,000, or 1.2% of $59.2 million, which was its implied market capitalisation.
(Another company, Radius Care’s one-off listing costs were $1.227 million. This is arguably high, but was 0.9% of its implied market capitalisation of $141.2 million and still in line with the 1% rule).
In an IPO, there is a public capital raise, which can be used to pay for the costs of the IPO. In a direct listing, all advisory fees (and NZX fees) need to be paid from the company’s cash balance. Companies can work with their advisors to manage the cash impact. Radius Care, for example, paid for some of its listing expenses in shares.
Due diligence and preparation
With the right team, the company can kickstart a “due diligence” process on itself and its group companies. The purpose of this process is to ensure that its listing profile – a key document required part of direct listing – and other related documents contain all the information that is required by the NZX Listing Rules and do not contain any false, misleading or deceptive statements or omit material information. An effective due diligence process helps to minimise the potential for any company or director liabilities, even if a key document contains false information.
The due diligence exercise is arguably more rigorous in an IPO process than in a direct listing. In an IPO, there is a public offer of securities, which is a heavily regulated exercise and will attract the scrutiny of the Financial Markets Authority (see their expectation/information on due diligence process) and the wider public. A direct listing does not involve a public offer. However, it is still a communications exercise to the public about the company’s business, its shares, its financials and business risks, etc. And, once listed, the public market will rely on those communications to buy and sell the shares in the company. So arguably, those communications must be accurate and not misleading, and a prudent board should insist on a robust due diligence exercise prior to direct listing.
At the start of the due diligence process, the legal advisors will request the board to establish a due diligence committee (a “DDC”). The DDC should have representatives of the board, the management team and key advisors, and report directly to the board. The DDC will formally adopt a due diligence process memorandum that sets out the process and framework for the due diligence exercise, all key legal requirements and a summary of legal liabilities, among other things. The DDC should meet every 2 to 4 weeks to progress the due diligence process and ready the company for listing.
The preparation process will involve:
Preparing the listing profile. The contents of a listing profile are strictly regulated. They include an overview of the business, financial information about the company, key risks of investment, features and terms of the shares. It takes up the most time and resources to prepare and accurately verify the contents of a listing profile.
Adopting an appropriate corporate governance structure for the company. Independent directors may need to be appointed, new constitution, corporate governance charters, policies and protocols will need to be prepared and adopted on listing, and new board committees will need to be appointed.
Putting in place an appropriate reporting framework. Once listed, periodic financial reporting and continuous disclosure regimes will apply. The board and the management team, particularly the CFO, will need to ensure that they understand the reporting regimes and are able to meet the public market expectations from the day of listing.
Undertaking any pre-listing restructures and capital raises.
Keeping the shareholders informed and obtaining their approvals (for example, to adopt the new constitution).
The due diligence and preparation stage is where all the heavy lifting is done. It can take anywhere between 2 to 5 months, depending on how much work is required. The company may also be actively exploring alternative exit or listing options. At the end of the process, all key issues need to have been resolved, the company must have prepared all key documents and have in place a structure that is fit for a listed company.
So the preparation is complete. What next? In the final part of the direct listing series, I will talk about the application to list on the NZX and what happens on and after the listing.
Josh Woo is an NZX-approved solicitor for listing. If you have any questions or comments regarding this article or would like to discuss capital raising or exit options, please get in touch with Josh (e: josh.woo@jwlegal.co.nz | p: +642102938699).
