Category: Capital Markets Comparative Guide: 2020

Contributed by Cobalt.

1. Market Overview
Nasdaq Riga is the only stock exchange in Latvia. It is supervised by the Financial and Capital Market Commission of Latvia and belongs to the Nasdaq Baltic Exchange group. It is part of a unique structure, consolidating the common market platform and capital market infrastructure for the three Baltic States. The Riga Stock Exchange uses a uniform trading platform and one depository with Vilnius and Tallinn stock exchanges, forming the uniform Baltic stock market. The Baltic Exchange provides a trading platform for shares of approximately 70 companies from Estonia, Latvia, and Lithuania and maintains bond listings of more than 30 companies as well as treasury notes of governments of Latvia and Lithuania. Nasdaq Baltic offers issuers and investors common marketplace for trading and common information distribution.

Over the past few years Baltic debt markets have demonstrated increasing activity. Latvian bond issuers have been particularly active. Both Latvia’s financial institutions, such as Citadele Banka or Altum, and its industrial companies, such as Latvenergo, Hansa Matrix, and Storent Investments, have successfully placed their fixed-income debt instruments on the Baltic Bond List. As the most recent sign of solid debt market conditions, on April 8, 2020 ALTUM, a development finance institution, issued bonds in a total amount of EUR 20,000,000. This was the second issue of notes within a EUR 70,000,000 Notes issue programme (the emission was in addition to EUR 10,000,000 in 2018 and EUR 15,000,000 in 2019) with five-year maturity and a fixed annual interest rate of 1.3%. This issue attracted impressive interest from Baltic investors and the bonds were oversubscribed 3.8 times.

In contrast to the active debt market, there have been no new IPOs for the past two years. Hansa Matrix in 2016 and Madara Cosmetics in 2017 stimulated a number of Latvian companies to prepare for listing up to the level of agreeing on documentation with the regulator, but unfavourable market conditions have deterred new entrants from joining the public markets.

2. Overview of the local stock exchange and listing segments (markets)

a. Regulated market

Nasdaq Baltic stock exchanges have structured listings on the Main List, Secondary List, and Bond List. The Main list and the Second list of the Nasdaq Baltic exchanges are compliant with European Union regulations and the listing requirements are guided by EU standards. The regulatory requirements for these two lists are more complex than for the First North alternative market.

Baltic company bonds are listed in a joint Baltic Bond List. They include notes of major Latvian commercial entities and Latvian government treasury bills.
The Baltic Main List offers shares of solid business entities from Latvia, Lithuania, and Estonia. The Main list companies shall have a sound financial position, market capitalization of at least EUR 4 million, sufficient free float, reporting according to IFRS, and a history of at least 3 years of operations. These special requirements for inclusion do not apply for Secondary List companies.

b. Non-regulated market

In addition to both regulated lists of shares, Nasdaq Baltic stock exchange hosts a non-regulated, alternative market, Nasdaq First North. This is a multilateral trading facility (MTF), or “alternative market,” operated by the different exchanges within Nasdaq. This section of the share market does not have the legal status of an EU-regulated market. Companies on First North are subject to the rules of Nasdaq Baltic/First North rather than the legal requirements for admission to trading on a regulated market.

3. Key Listing Requirements

The listing requirements for the admission of equity and debt securities varies quite considerably dependant on the market. For instance, First North is tailored specifically to permit small and medium sized companies to access public markets, with lower thresholds for admission and less stringent continuous disclosure requirements.

A. General Requirements

First of all, pursuant to the Rules of Nasdaq Riga, an issuer who wants to have its securities listed on Nasdaq Riga has to be registered and its activities should be in compliance with the laws and other legal acts of its country of registration, its Articles of Association, and applicable Rules of Nasdaq Riga.

Nasdaq Riga has the right not to admit to trading the securities of an issuer who is subject to liquidation, insolvency, or bankruptcy proceedings or who has initiated suspension of its operation, nor when there are reasonable doubts about the issuer’s ability to continue its commercial activity or where the issuer has had permanent solvency problems before submitting the listing application. In addition, the issuer’s economic, legal, or other situation or activity may not jeopardise the interests and fair and equal treatment of investors.

Only freely transferable dematerialized securities may be listed on Nasdaq Riga and the transfer right of such securities may not be restricted by the Articles of Association of the issuer.
Lastly, the securities applied for listing should be bookentered with the central securities depository Nasdaq CSD SE or another foreign central depository with whom Nasdaq Riga and/or the Nasdaq CSD SE has entered into agreement on cooperation in provision of payments.

B. Equity Capital Markets

(i) Main List
Issuers who apply for listing of their shares on the Main List have to be active in the main field of their economic activity for at least 3 years and at least their last annual report has to be prepared in compliance with the IFRS.
Shares may be listed on the Main List if the issuer’s anticipated market capitalization (or, if it cannot be assessed, the equity of the issuer) is at least 4 million euros. However, Nasdaq Riga has a right to set exceptions to this requirement if sufficient interest from investors about the trading of the relevant shares is expected.
Pursuant to the Rules of Nasdaq Riga all shares of the same category should be listed and are subject to a 25% free float requirement –or, if the number of shares in free float is smaller than 25%, when the capitalisation of the shares on free float exceeds 10 million.
(ii) Secondary List
The requirements for listing of shares on the Secondary List are the same as for the Main List, except for the requirement to have a market capitalization and free float of shares.
(iii) First North
The issuer should comply with the general listing requirements discussed above and it is not subject to the requirements of minimum period of operation history, market capitalization, and free float of shares. In addition, there is no requirement that the issuer’s financial statements be prepared in compliance with the IFRS. However, the issuer is obliged to engage an adviser certified by Nasdaq Riga.

C. Debt Capital Markets

(i) Bond List
Issuers who apply for listing of their debt securities on the Bonf List have to be active in the main field of their economic activity for at least 2 years and at least their last annual report has to be prepared in compliance with the IFRS.
The total nominal value of the debt securities applied for the listing should be at least 200,000 euros.
(ii) First North
Issuers should comply with the general listing requirements discussed above. They are not subject to the requirement of minimum period of operation history, and there is no requirement that their financial statements be prepared in compliance with the IFRS. In addition, there is no requirement that the debt securities applied for the listing have a certain value. However, the issuers are obliged to engage an adviser certified by Nasdaq Riga.

4. Prospectus Disclosure

A. Regulatory regimes and local market practice
When the company is seeking admission to the Main List, the Secondary List, or the Bond List the key disclosure document is a prospectus. Nasdaq Riga Alternative Market First North Rules are applicable to companies seeking admission to First North (assuming that they do not conduct an “offer to the public”) and in which case the key disclosure document is a “company description.”

The prospectus regime in the Latvia is governed by the Prospectus Regulation and the delegated legislation which includes the Commission Delegated Regulation (EU) 2019/980 (the “PR Delegated Regulation”) relevant for the format, content, scrutiny, and approval of the prospectus and the Commission Delegated Regulation (EU) 2019/979 (“Prospectus RTS Regulation”) relevant for the technical standards on key financial information in the summary of a prospectus, the publication and classification of prospectuses, advertisements for securities, supplements to a prospectus, and the notification portal. In addition, the PR Delegated Regulation imposes specific minimum information requirements for a prospectus as set out in the Annexes of the PR Delegated Regulation. The relevant Annexes that will apply in each particular case are prescribed by Articles 2 to 23 of the PR Delegated Regulation and will depend on, among others, the type of securities being issued, the type of issue (in certain cases), the nature of the issuer, whether the issuer has a complex financial history or has made a significant financial commitment.

The Prospectus Regulation requires a prospectus to be written in an easily analysable, concise, and comprehensible form and to contain the necessary information which is material to an investor for making an informed assessment of the financial position, etc. of the issuer, the rights attaching to the securities being offered and the reasons for the issue and impact on the issuer. It may be published in a single document (which is the typical Latvian practice) or in three separate documents comprising a registration document (containing information relating to the issuer), a securities note (containing information concerning the securities being offered), and a prospectus summary.

The key information that the Prospectus Regulation requires to be included in a prospectus includes:
• risk factors informing potential investors of the material risks to the issuer, its industry and the securities being offered;
• the last three years’ (two years’ for non-equity securities) audited financial information prepared in accordance with IFRS;
• details of any significant changes in the financial or trading position of the company since the date of the latest published audited or interim financial information included in the prospectus;
• in relation to equity securities, a working capital statement;
• an operating and financial review (“OFR”) describing the company’s financial condition, changes in financial condition and results of operations for the periods covered by the historical financial information included in the prospectus;
• summaries of material contracts entered into outside of the ordinary course of business by the company’s group;
• details of any significant shareholders of the issuer, whose interest is notifiable under the issuer’s national laws;
• in relation to equity securities, details of any related party transactions that the company has entered into during the period covered by the historical financial information and up to the date of the prospectus;
• details of any legal proceedings that the company has been party to in the last year;
• prescribed information on the company’s directors and senior management, including remuneration, benefits and interests in the shares of the company (including share options) and also with respect to the company’s corporate governance; and
• responsibility statements from the company, the directors and any proposed directors, confirming that they accept responsibility for the information contained in the prospectus and that, to the best of their knowledge (having taken all reasonable care to ensure that such is the case), such information is in accordance with the facts and contains no omission likely to affect its import.
The prospective issuers can omit information from a prospectus in limited circumstances where the Financial and Capital Market Commission may authorise that disclosure of such information would be contrary to the public interest, seriously detrimental to the issuer (provided that the omission would not be likely to be misleading the public) or the information is of minor importance in the specific situation and would not influence the assessment of the financial position and prospects of the issuer.

A supplementary prospectus will need to be published if any significant new factor, material mistake or inaccuracy relating to the information included in the original prospectus arises during the period after publication of the original prospectus but before the later of the securities being admitted to trading and the closing of the offer to the public. Significantly, the issuance of a supplementary prospectus triggers withdrawal rights for any investor who had previously agreed to purchase shares in the offering. Such rights are exercisable before the end of the second working day after the day on which the supplementary prospectus was published.

B. Language of the prospectus for local and international offerings
Where an offer of securities to the public is made or admission to trading on a regulated market is sought only in Latvia, the prospectus shall be drawn up in Latvian. However, where an offer of securities to the public is made or an admission to trading on a regulated market is sought in more than one Member State including Latvia, the prospectus can be drawn up in English and the prospectus summary should be translated into Latvian and, if required, also in the official languages of the host Member States.

5. Prospectus Approval Process

A. Competent Regulator
The Financial and Capital Market Commission is the competent authority in Latvia for reviewing and approving prospectuses and the company will need to follow the formal admission requirements set out in the Rules of Nasdaq Riga.

B. Timeline, number of draft submissions, review and approval process
According to the Prospectus Regulation the Financial and Capital Market Commission should take a decision on approval of the prospectus within 10 working days of the submission of the draft prospectus. The time limit can be extended to 20 working days where the offer to the public involves securities issued by an issuer that does not have any securities admitted to trading on a regulated market and that has not previously offered securities to the public.
The number of drafts that can be submitted to the Financial and Capital Market Commission is not limited. However, local practice is to provide to the Financial and Capital Market Commission a draft which is very close to the final version.

6. Listing Process

A. Timeline, process with the stock exchange
The issuer who wants to have its securities listed on any of the lists of Nasdaq Riga shall submit to Nasdaq Riga a listing application and all other documents specified herein.

(i) Main List and Secondary List
If the issuer applies its shares for listing on the Main List or the Secondary List, it must append the following documents to the listing application:
1) a copy of the issuer’s registration certificate or a similar document certifying the legal status of the issuer (fact of registration);
2) a copy of Articles of Association of the issuer;
3) a report of the Management Board of the issuer on business plans for the current and at least the next reporting period;
4) a copy of the decision of the issuer’s shareholders’ meeting on amendments to the Articles of Association and the increase of its share capital;
5) a resolution on submission of the listing application taken by the authorised management body of the issuer;
6) a prospectus registered with the Financial and Capital Market Commission or an offering document;
7) copies of audited annual reports for the last 3 years;
8) if an agreement with a member of Nasdaq Riga on market making for the securities of the issuer has been concluded, the information about the conclusion of the agreement and a description of the main provisions of the agreement;
9) in the event the issuer has a parent company, confirmation of the parent company and the issuer that there do not exist any arrangements that the issuer would have to transfer the entire profit or a part thereof to its parent company and that none such would be made during the listing period on Nasdaq Riga; and
10) in the event the Issuer has a parent company, the parent company’s written commitment to conform to the Rules of Nasdaq Riga.
Nasdaq Riga shall take a decision on listing within 10 days following receipt of all required documents and information.

(ii) Bond List
If the issuer applies its debt securities for listing on the Bond List, it must append the following documents to the listing application:
1) a copy of the issuer’s registration certificate or a similar document which certifies the legal status of the issuer (fact of registration);
2) a copy of Articles of Association of the issuer;
3) a copy of resolution on issuance of debt securities and submission of the listing application taken by the authorised management body of the issuer;
4) a prospectus registered with the Financial and Capital Market Commission or an offering document;
5) copies of audited annual reports for the last 2 years; and
6) if an agreement with a member of Nasdaq Riga on market making for the securities of the issuer has been concluded, the information about the conclusion of the agreement and a description of the main provisions of the agreement.
Nasdaq Riga takes a decision on listing within 10 days following receipt of all required documents and information.

(iii) First North
If the issuer applies its shares or debt securities for listing on First North, it must append the following documents to the listing application:
1) a certified copy of the issuer’s registration certificate or a similar document which certifies the legal status of the issuer (fact of registration);
2) a copy of Articles of Association of the issuer;
3) a resolution on submission of the listing application taken by the authorised management body of the issuer;
4) a prospectus registered with the Financial and Capital Market Commission, an offering document or the company’s description if the issuer is not required to prepare the prospectus or an offering document;
5) copies of audited annual reports for the last 2 years;
6) a report of the Management Board of the issuer on the business plans of the issuer for the current and at least next reporting period, unless disclosed in the prospectus or the company’s description; and
7) an agreement with a certified adviser.
Considering the specific circumstances, Nasdaq Riga has the right to make exemptions and decide that the submission of certain documents is not necessary.
Nasdaq Riga takes a decision on admission of securities to trading on the First North within 3 months following receipt of all required documents and information.

7. Corporate Governance

a. Corporate governance code / rules (INED, board and supervisory composition, committees)

Companies listed in the Riga Stock Exchange shall follow and implement Principles of Corporate Governance and Recommendations on their Implementation, approved by Nasdaq Riga in 2010. These guidelines govern all important corporate issues of listed entities, including convening and managing shareholders meetings, composition of supervisory council and board, remuneration policies and internal controls of listed entities. Rules provide imperative requirements for sharing information with shareholders and other guarantees of minority shareholders.
Requirements for independent non-executive directors are determined by the regulation. The Principles provide recommendation that at least a half of council members are independent. It is stipulated that individual council members or groups thereof do not have a dominating role in decision making. The rules determine, that council should be composed of individuals whose knowledge, opinions and experience is varied. Council members are required to ensure sufficiently critical and independent attitude in evaluating and taking decisions.
In addition to requirements to issuers, also council members are addressed. It is prescribed by The Principles that every council member shall be independent from any external influence and shall comply with business ethics principles when taking decisions in relation to the business of the respective issuer.

b. Any other ESG considerations

There are no explicit rules for entities listing in Riga Stock Exchange regarding Environmental, social and governance (ESG) criteria. Meanwhile Principles of Corporate Governance and Recommendations on their Implementation, approved by Nasdaq Riga in 2010 determine business transparency requirements.
Nasdaq Baltics has emphasized environmental criteria in commencing listing of green bonds of several issuers. The Nasdaq Baltic Bond List currently includes three Green bond offerings. In 2015 Latvia’s Latvenergo was the first in Nasdaq Baltics and the first state-owned energy company in Eastern Europe to offer green bonds. In 2017 Latvian development finance institution ALTUM commenced series of issues of green bonds. Rules of bond issues contain a set of standards for a company’s operations that environmentally and socially conscious investors have used to screen potential investments.

8. Documentation and Other Process Matters

A. Over-allotment
In recent IPOs made by Latvian companies over-allotment option was not used. Moreover, implementation of greenshoe and brownshoe structures is somewhat uncertain under Latvian regulation and would require a very careful structuring from the corporate law perspective.

B. Stock lending agreement
Stock lending structure has never been used in Latvian IPOs, and implementation of such structure is also somewhat uncertain under Latvian law.

C. Stabilisation
Stabilisation is allowed in Latvia if made in compliance with the Market Abuse Regulation (MAR) and the Commission Delegated Regulation (EU) 2016/1052.
Under MAR stabilisation is exempted from the prohibition on insider dealing, market manipulation and unlawful disclosure of inside information so long as:
• the undertaking of the stabilisation is for a limited period (in respect of shares the time period is no longer than 30 calendar days whilst in respect of bonds it is no longer than 60 days);
• relevant information is disclosed to the competent authority;
• disclosure is made in the offering documents; and
• the undertaking is in compliance with adequate limits with regard to price.
The European Securities and Markets Authority (ESMA) indicated that disclosure obligations will include further requirements, namely that (a) prior to the stabilisation, issuers must disclose where the stabilisation measure may occur (whether it be on or outside a trading venue); and (b) after the stabilisation, issuers must disclose the trading venue on which the stabilisation transactions were carried out.

9. Ongoing Reporting Obligations (Life as a Public Company)
Listed companies are required to comply with various ongoing reporting obligations, which vary based on whether the securities are included on the regulated market or alternative market Firth North.
In addition to the reporting requirements provided in the Financial Instruments Market Law, there are also reporting requirements provided in the Rules of Nasdaq.
Moreover, both listed and unlisted companies will need to ensure that they meet the ongoing obligations under MAR, as a breach of MAR by an individual or legal person is a civil offence punishable by a fine and administrative sanction.

A. Annual and interim financials
The companies whose securities are listed on a regulated market of Nasdaq Riga must publish their audited annual reports prepared in accordance with the IFRS within 4 months of its financial year end and unaudited interim reports prepared in accordance with the IFRS within 2 months of the interim financial period.
The companies whose securities are listed on alternative market First North must publish their audited annual reports not later that on the day on which, in accordance with the regulatory acts of the registration country of the issuer, the annual report is to be audited and/or approved, and unaudited semi-annual reports within 3 months of the end of the reporting period.

B. Periodic Reporting
Companies with securities listed on the regulated market of Nasdaq Riga or on the First North alternative market are also subject to various periodic reporting requirement, including the obligation to publish the inside information in accordance with the requirements of MAR.
Companies with securities listed on the Nasdaq Riga regulated market are required to disclose, inter alia, information about: changes in the issuer’s management board, supervisory board or auditors; changes of the issuer’s legal address or actual location of the office; all proposed changes in the rights or liabilities of holders of securities; the court or arbitration proceedings which have been initiated by the issuer or against the issuer (provided that such proceedings are affecting or may affect the price of the issuer’s listed securities); initiation of legal protection, insolvency or liquidation of the issuer, its parent company or its material subsidiary; the issuer’s intention to seek for secondary listing on another regulated market; all circumstances and events that have materially affected or which could materially affect the issuer’s business or financial standing; convening of shareholders’ or bondholders meeting; payment of dividends; increase or reduction of share capital and acquisition of its own shares; issuance of debt securities; significant changes in the issuer’s shareholders, and other significant events.

Disclosure requirements for the companies whose securities are listed alternative market First North are less stringent and, inter alia, includes disclosure of information about: changes in the issuer’s management board, supervisory board or auditors; convening of shareholders’ or bondholders meeting; increase or reduction of share capital; the issuer’s intention to seek for admission to trading of its securities on another multilateral trading facility or a regulated market, and other significant events.

 

Contributed by Majernik & Mihalikova.

1. Market Overview

1.1. Biggest ECM and DCM transactions over the past 2-3 years

Over the last several years, the Slovak regulated market has been at the lowest levels within the EU from the viewpoint of liquidity, depth, volumes and market capitalisation, and has ranked among extremely illiquid markets.

From a perspective of achieved financial volume, the year 2019’s most prominent share issues on the market of listed securities were Tatry Mountain Resorts (EUR 3.115 million; 653 transactions), Všeobecná úverová banka (EUR 2.219 million; 509 transactions) and Slovnaft (EUR 1.607 million; 336 transactions).

Among the issues of debt securities of the private sector, the most noticeable were issues JTEF IX 2026 (EUR 30.63 million; 153 transactions), Dlh. JTEF VII 2025 (EUR 21.464 million; 96 transactions) and EMG 5,25/2022 (EUR 16.47 million; 185 transactions).

2. Overview of the local stock exchange and listing segments (markets)

2.1. Regulated market

At present, the Bratislava Stock Exchange, a.s. is the sole operator of a regulated market of securities in the Slovak Republic.

2.2. Non-regulated market

The Bratislava Stock Exchange also operates a multilateral trading facility (MTF) under its rules of the multilateral trading facility for the purpose of joining or enabling to join business interests of several third parties  to buy and sell securities within the system and in compliance with fixed rules; this results in  conclusion of securities transaction on the MTF.

3. Key Listing Requirements

3.1. ECM

Shares can be admitted to the listed market of the Bratislava Stock Exchange only if the shares and their issuer meet the requirements according to the Stock Exchange Act, separate regulations (e.g., Prospectus Regulation), and the Stock Exchange Rules for Shares Admission to the Listed Market.

The non-exhaustive list of key listing requirements includes the following requirements:

The shares can be listed on the stock exchange only if they are financial instruments pursuant to Slovak Act on Securities, are substitutable, their transferability is not limited, are book-entry securities (under certain circumstances can be also physical securities ) issued in conformity with the law of the country of their issue and their issuer meets the requirements under the laws of country of its registration for the issuance, the issue price of shares has been paid in full, the subscription of shares based on a public offering has been successfully completed, the issuer has been assigned a valid LEI code and the Prospectus has been approved and published. The shares can be admitted to the stock exchange main market only if the issuer has compiled and published the annual financial statements at least for three years immediately preceding the year in which the application is submitted; the shares representing at least 25% of the total nominal value of the shares, for which the application for admission is submitted, are distributed among the public; the minimum market capitalization of the issue is met (i.e., the minimum market capitalisation of the issue for the main market is EUR 15,000,000 and for the parallel market EUR 3,000,000) and in the last three years prior to the year in which the application for admission of share is submitted, the issuer has not entered into liquidation, its property has not been subject to bankruptcy proceeding or, respectively, restructuring has not been approved, or a bankruptcy petition has not been rejected due to insufficient property of the issuer.    

3.2. DCM

The listing requirements for bonds are very similar to listing requirements for shares save for minor differences such as the total nominal value of the bond issue, which should be at least EUR 5,000,000 for the main market or EUR 1,000,000 for the parallel market.

Convertible bonds can be admitted to the listed market only if the issuer’s shares, for which the convertible bonds are to be exchanged, have already been admitted to the stock exchange’s listed market or if these shares will be admitted together with the convertible bonds.

Securities can be included into the MTF list only if they meet the listing requirements as shares and bonds above except for obligation to have the Prospectus approved and published.

4. Prospectus Disclosure

4.1. Regulatory regimes (Prospectus Regulation or similar) – equity and debt

In accordance with the Prospectus Regulation (EU) 2017/1129 (Prospectus Regulation), which lists requirements for drawing up, approval and distribution of the prospectus, an approved prospectus is required to be published when securities are offered to the public or admitted to trading on a regulated market in Slovakia save for applicable prospectus exemptions set up in the Prospectus Regulation. Further requirements as regards the format, content, scrutiny and approval of the prospectus are governed by the Regulation (EU) 2019/980, which supplements the Prospectus Regulation.

The leading pieces of Slovak legislation governing the securities offerings, including the regulation of the prospectus are the Act No. 566/2001 Coll. on securities and investment services and on amendments and supplements of certain laws as amended (the “Securities Act”) and the Act No. 429/2002 Coll. on the Stock Exchange as amended (the “Stock Exchange Act”).

The National Bank of Slovakia is the only competent authority for administration and execution of authorizations in relation to the prospectus.   

4.2. Local market practice

Please see our answer above.

4.3. Language of the prospectus for local and international offerings

If the offer of securities to the public is made or admission to trading is sought only in Slovakia, the prospectus should be issued in Slovak language. Otherwise the prospectus should be issued either in a language accepted by the competent authorities of those Member States, where the offer of securities to the public or admission to trading is sought or in a language customary in the international finance environment.

5. Prospectus Approval Process

5.1. Competent Regulator

The National Bank of Slovakia (NBS) is the only competent authority for regulation and oversight over issuance of prospectus. 

5.2. Timeline, number of draft submissions, review and approval process

The NBS approves the prospectuses of securities within the time limits specified in the Prospectus Regulation as follows:

(a) the prospectus, documents forming the prospectus (including Registration document or Universal registration document) within 10 working days of the submission of the draft prospectus for its approval; in case of a frequent issuer, the time limit for the prospectus consisting of separate documents is reduced to 5 working days;

(b) a supplement to the prospectus within 5 working days of the submission of the application for approval;

(c) a prospectus where the public offer involves securities issued by an issuer who has no securities admitted to trading on a regulated market and who has not yet publicly offered securities (first draft only) within 20 working days of the request for approval;

Due to the short deadlines for the prospectus approval and the large scope of the documents which should be approved by the NBS, the NBS prefers unofficial consultations over the preparation and content of the prospectus in the form of an unofficial prospectus assessment through email communication.

All drafts of a prospectus shall be submitted to the NBS in searchable electronic format via electronic means.

Approved prospectus shall be made available to the public by the issuer, the offeror or the person asking for admission to trade on a regulated market reasonably in advance, and at the latest at the beginning of, the offer to the public or the admission for trading of the securities involved.

6. Listing Process

6.1. Timeline, process with the stock exchange

Securities can be admitted to the listed market or the MTF based on a written application for admission with Bratislava Stock Exchange. The proceedings shall start on the day of the application delivery to the Bratislava Stock Exchange. An issuer of shares, or a Stock Exchange member authorised by the issuer can apply for admission of securities. The application for admission shall be, amongst other things, accompanied in particular by a valid prospectus, the regulatory authority’s decision approving the prospectus, a document proving that the approved prospectus has been made publicly accessible, the articles of association, the deed of association and the foundation agreement or the foundation charter of the issuer in valid and current wording, the issuer’s extract from the business register if the applicant is not the issuer and a decision of the competent body of the issuer on the issue of shares.

The application and certain enclosures such as the supervisory authority’s decision approving the prospectus, article of association, the issuer’s extract from the business register and the power of attorney should be submitted to the Bratislava Stock Exchange as originals or officially authenticated copies. Other enclosures can be submitted as simple copies that are to be verified by the Bratislava Stock Exchange upon seeing the original documents.

If the conditions for admission of securities are met, the Bratislava Stock Exchange shall decide on an application within 60 days from its submission or supplementation. The Bratislava Stock Exchange may prolong the decision-making period to six months from the submission or supplementation of the application, if the applicant has applied for admission of securities also on other listed markets in the EU Member States.

The application may be submitted in Slovak, Czech, or English. The enclosures are usually submitted in Slovak, Czech, or English. If an enclosure is made in a different language, the Bratislava Stock Exchange may decide that an officially authenticated translation into the Slovak, Czech, or English is submitted along with the particular enclosure.

7. Corporate Governance

7.1.  Corporate governance code / rules (INED, board and supervisory composition, committees)

As of 1 January 2012 the Bratislava Stock Exchange decided to leave out from the Stock Exchange Rules the issuers’ obligation to accede solely to the Corporate Governance Code created by the Central European Corporate Governance Association and enable issuers to accede and abide to, any accepted Corporate Governance Code in compliance with the legislation in effect. Those issuers who acceded to the Corporate Governance Code for Slovakia can continue to follow it and new issuers are also allowed to sign up. The issuers, who decide to adhere to the Corporate Governance Code for Slovakia (the “Code”) are only obliged to prepare a statement according to the Code and for this purpose they can use the template called “Statement of Compliance with the Principles of the Corporate Governance Code for Slovakia”.

7.2. Any other ESG considerations

N/A

8. Documentation and Other Process Matters

8.1. Over-allotment (green-shoe or brown-shoe structure)

Issuers with financial instruments listed on a regulated market must comply with the rules set out in the EU-Market Abuse Regulation (MAR) and Delegated Regulation (EU) No. 2016/1052, which grant, under certain conditions, exemptions from the prohibitions of insider dealing and market manipulation for buy-back programmes and stabilisation measures. The MAR, in Art. 5, provides the conditions under which buy-back programmes and stabilisation may be carried out, without conflicting with the rules on prohibition of market manipulation. Part of these conditions are obligations to disclose the full details of the programme prior to the start of trading and to report transactions to the competent authorities. Regulation (EU) 2019/980 sets out the detailed information of any stabilisation, which issuers must disclose in prospectus. In case of both, buy-back programmes and stabilisation measures, each transaction shall be reported to the NBS no later than by the end of the seventh daily market session following the date of such transaction.

8.2. Stock lending agreement – whether it is used and whether there are any issues (tax, takeover directive)

The Securities Act recognizes the contract on the loan of securities, where the lender undertakes to transfer to the borrower a certain number of substitutable securities, and the borrower agrees to transfer to the creditor the same number of substitutable securities after the completion of an agreed period. The borrower also undertakes to pay a fee, if agreed. Instead of a monetary fee, it can be agreed that the number of substitutable securities returned will be greater than the number which the creditor loaned to the borrower. A contract on the loan of securities must be made in writing. The pre-requisites of valid contract on loan of securities are specification of the class, number and the ISIN number of the securities transferred (if assigned). 

8.3. Stabilisation – whether allowed and on what terms (MAR, local regimes)

Please see the answer under letter (a) above.

9. Ongoing Reporting Obligations (Life as a Public Company)

The issuers are obligated to meet a number of information duties. The fundamental and most important obligations for issuers after admission of their securities to the regulated market ensue primarily from the MAR and Directive 2013/50/EU (Transparency Directive), which has been transposed into the Slovak Republic’s legislation, primarily into the Securities Act and the Stock Exchange Act.

Pursuant to the Stock Exchange Act, an issuer of shares or debt shall publish its annual financial report at the latest four months after the end of each financial year and a semi-annual financial report covering the first six months of the financial year no later than three months after the end of the respective period for which the semi-annual financial report is prepared; the issuer shall also ensure that these reports remain publicly available for at least ten years.

9.1. Ad hoc disclosures

MAR obliges all issuers of financial instruments to notify the market of inside information so that other market participants are not put at a disadvantage against company insiders. The ad hoc disclosure requirement applies to all issuers who have requested or received admission of their financial instruments to trading on a regulated market or a multilateral trading facility (MTF) in Slovakia.

The issuers shall notify all market participants rapidly and comprehensively of any inside information so that investors can make well-founded decisions. For this reason, the issuers have a legal obligation to disclose to the public immediately any facts about their company that have the potential to influence the price of the financial instrument and directly concern the issuer (Article 17(1) of the MAR).

Amongst other reporting obligations, the issuer is, inter alia, obliged to disclose the information about changes in the issuer’s financial situation or other facts which can cause a substantial change in the price of shares or restrict the issuer’s ability to fulfil the obligations resulting from the share issue, or significantly affect the issuer’s business activity, the information about convening ordinary and extraordinary general meetings, including their agenda, the information about personnel changes of the members of a statutory body, members of supervisory bodies and key managers of the issuer, the information about admission of the issuer’s securities to trading on another regulated market and the  information about any modification of rights attached to the various types of shares.

Contributed by Weber & Co.

1. Market Overview

1.1. Biggest ECM and DCM transactions over the past 2-3 years

On the DCM side, in the past 2 to 3 years, the biggest DCM transactions consisted of two multi-tranche bond issuances by OMV AG, an integrated oil, gas and polymer company, with EUR 1 bn multi-tranche corporate bonds issued in each of 2018 and 2019, as well as a EUR 1.75 billion multi-tranche corporate bond issued in April 2020. Further, several other issuers issued benchmark size or sub-benchmark size corporate bonds in 2019 and 2020, including, inter alia, CA Immobilien Anlagen Aktiengesellschaft, voestalpine AG, IMMOFINANZ AG.

On the ECM side, in 2020, Swiss-listed but Austrian-based ams AG competed a substantial capital increase in an amount of EUR 1.65 billion, which served for the purpose of partially financing the acquisition of German OSRAM. In view of the Covid-19 pandemic, 62% of shares were placed among investors, whereas 38% were subscribed by the joint bookrunners. The transaction was the first notable ECM issue in Vienna in 2020. In 2019, three initial public offerings (IPOs) took place in Vienna, with Marionomed Biotech AG opening the field for other issuers in February, followed by Frequentis AG and Addiko Bank AG in July 2019.

2. Overview of the local stock exchange and listing segments (markets)

2.1. Regulated market

The Official Market (Amtlicher Handel) of the Vienna Stock Exchange (Wiener Börse) is the only regulated market in Austria in accordance with the Markets in Financial Instruments Directive (Directive 2014/65/EU (MiFID II). The Stock Exchange Act 2018 (Börsegesetz 2018) constitutes the primary framework for the admission of securities to a regulated market in Austria as well as for ongoing obligations of issuers of listed equity and debt instruments.

2.2. Non-regulated market

The Vienna Stock Exchange also operates the Vienna MTF (formerly the Third Market (Dritter Markt)), which is not a regulated market within the meaning of MiFID II but a multilateral trading facility. Securities are usually admitted to trading on the Vienna MTF if securities need to be listed but the extensive governance and disclosure framework applicable to the Official Market should be avoided. The Vienna MTF is governed by the Rules for the Operation of the Vienna MTF of the VSE. Some of the provisions and requirements set forth in the Stock Exchange Act 2018 do not apply to financial instruments traded on the Vienna MTF. However, the key provisions of the Regulation (EU) 596/2014 (Market Abuse Regulation (MAR)) (dissemination of inside information, directors’ dealing reports and maintaining insider lists) apply also for issuers having securities admitted to trading on the Vienna MTF.

3. Key Listing Requirements

3.1. ECM

Official Market:

Any admission to the Official Market requires the publication of an approved prospectus (see below).

For a listing on the Official Market (i.e. a regulated market pursuant to MiFID II) in the standard market segment the minimum period of existence is three years (exceptions apply) and a minimum nominal share capital of EUR 1 million is required. The free float needs to meet 25% of the total nominal value (par value shares) or 25% of the number of shares (par value shares) or 10% held by at least 50 different shareholders. From an accounting perspective, IFRS or internationally-recognized accounting standards for groups or also national standards for single entities must apply.

If issuers target the so-called “prime market” segment of the Vienna Stock Exchange, some further requirements on top of those for the standard market segment apply: a specialist and further market makers need to be appointed, the capitalization of the free float needs to exceed certain thresholds (a minimum of EUR 20 million for free float > 25% or a minimum of EUR 40 million for free float < 25%), publications have to be made in German and English, and the level of compliance with post-issuance on-going requirements is higher.

Vienna MTF:

If no regulated market segment pursuant to MiFID II is required, issuers can also choose the so-called “direct market” or “direct market plus”, both of which are part of the Vienna MTF segment. No prospectus is required for inclusion to trading on the Vienna MTF.

These sub-segments of the Vienna MTF are seen as basic exchange-regulated segments for SME and young companies as an entry segment to capital markets. There are no or only minimum periods of existence (direct market: no minimum period, direct market plus: one year). The minimum share capital for a joint stock corporation is the mandatory minimum for such legal form in Austria, amounting to EUR 70,000. For the direct market plus, the market capitalization has to be approximately EUR 10 million as a minimum and a sufficient share diversification of at least 20 shareholders is requested by the Vienna Stock Exchange.

3.2. DCM

Also in relation to DCM listings, it has to be distinguished between a listing on the Official Market and an inclusion to trading on the Vienna MTF.

The admission of bonds to listing must be applied for by the issuer for the admission segment regulated by law (Official Market) along with a stock exchange member of the Vienna Stock Exchange (i.e., a credit institution being a member of the stock exchange). The minimum issue size for the Official Market is EUR 250,000; there is no such requirement for the Vienna MTF. Bonds are included in trading in the Vienna MTF upon the request of a credit institution, an investment firm, a law firm or the issuer itself.

When an issuance program is admitted to the Vienna Stock Exchange, no separate admission procedures are required for each of the individual bonds. Trading in the bonds may start as quickly as two days after the Vienna Stock Exchange has received the bond terms of the bonds issued under the program.

4. Prospectus Disclosure

4.1. Regulatory regimes (Prospectus Regulation or similar) – equity and debt

Unless a prospectus exemption applies, an issuer will be required to publish an approved prospectus when conducting a public offer of securities in Austria or filing a request for the admission to trading of securities on the regulated market in Austria, namely, on the Official Market.

The key laws applicable to securities offerings in Austria are the Capital Markets Act 2019 (Kapitalmarktgesetz 2019) and the Stock Exchange Act 2018 (Börsegesetz 2018). The Prospectus Regulation (EU) 2017/1129 is the primary source governing the offering of securities, including in particular the prospectus obligation (publication of an approved prospectus for public offers of securities) as well as exemptions from the prospectus obligation. The Capital Markets Act 2019, which replaced the former version of the Austrian Capital Markets Act after the Prospectus Regulation entered into force on 21 July 2019, supplements the Prospectus Regulation and sets out the rules for the public offering of investments in Austria, which requires in principle the publication of an investment prospectus.

The Prospectus Regulation, the Capital Markets Act 2019 and the Stock Exchange Act 2018 are primarily administered and enforced by the Austrian Financial Market Authority (Finanzmarktaufsichtsbehörde – FMA). Any public offer of securities or investments pursuant to the Prospectus Regulation or the Capital Markets Act 2019 is subject to a prospectus publication, either approved by the FMA or passported into Austria. If a listing of securities is sought, the prospectus, along with other documents, has to be filed with the Vienna Stock Exchange which operates the only regulated market in Austria: the Official Market. In addition, any prospectus for an offer of securities in Austria has to be filed with Oesterreichische Kontrollbank AG (OeKB). If the FMA approves a prospectus, the FMA directly procures the filing with OeKB.

4.2. Local market practice

See above.

4.3. Language of the prospectus for local and international offerings

The most common language used for prospectuses is English; however, a prospectus drafted only in German can be used for debt offerings. For ECM market practice will only accept an English prospectus, along with a German language translation of the summary in case Austrian retail investors are also targeted.

5. Prospectus Approval Process

5.1. Competent Regulator

The competent regulator for prospectuses in Austria is the Austrian Financial Market Authority (Finanzmarktaufsichtsbehörde – FMA).

5.2. Timelime, number of draft submissions, review and approval process

To commence a public offer, a prospectus must be drawn up in accordance with the Prospectus Regulation (public offer of securities) or the Capital Markets Act 2019 (public offer of investments), and filed with the FMA for approval.

The FMA must notify the issuer, the offeror or the entity asking for admission to trading on a regulated market, as the case may be, of its decision regarding the approval of the prospectus within ten banking days of the filing of the prospectus. This time limit is reduced to five working days for a prospectus drawn up by frequent issuers referred to in Article 9, Paragraph 11 of the Prospectus Regulation. An extended review period of 20 banking days applies if the issuer’s securities have not yet been admitted to trading on a regulated market. Usually, the first version submitted to the FMA is not complete and still includes placeholders for missing parts and information. The FMA provides comments on the submitted prospectus at the end of the review period. In such case, the issuer adds further missing information, addresses the FMA’s comments and re-submits an amended prospectus version to the FMA. After that, the FMA again reverts within the respective review period. The review period of ten or twenty banking days applies to each prospectus version submitted. Accordingly, it is common practice to have several review rounds for debt prospectuses and even more for prospectuses for equity offerings.

Once approved, the prospectus must be published as soon as practicable, at least prior to the commencement of the offering. The publication may, inter alia, be undertaken electronically on the website of the issuer. Subsequent to the approval, the prospectus must also be provided to the Oesterreichische Kontrollbank AG (OeKB) as the registration office. The issuer must notify the New Issue Calendar (Emissionskalender) maintained by the OeKB for statistical purposes prior to commencement of the offering.

In practice, issuers usually file a preliminary prospectus without the final price and the final volume of securities offered as this information can be provided only after completion of the book-building process. The book-building process starts with investors submitting bids for purchasing the securities at prices that must be within a pre-defined offer price range or maximum limit. At the same time, marketing activities are usually undertaken by the issuer and the underwriters (eg, press conferences, road shows or advertising). The offer price is usually determined after the book-building phase. Finally, the issuer is obliged to file and publish a supplement to the preliminary prospectus including the final offer price, the gross proceeds as well as the net proceeds of the issues.

Sales of securities in a public offering are usually settled through a clearing system. The settlement process, whereby securities are delivered, usually against payment, is subject to the rules and procedures of the respective clearing system. In most issues, individual certification of the security is excluded. Therefore, global certificates are deposited with a securities clearing bank (e.g. Oesterreichische Kontrollbank AG). In certain cases, temporary and permanent global notes are used.

6. Listing Process

6.1. Timeline, process with the stock exchange

An application to list securities to the Official Market or to include the securities in trading on the Vienna MTF has to be filed with the Vienna Stock Exchange. For a listing on the Official Market the application for admission to listing of securities or of an issue programme must be made in writing by the issuer and signed by an exchange member of the Vienna Stock Exchange. The issuer must state, among other things, the type and denomination of the securities as well as the total amount of the issue to be admitted by stating the nominal value or in the case of no-par value securities, the expected market value and the number of securities. In the case of an application for admission to listing of an issue programme, the total amount of the maximum issue volume stated in the prospectus shall refer to all potential non-dividend paying securities. The filing with the Vienna Stock Exchange must be accompanied by, inter alia, the approved prospectus, an excerpt from the companies’ register relating to the issuer not older than four weeks and proof of any other legal requirements for the issue of securities (eg, corporate resolutions).

The issuer and the Vienna Stock Exchange usually agree on the date of the public listing. The Vienna Stock Exchange is obliged to reach a decision on applications for admission of securities within ten weeks after submission.

7. Corporate Governance

7.1. Corporate governance code / rules (INED, board and supervisory composition, committees)

7.1.1. ACGC

The Austrian Corporate Governance Code (ACGC) was published by the Austrian Working Group on Corporate Governance, a group of private organizations and individuals in 2002 and was amended most recently in January 2020. The ACGC primarily applies to Austrian stock market-listed companies that undertake to adhere to its principles. The ACGC is based on statutory provisions of Austrian corporate law, securities law and capital markets law (“Legal Requirements”, “L Rules”), which must be complied with. In addition, the ACGC contains rules considered to be a part of common international practice, such as the principles set out in the OECD Principles of Corporate Governance and the recommendations of the European Commission. Rules an issuer should comply with are so-called “Comply or Explain” rules (“C Rules”); reasons and explanations for deviations from C Rules must be provided in order to ensure compliance with the ACGC. In addition, the ACGC provides for voluntary rules seen as recommendations only, deviations of which do not require explanations (“Recommendation”, “R Rules”).

7.1.2. Management Board

As to the composition of the management board (Vorstand), which handles the day-to-day management of an Austrian joint stock company, the ACGC foresees that the management board shall be made up of several persons, with one member acting as the chairperson of the management board. Internal rules of procedure of the management board shall define

the distribution of responsibilities and the mode of cooperation between management board members.

The management board shall provide the supervisory board periodically and in a timely manner with comprehensive information on all relevant issues of business developments including an assessment of the risk situation and the risk management in place at the company and at group companies in which it has major shareholdings. If an event of major significance occurs, the management board shall immediately inform the chairperson of the supervisory board; furthermore, the supervisory board shall be immediately informed of any circumstances that may have a material impact on the profitability or liquidity of the company (special report). Ensuring that the supervisory board is supplied with sufficient information is a joint task of the management board and the supervisory board. Members of the boards and the staff members involved are obliged to maintain strict confidentiality.

The management board shall agree on the strategic direction of the company with the supervisory board and shall periodically discuss the progress made on implementing the strategy.

7.1.3. Supervisory Board

The supervisory board (Aufsichtsrat) of an Austrian joint stock company is responsible for overseeing the management board and shall provide support to the management board in governing the enterprise and, in particular, shall assist in making decisions of fundamental significance. The supervisory board appoints the members of the management board and has the right to terminate their employment. The supervisory board shall set up expert committees from among its members depending on the specific circumstances of the enterprise and the number of supervisory board members. These committees shall serve to improve the efficiency of the work of the supervisory board and shall deal with complex issues. However, the supervisory board may discuss the issues of the committees with the entire supervisory board at its discretion. An audit committee must be set up. At least one person with special knowledge meeting the company’s requirements and practical experience in the area of finance and accounting and reporting must belong to the audit committee (financial expert). The chairperson of the audit committee or financial expert may not be a person who in the past three years has served as a member of the management board or has discharged managerial duties or has served as auditor of the company or has signed an auditor’s opinion or who is not independent and free of prejudice for any other reason. The audit committee shall be responsible for monitoring the accounting process and or monitoring the efficacy of the internal control and risk management system, the independence and the activities of the auditor of the financial statements as well as for the approval of non-audit services.

7.3. Any other ESG considerations

Not applicable.

8. Documentation and Other Process Matters

8.1. Over-allotment (greenshoe or brownshoe structure)

Price stabilisation in connection with an offering of securities, for example, by means of overallotment or the exercise of greenshoe options, may contravene the restrictions on market manipulation set forth in the Market Abuse Regulation 2014/596/EU (MAR). Pursuant to Article 5 of the MAR, price stabilization is permitted provided that such stabilization measures are carried out in accordance with Commission Regulation (EU) 1052/2016 with regard to Regulatory Technical Standards (the RTS Regulation). To benefit from the exemption under the RTS Regulation, some key obligations have to be complied with.

Issuers, offerors or entities undertaking stabilization have to notify details of all stabilization transactions to the competent authority of the relevant market no later than the end of the seventh daily market session following the date of execution of such transaction. Within one week of the end of the stabilization period, issuers, offerors or entities undertaking stabilization have to adequately publicly disclose the following: whether stabilization was undertaken; the date at which stabilization started; the date at which stabilization last occurred; the price range within which stabilization was carried out, for each of the dates during which stabilization transactions were carried out; and the trading venues on which the stabilization transactions were carried out, where applicable.

When conducting stabilization measures and exercising an overallotment facility or green shoe option outside the permitted frame of the RTS Regulation, although the European Securities and Markets Authority has indicated that stabilization will not necessarily be regarded as abusive solely because it falls outside the MAR and the RTS Regulation, a risk remains that the Financial Market Authority will consider those measures as market manipulation. This may lead to criminal sanctions, or administrative fines of up to €5 million or up to three times the amount of the benefit gained, taking into account any losses avoided due to the infringement committed, provided that benefit can be expressed in figures.

8.2. Stock lending agreement – whether it is used and whether there are any issues (tax, takeover directive)

Stock lending transactions are considered to be transfers of ownership of the underlying securities. Therefore, any transfer of shares by means of stock lending transactions is subject to reporting requirements provided for in terms of major shareholding disclosure as well as potential takeover law implications of any share transfer.

8.3. Stabilisation – whether allowed and on what terms (MAR, local regimes)

See above.

9. Ongoing Reporting Obligations (Life as a Public Company)

Upon listing on the Official Market of the Vienna Stock Exchange, issuers become subject to ongoing reporting requirements set forth in the Stock Exchange Act 2018. Provisions on the reporting obligations are harmonised as a result of the implementation of Directive 2004/109/EC as amended by Directive 2013/50/EU (Transparency Directive), including major shareholding disclosure, ad hoc disclosure and mandatory publications of financial information.

Further, in case of admission of securities to trading on the Vienna multilateral trading facility (MTF), the issuer will become subject to key Market Abuse Regulation 2014/596/EU provisions (dissemination of inside information, directors’ dealing reports, maintaining of insider lists, prohibition of market manipulation and prohibition of insider dealing and of unlawful disclosure of inside information) if he has submitted an application for inclusion in trading of the financial instrument or has approved it.

9.1. Annual and interim financials

Issuers of debt and equity securities must disclose annual financial statements no later than four months after the close of the financial year and half-year reports no later than three months after the close of the reporting period, and shall ensure that this report is available to the public for at least 10 years. Moreover, issuers whose shares are listed in the Vienna Stock Exchange’s prime market segment must publish their half-year report no later than two months after the close of the reporting period. Since February 2019, companies listed on the Vienna Stock Exchange’s prime market segment may choose whether to publish quarterly reports for the first and third quarters and in what form.

Annual financial reports for financial years starting from 1 January 2020 are required to be published in the European Single Electronic Format. An overview about the planned process for the acceptance of the technical standards on the reporting format in which issuers should prepare their annual financial reports is currently provided by the draft Regulatory Technical Standards (RTS).

9.2. Ad hoc disclosures

Pursuant to Article 17 of the Market Abuse Regulation (Regulation 2014/596/EU), issuers of financial instruments shall inform the public as soon as possible of inside information that directly concerns that issuer. Inside Information according to Article 7 of the Market Abuse Regulation is any information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers or to one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments.

The issuer must ensure that the inside information is made public in a manner that enables fast access and complete, correct and timely assessment of the information by the public and, where applicable, in the officially appointed mechanism referred to in Article 21 of Directive 2013/50/EU. The issuer shall not combine the disclosure of inside information to the public with the marketing of its activities. The issuer shall post and maintain on its website for a period of at least five years, all inside information it is required to disclose publicly.

Inside information has to be disclosed ad hoc with the intention of an EU-wide distribution via certain channels, including Reuters, Bloomberg and Dow Jones Newswire. Any major changes with respect to inside information, which has already been disclosed, must be disseminated immediately after any such change takes place.

In certain cases, an issuer possessing inside information is entitled to postpone the ad-hoc disclosure to protect its justified interests. Issuers are permitted to delay disclosure of inside information to protect their legitimate interests, as long as the public is not misled and confidentiality can be maintained (Article 17 para 4 of the Market Abuse Regulation). In such case, the issuer is obliged to ensure confidentiality. The FMA has to be notified immediately after the disclosure of inside information via email. To preserve the stability of the financial system, an issuer that is a credit institution or a financial institution, may, on its own responsibility, delay the public disclosure of inside information, under certain circumstances.

Contributed by Jadek & Pensa.

1. Market Overview

Equity capital markets and debt capital markets are somewhat underdeveloped in Slovenia compared to its Western EU counterparts. The Ljubljana Stock Exchange, which celebrated 30 years of existence in 2019, is the main market for admission of equity, debt and other instruments. However, the liquidity of the market is on the weaker side, even though a new liquidity provider was added in 2019. In Slovenia SME’s typically resort to classic debt financing through banks and very rarely turn to capital markets to seek funding. Therefore, companies that participate in the Ljubljana Stock Exchange through admission of equity, debt or other instruments are predominantly older, larger companies.

In the last three years there has been only one major IPO on the Ljubljana stock exchange – the listing of the stock of Nova Ljubljanska Banka in 2018 in a total amount of EUR 1.03 billion and GDRs on the London Stock Exchange. In 2018 one of the mayor Slovenian companies, Gorenje, went private and delisted from the Ljubljana stock exchange after an acquisition of majority share by Hisense and subsequent squeeze-out of remaining shareholders. This follows the continuous pattern of delisting of companies from Ljubljana Stock Exchange in recent years.

The majority of transactions on the Ljubljana stock exchange in recent years involved shares (transactions with shares amounted to slightly more than EUR 300 million in 2019) followed by transactions with bonds (transactions with bonds amounted to slightly more than EUR 25 million). Some more notable transactions with shares in the last three years were M&A driven, such as the acquisition of large Slovenian logistics and freights provider Intereuropa or the privatisation of the second largest Slovenian bank Abanka, however the highest volume of transactions was performed with the shares of Slovenian pharmaceutical company Krka. Several bonds and commercial paper issues were made in 2019. Namely, in 2019 two bond issues with a total value of EUR 1.5 billion and 2 commercial paper issues with a total value of EUR 53.100 billion were made. The data was comparable in volume to the previous year (two new bond issues with a total issuing value of EUR 1.52 billion and 3 commercial papers in the total value of EUR 66.53 billion). In 2019 the total volume of the transactions remained at a similar level to that of 2018 (combined total of transactions amounted to approximately EUR 329 million), but the market cap of the index SBI TOP grew more than 15%.

2. Overview of the local stock exchange and listing segments (markets)

2.1. Regulated market

The Ljubljana Stock Exchange is the only stock exchange in the Republic of Slovenia. The equity market is divided into the Prime market and the Standard market. The Prime market is the elite part of the equity market, intended for companies that stand out for their liquidity, size, and transparency of operations. It is designed to increase the reputation of the best Slovenian companies in front of international investors. Companies that are listed on the Prime market have to fulfil additional reporting standards and their stocks usually have higher liquidity than those on other segments of the market. Both markets are regarded as “regulated markets” under the EU Directive on Markets in Financial Instruments (No. 2014/65/EC) (MiFID II) and the Slovenian Market in Financial Instruments Act (ZTFI-1).

Stocks that are listed on the Standard market fulfil the basic conditions for listing on the stock exchange, but are not yet mature enough for a more advanced trading segment. Companies whose stocks are listed on the Standard market meet the disclosure standards pursuant to Slovene legislation.

The Bonds market of the Ljubljana Stock Exchange is structured into Bonds and Money Market Instruments. Money Market Instruments are further subdivided into treasury bills and commercial papers. An additional market is the Structured Products Market, which is subdivided into Closed-end fund shares, Fund market, Certificates, Warrants, Rights and Other products. For listings on the Bonds market similar criteria as for the stock exchanges is applicable. Nevertheless, for open-end and close-end funds additional criteria applies regulating asset management companies.

2.2. Non-regulated market

The Ljubljana Stock Exchange also operates SI ENTER, a multilateral trading facility (MTF). The purpose of SI ENTER is to enable trading in securities that are not listed on the regulated market with the purpose of enhancing transparency and achieving a better price formation that at the OTC market. SI ENTER also serves the purpose of listing securities of start-ups and SMEs, who do not meet the requirements or lack sufficient funding to be listed on the regulated market (described above under point 2.a). SI ENTER market provides for less transparency compared to the regulated market (described above under point 2.a). The transparency requirements for the SI ENTER as MTF are regulated with the applicable legislation, i.e., EU Markets in Financial Instruments Regulation (No. 600/2014) (MiFIR) as well as the SI ENTER rules.

SI ENTER is subdivided into three segments: (i) the ADVANCE Segment, (ii) the BASIC Segment and (iii) the PROGRESS Segment. The main difference between the ADVANCE and PROGRESS Segments on one side and the BASIC Segment on the other side is that shares listed in the BASIC Segment are not listed upon the request of the issuer but as a consequence of the interest of traders. Accordingly, there are no additional reporting and disclosure obligations imposed on the issuers in the BASIC Segment, therefore transparency level is low and investing in BASIC Segment is associated with higher risk. The main difference between ADVANCE and PROGRESS Segments is that PROGRESS Segment requires additional reporting and disclosures and is associated with higher costs, therefore it is more appropriate for more mature issuers that are preparing to be listed at one of the “regulated markets” (described above under point 2.a).  The three SI ENTER Segments are subdivided as follows: 

• ADVANCE Segment, which includes:
  • ADVANCE SHARES – greater transparency of operations compared to BASIC Segment, meant for shares, share-equivalent securities representing a share in membership rights of legal persons and GDRs related to shares or share equivalent securities, listed on the basis of the issuer application
  • ADVANCE BONDS – meant for bonds, other types of securities containing monetary obligation of the issuer and GDRs related to these securities, listed on the basis of the issuer application
  • ADVANCE COMMERCIAL PAPERS – meant for commercial papers, listed on the basis of the issuer application
• BASIC Segments. The purpose of the BASIC Segment is to allow traders to trade with shares for which trading interest among traders exist, to avoid OTC trading with such shares. As the shares are not listed on the basis of an application of the issuer, the issuer does not have any additional obligations or costs associated with the listing on the BASIC segment. The only sub-segment of the BASIC Segment is:
  • SHARES SLOVENIA – lower transparency of operations, only issuers with registered office in Republic of Slovenia, listed on the basis of an invitation of the exchange.
• PROGRESS Segment, which is a segment shared between Ljubljana Stock Exchange and Zagreb Stock Exchange. In comparison to the ADVANCE Segment, which is a segment of Ljubljana Stock Exchange only, the PROGRESS segment requires additional reporting of companies and is associated with higher costs for the issuer (among other requirements, at the time of listing as well as for an additional two year period the issuer has to have a contract concluded with one of the advisors officially registered with the Progress MTF). In this sense the PROGRESS Segment is closer to the “regulated markets” (described above under point 2.a). PROGRESS Segment is therefore advisable to issuers who are preparing to be listed with the “regulated markets”. Currently there are no Slovenian companies listed with the PROGRESS Segment. The PROGRESS Segments is sub-divided to:
  • PROGRESS SHARES – additional reporting and discloser requirements compared to ADVANCE Segment, meant for shares, share-equivalent securities representing a share in membership rights of legal persons and GDRs related to shares or share equivalent securities, listed on the basis of the issuer application
  • PROGRESS BONDS – additional reporting and discloser requirements compared to ADVANCE Segment, meant for bonds, other types of securities containing monetary obligation of the issuer and GDRs related to these securities, listed on the basis of the issuer application
  • PROGRESS COMMERCIAL PAPERS – additional reporting and discloser requirements compared to ADVANCE Segment, meant for commercial papers, listed on the basis of the issuer application

 

3. Key Listing Requirements

The listing process and listing requirements for listing equity and debt securities on Ljubljana Stock Exchange are regulated in the Stock Exchange Rules (in Slovene: “Pravila borze”, published on: http://www.ljse.si/cgi-bin/jve.cgi?doc=678, the “LJSE Rules”).

3.1. ECM

As mentioned above, stocks can be listed and traded on Ljubljana Stock Exchange on two market sub-segments:

• Standard Market
• Prime Market

Listing requirements for Standard Market

For a company’s shares to be listed on the Standard Market the following requirements shall be fulfilled (Article 8 and 9 of the LJSE Rules):

• regarding the legal standing of the issuer:
  • established and operating under the law of the country of its establishment;
  • obtainment of LEI code;
• regarding publication of the prospectus and other information pursuant to the ZTFI-1:
  • if publication of the prospectus is required; obtaining Securities Market Agency (ATVP) decision on the approval of the prospectus; the prospectus needs to be submitted to the Ljubljana Stock Exchange before listing;
  • if publication of the prospectus is not required due to the application of the exceptions: notification to ATVP; such notification needs to be submitted to the Stock Exchange before listing;
• regarding transferability:
  • the shares listed need to be freely transferable;
• regarding share issuance and trade settlement mechanism:
  • the shares need to be validly issued and the requirements for reliable settlement of trades need to be fulfilled (this condition is fulfilled if the shares of the issuer established in Slovenia are issued as book-entry securities and entered in the central register).

The companies whose stocks are listed on the Ljubljana Stock Exchange need to fulfil the above stated requirements throughout the trading of their shares on the Ljubljana Stock Exchange. Furthermore, companies shall also comply with the LJSE Rules and other applicable regulation as well as decision adopted by the Ljubljana Stock Exchange and its management.

3.1.1. Listing requirements for Prime Market

For the stocks to be listed on the Prime Market all the listing requirements for listing on the Standard Market stated above need to be fulfilled as well as the following additional requirements (Article 11 of the Rules): 

• share class:
  • shares need to be issued as ordinary shares which give their holders one vote;
• quality criteria:
  • operation of the company for at least three years before listing;
  • audited annual reports for the past three years;
  • minimum value of the capital shall be EUR 10 million or amount in other currency, which is equal;
  • percentage of the shares held by the public: at least 25% (or less than 25%, provided that the Stock Exchange decides that the requirement is fulfilled if it assesses that due to the large number of shares of the same class and the volume of its sale to the public, the market will still function properly);
• disclosure requirements and publication of statements, whit which the issuer undertakes:
  • to disclose information and report also in accordance with International Financial Reporting Standards (IFRS);
  • to publish summaries of the public announcements both in Slovenian and English language;
  • to publish interim business information (quarterly reports or interim statements), the financial calendar and the declarations of compliance with the Corporate Governance Code;
  • to strive to the best of the abilities to meet the best practices of disclosure, as stipulated by the Guidelines, published by the management of the Stock Exchange-

3.2. DCM

Debt securities trading on the Ljubljana Stock Exchange are bonds and money market instruments, such as treasury bills, commercial papers and certificates of deposit in connection with the bonds (Article 6(3) of the LJSE Rules).

3.2.1. Bonds

According to Article 40 of the LJSE Rules, for listing the bonds on Ljubljana Stock Exchange, the same requirements needs to be fulfilled as for listing stock on the Standard Market. Furthermore, the issuer or the person requesting listing of the bonds on the Stock Exchange needs to comply with the obligation on the publication of the prospectus in accordance with ZTFI-1.

3.2.2. Money market instrument

Money market instrument (treasury bills and commercial papers) shall be listed on Ljubljana Stock Exchange provided that (Article 45 of the LJSE Rules):

• they are freely transferable;
• they are validly issued and the conditions for reliable settlement od trades are fulfilled;
• basic information regarding the money marker instrument is published; and
• administrative fee is paid.

3.3.3. Other

According to the Rules, special provisions and listing requirements may apply for listing the securities of the issuers having their seat in other EU Member States and third countries. 

4. Prospectus Disclosure

4.1. Regulatory regimes

The prospectus is a key document that needs to be published when the securities are offered to the public or when the admission of securities on a regulated market situated or operating within a Member State is sought. 

In Slovenia, matters concerning the preparation and content of the prospectus are primarily governed by the directly applicable Regulation (EU) 2017/1129 of 14 June 2017 (the “Prospectus Regulation”), the Commission Delegated Regulation (EU) 2019/980 of 14 March 2019 concerning the format, content, scrutiny and approval of the prospectus and the Commission Delegated Regulation (EU) 2019/979 of 14 March 2019 concerning regulatory technical standards on key financial information in the summary of a prospectus, the publication and classification of prospectuses, advertisements for securities, supplements to a prospectus, and the notification portal.

Since Prospectus Regulation repealed the previously valid Directive 2003/71 of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading, majority of the matters concerning the prospectus are now uniformly regulated on the European level. Only minority of matters are therefore left to the individual Member States to regulate. In Slovenia, certain matters regarding the prospectus are thus still regulated in the ZTFI-1, however, no provisions apply to the content of the prospectus and disclosure requirements.

According to the Prospectus Regulation, prospectus shall be written and presented in an easily analysable, concise and comprehensible form so that enables the investors to make informed investment decisions. The information presented shall be sufficiently and objectively presented in a single document or separate documents. As a general rule, the prospectus shall therefore include essential information, which allow the investors to make an informed assessment of financial situation of the issuer or guarantor (the assets and liabilities, profits and losses, financial position, prospects), the rights attaching to the securities, reasons for the issuance as well as its impact on the issuer.

Article 16 of the Prospectus Regulation emphasizes the importance of disclosing the of risk factors to ensure that investors make an informed assessment of such risks and thus take investment decisions in full knowledge of the facts. The risk factors included in the prospectus shall be limited to risks which are specific to the issuer and/or to the securities and which are material for taking an informed investment decision. The prospectus also needs to include assessment of the materiality of the risk factors based on the probability of their occurrence and the expected magnitude of their negative impact. Risk factors shall be presented in a limited number of categories depending on their nature and shall be adequately described, explaining how they affect the issuer or the securities being offered or to be admitted to trading.

The Prospectus Regulation stipulates that the European Commission shall adopt delegated acts and further regulate the content of the prospectus. The Commission did so and issued Commission Delegated Regulation 2019/980, which in detail provides the information that need to be included in each type of the prospectus.

According to the Commission Delegated Regulation 2019/980, the prospectus shall therefore, inter alia, consist of:

• Information regarding the issuer, its organisational structure, management and supervisory bodies, remunerations and benefits policy, as well as persons responsible for information provided in the prospectus.
• Risk factor as provided in detail above.
• Business overview, including principal activities and markets, strategies and objectives, important events in the development of the issuer’s business, investments.
• Operating and financial review, including financial condition of the issuer and issuer’s likely future development.
• Trend overview in operational and financial field.
• Information about the employees and related shareholding and stock option plans.
• Major shareholders, including any potential differences in voting rights as well as information whether the issuer is directly or indirectly controlled and by whom.
• Related party transactions that the issuer has entered into during the period covered by the historical financial information and up to the date of the prospectus.
• Financial information about the issuer, including audited historical financial information covering the latest three financial years (or such shorter period as the issuer has been in operation) and the audit report in respect of each year prepared in accordance with the IFRS.
• Information about any (legal) proceedings (including any such proceedings which are pending or threatened of which the issuer is aware), during a period covering at least the year which may have, or have had in the recent past significant effects on the issuer and/or group’s financial position or profitability, or provide an appropriate negative statement.

Since a prospectus is a complex and extensive document, the prospects shall include a summary aiding the investors when considering whether to invest in a security or not. It shall be written in a way that is easy to read, using characters of readable size and written in a language and a style that facilitate the understanding of the information, in particular, in language that is clear, non-technical, concise and comprehensible for investors. A summary shall therefore include key information that investors need in order to understand the nature and the risks of the issuer, the guarantor and the securities that are being offered or admitted to trading on a regulated market. In accordance with Article 7 of the Prospectus Regulation, a summary should include the following four sections: (i) introduction, containing the prescribed warnings, (ii) key information on the issuer, (iii) key information on the securities as well as (iv) key information on the offer of securities and/or the admission to trading on a regulated market.

4.2. Local market practice

As evident above, there are fewer offerings of securities in the Slovenian market compared to other European markets. As ATVP stated in its yearly report for the year 2018, the trend in the issuance of new securities and the volumes of financing of businesses on the capital market is not encouraging neither in the equity nor in the debt sector. This is likely due to the fact that businesses in Slovenia usually seek funding sources within the banking sector and not on the capital markets. As the capital markets are not as developed in Slovenia as in certain other EU countries, there is no particular local market practice in relation to drafting and content of the prospectus.

4.3. Language of the prospectus for local and international offerings

According to Article 27 of the Prospectus Regulation, the language of the prospectus depends on the territory where the securities are offered to the public or where the admission on a regulated marker is sought. Provided that the securities are offered to the public or admission to trading on a regulated market is sought:

only in Slovenia as a home Member State, then the prospectus shall be prepared in Slovenian language only (Article 27(1) of the Prospectus Regulation).

in home Member State, namely Slovenia, and in other host Member States, then the prospectus shall be prepared in Slovenian language, however, it shall also be available in the language accepted by the competent authorities of the each host Member State or in the language which is customary in the sphere of international finance, at the choice of the issuer, the offeror, or the person asking for admission to trading on a regulated market (Article 27(3) of the Prospectus Regulation).

in other Member states (rather than the host Member State), than the prospectus shall be prepared either in a language accepted by the competent authorities of those Member States or in a language customary in the sphere of international finance, at the choice of the issuer, the offeror or the person asking for admission to trading on a regulated market.

Nevertheless, according to paragraph 2 of the Article 27(2) of the Prospectus Regulation, the competent authority of each host Member State shall require that the prospectus summary referred to in Article 7 be available in its official language, or at least one of its official languages, or in another language accepted by the competent authority of that Member State, but it shall not require the translation of any other part of the prospectus.

In case where non-equity securities are offered to the public or admission to trading of non-equity securities on a regulated market is sought one or more Member States, the prospectus shall be drawn up either in a language accepted by the competent authorities of the home and host Member States or in a language customary in the sphere of international finance, at the choice of the issuer, the offeror or the person asking for admission to trading on a regulated market. Such obligations apply only if such non-equity securities are to be traded only on a regulated market, or a specific segment thereof, to which only qualified investors can have access for the purposes of trading such securities or such securities have a denomination per unit of at least EUR 100,000 (Article 27(5) of the Prospectus Regulation).

5. Prospectus Approval Process

5.1. Competent Regulator

In Slovenia, ATVP is competent for all the matters related to the publication of the prospectus and is responsible for monitoring compliance with the provisions on prospectus.

5.2. Timeline, number of draft submissions, review and approval process

The prospectus approval process is regulated in the Prospectus Regulation, Commission Delegated Regulations as well as in ZTFI-1.  Furthermore, ATVP has adopted Guidelines on the prospectus review and approval process (Smernice o postopku pregleda in potrditve prospekta, or the “Guidelines”) which further regulate the prospectus review and approval process according to the Commission Delegated Regulation 2019/980.

The request for the approval of the prospectus for the offering of the securities to the public shall be submitted by the issuer or the offeror. In case the approval of the prospectus relates to the admission of securities to trading on a regulated it shall be submitted by the offeror or other person asking for admission to trading on a regulated market.

The request for the approval of the prospectus shall include the draft prospectus, confirmation on the payment of the administrative fee, a list of cross-references as well as all information required under point 2 of the Article 42 of the Commission Delegated Regulation 2019/980. In the event that the request for approval relates to the approval of the prospectus for the first offering of the securities, then such a request shall also include the resolution of the complement authority of the issuer regarding its issuance. The request together with the required attachments shall be submitted to ATVP in electronic form via email to webmaster@atvp.si.

Once the request with the above-mentioned attachments is submitted, ATVP shall inform the issuer, offeror other person asking for admission about the receipt of the documentation no later than the end of the second business day following the receipt of the request.

If during the review process ATVP finds that the draft prospectus does not meet the standards of completeness, comprehensibility and consistency from the Prospectus Regulation, ZTFI-1 and Commission Delegated Regulation 2019/980 it shall inform the person submitting the request about the deficiencies within 10 days and shall clearly specify the changes or supplementary information that need to be supplemented. ATVP emphasized in its Guidelines that it usually issues one or two such resolutions on remedying the deficiencies during each prospectus review process.

Final version of the prospectus shall be submitted to ATVP electronically and shall be signed by the authorized persons of the offeror or, if necessary, by other responsible persons (i.e. guarantors). The form of the final version of the prospectus is prescribed by the Article 44 of the Commission Delegated Regulation 2019/980.

ATVP shall reject the request if the request was not submitted by eligible person or the prospectus is not compliant with the relevant legislative provisions or if the prospectus was not amended in accordance with ATVP’s resolution within a set deadline.

Once the prospectus includes all the requested information and once all the vague and conflicting information in the prospectus have been amended or corrected accordingly, ATVP shall approve the prospectus and issue its decision. ATVP will approve the prospectus provided that the request was submitted by the eligible person (issuer, offeror other person asking for admission to trading on a regulated market as it may be) and if the prospectus is compliant with all the requirements from the Prospectus Regulation, applicable provision of ZTFI-1 and Commission Delegated Regulation 2019/980.

ATVP informs the issuer, the offeror or the person asking for admission about its decision in writing by email as well as by post. ATVP shall issue a decision approving the prospectus:

• within 10 business days from the receipt of the request; however, the deadline shall only be applicable for the initial submission of the draft prospectus and not for subsequent amendments of the draft prospectus;
• within 20 business days in case of an initial public offering, namely where the offer to the public involves securities issued by an issuer that does not have any securities admitted to trading on a regulated market and that has not previously offered securities to the public;
• within 5 business days from receipt of the request in the case of a prospectus consisting of separate documents produced by frequent issuers.

Provided that the decision is not issued within the prescribed deadline, such a failure shall not be deemed to constitute approval of the prospectus.

6.  Listing Process

6.1. Timeline, process with the stock exchange

If issuer fulfils the conditions and criteria for listing on the Standard Market or for listing on the Prime Market, it may request that its shares are listed on the Ljubljana Stock Exchange. The process is governed by the LJSE Rules.

Under LJSE Rules, the application for listing stocks consists of a signed and completed application form and the Listing Agreement. The application and all other documentation should be in Slovenian or English. Alternatively, the documents may be filed in a different language, together with certified translation into Slovenian or English. The deadline for the decision of the Stock Exchange regarding the listing is set to 30 days after the Stock Exchange received the application to be listed. However, the Stock Exchange may request additional information within 8 days after the receipt of the application. In such case the deadline for the decision of the Stock Exchange shall be prolonged.

In case all the conditions and criteria are fulfilled, the Stock Exchange signs the Listing Agreement and issues the decision on listing of the stocks. Before the trading with the listed stocks may be initiated the applicant has to publish any potential supplement to the prospectus and pay the requested listing fee. If such obligations are fulfilled before Ljubljana Stock Exchange issues the decision on the listing, the date the trading is initiated is stated in the decision on the listing. However, if the applicant fails to timely fulfil its obligations and trading is not initiated within three months after the listing of the stocks, Ljubljana Stock Exchange may remove the stocks from trading. In such case, both the Listing Agreement and the Stock Exchange’s decision on listing cease to be valid.

In case of bonds, the same procedure as described for the procedure of listing of stocks applies, insofar as the conditions and criteria for listing is fulfilled, the applicant fulfils its obligations relating to publishing of the prospectus and other information and completes all requirements prior to initiation of the trading.

7. Corporate Governance

7.1. Corporate governance code / rules (INED, board and supervisory composition, committees)

The primary source of (binding) corporate governance rules in Slovenia is the Companies Act (ZGD-1). ZGD-1 applies to all companies (public and private corporations, LLCs, sole proprietors etc.). In accordance with ZGD-1, corporations may opt either for a two-tier or one-tier management system.

If a corporation opts for a two-tier management system, it shall be managed by the management board (consisting of one or more managers) and the management board shall be supervised by the supervisory board (consisting of at least three members). The management board shall be appointed by the supervisory board and shall direct the business operations of the company, represent the company, and act on the company’s behalf. It shall report to the supervisory board. The supervisory board shall be appointed by the general meeting of the company and shall supervise the conducting of the company’s business. The supervisory board may appoint one or more committees (e.g. audit committee, appointment committee, remunerations committee). A committee shall be composed of a chair and at least two members (the chair shall be appointed from among the members of the supervisory board). Committees shall report on their work to the supervisory board.

If a corporation opts for a one-tier system, it shall be managed by a unified board of directors (consisting of at least three members), appointed by the general meeting of the company. The unified board of directors shall manage a company and supervise its operations. In public companies, the unified board of directors shall appoint at least one executive director from among its members; however, no more than one half of the members of the unified board of directors may be appointed executive directors. Executive directors shall represent and act on behalf of the company unless otherwise provided in the articles of association. The unified board of directors may also delegate certain tasks to the executive directors, including the management of current operations and administration of the books of account. The unified board of directors may appoint one or more committees; in public companies, the appointment of an audit committee is mandatory.

Besides ZGD-1, public companies also observe a legally non-binding Management Code for Publicly Traded Companies (Kodeks upravljanja javnih delniskih druzb, or “Management Code”), adopted by the Ljubljana Stock Exchange and Slovenian Directors’ Association on 27 October 2016. The Management Code sets forth recommendations for managing of the companies on the basis of the “comply or explain” principle. The Management Code prescribes rules on, inter alia, the adoption of a management policy, corporate governance statement, and statement on the compliance with the Management Code; relationship between the company and its shareholders; supervisory board, management board, and board of directors (including on the independence of their members); audit and internal control system; and transparency of business operations.

7.2. Any other ESG considerations

ZGD-1 prescribes that, when necessary, the companies shall include in their yearly business report markers, indicators and other factors that include information concerning environmental protection and employees. In addition, all public companies are obliged to include in their annual report a description of the diversity policy implemented in relation to representation in the management and supervisory bodies of the company (having regard to gender and other aspects, such as age, education and professional experience, and including an indication of the objectives, modalities and results of the diversity policy during the reporting period).

Additionally, the (non-binding) Management Code provides that all public companies shall develop and adopt a diversity policy and disclose a sustainability report, part of which shall be a corporate social responsibility report (touching upon responsibilities of the company to employees, consumers, local community, and environment), and that the remuneration of their management bodies shall promote sustainable development of the company and include non-financial criteria, important to create the long-term value of the company (such as compliance with applicable company rules and ethical standards).

8. Documentation and Other Process Matters

8.1. Over-allotment (greenshoe or brownshoe structure)

In the EU, over-allotment (and greenshoe structure specifically) is regulated in the Commission Delegated Regulation (EU) 2016/1052 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the conditions applicable to buy-back programmes and stabilisation measures (the “Delegated Regulation”). Overallotment shall only be used under the conditions set forth in Article 8 of the Delegated Regulation. These conditions are:

1) securities shall be overallotted only during the subscription period and at the offer price;

2) a position resulting from the exercise of an overallotment facility by an investment firm or credit institution which is not covered by the greenshoe option shall not exceed 5 % of the original offer;

3) the greenshoe option shall be exercised by the beneficiaries of such an option only where the securities have been overallotted;

4) the greenshoe option shall not amount to more than 15 % of the original offer;

5) the period during which the greenshoe option may be exercised shall be the same as the stabilisation period;

6) the exercise of the greenshoe option shall be disclosed to the public promptly, together with all appropriate details, including in particular the date of exercise of the option and the number and nature of securities involved.

Pursuant to the Delegated Regulation, before the start of the initial or secondary offer of the securities, the entity undertaking the stabilisation (as well as the persons acting on their behalf) shall ensure adequate public disclosure of:

1) the existence of any overallotment facility or greenshoe option and the maximum number of securities covered by that facility or option;

2) the period during which the greenshoe option may be exercised; and

3) any conditions for the use of the overallotment facility or exercise of the greenshoe option.

There are no provisions in Slovenian national legislation supplementing the EU legislation on over-allotment. Therefore, (only) EU legislation shall be observed with regard to this topic.

In the absence of rules on brownshoe (“reverse greenshoe”) structure, the general rules on over-allotment and rules applicable to greenshoe structure shall apply mutatis mutandis. Note that brownshoe structure is used far less commonly than greenshoe structure.

8.2. Stock lending agreement

Stock lending agreements, in the context of market stabilisation measures, are agreements allowing underwriters to borrow shares from the issuer and use such shares to settle with investors that are given overallotted shares.

Stock lending agreements may trigger certain obligations under Slovenian Takeovers Act (ZPre-1) and ZTFI-1 to the extent that voting rights are transferred under the lending agreement. Furthermore, tax implications may also arise under stock lending agreements, however this is depending on the structure of the transactions, amount of transferred rights and the status of the borrower and the lender.

8.3. Stabilisation

Pursuant to the definition set forth in the Regulation (EU) No 596/2014 (the “Market Abuse Regulation,” or MAR), stabilisation means a purchase or offer to purchase securities, or a transaction in associated instruments equivalent thereto, which is undertaken by a credit institution or an investment firm in the context of a significant distribution of such securities, exclusively for supporting the market price of those securities for a predetermined period of time (due to a selling pressure in such securities).

Generally, trading in securities or associated instruments for the stabilisation of securities shall be governed by the MAR. However, such trading is exempted from the prohibition of insider dealing and of unlawful disclosure of inside information and prohibition of market manipulation (set forth in Articles 14 and 15 of the MAR) if the following conditions are met:

1) stabilisation is carried out for a limited period;

2) relevant information about the stabilisation is disclosed and notified to the competent authority of the trading venue in accordance with the MAR;

3) adequate limits with regard to price are complied with; and

4) such trading complies with the conditions for stabilisation laid down in the regulatory technical standards referred to in the MAR.

As for the Slovenian national legislation, a provision relevant for stabilisation can be found in Article 141(5) of the ZTFI-1, which provides that a shareholder shall be exempt from the obligation to notify of the acquisition or disposal of major holdings when voting rights in shares are acquired to stabilize financial instruments in accordance with the MAR (unless voting rights in those shares are exercised or otherwise used to interfere with the management of a public company).

Other than that, there are no provisions in Slovenian national legislation materially supplementing the EU legislation on stabilisation.

9. Ongoing Reporting Obligations (Life as a Public Company)

9.1. Annual and interim financials

Pursuant to ZGD-1 and ZTFI-1, public companies shall report on their financials annually and semi-annually.

They shall prepare their annual report (and consolidated annual report, if applicable) within three months of the end of each financial year. The annual report shall consist of financial report (i.e., financial statements and notes to financial statements) and business report. The annual report shall be examined by an auditor (according to the method and under the conditions specified by the legislation governing auditing), who shall audit the financial report and examine the business report to the extent necessary in order to verify whether its content accords with other components of the annual report. The annual report (along with the auditor’s report) shall be published within four months after the end of each financial year.

Additionally, public companies shall also prepare an interim (semi-annual) report for the first six months of each financial year and publish it as soon as practicable and no later than three months after the end of such six-month period. The semi-annual report shall consist of a summary of the financial report and an interim business report. If the semi-annual report was audited, the auditor’s report shall be published as well. Furthermore, public companies holding listed shares in the Ljubljana Stock Exchange’s Prime market shall also prepare and publish quarterly reports.

Public companies shall ensure that both annual and semi-annual reports are publicly available for at least 10 years after their publication.

Finally, the legally non-binding Management Code also prescribes certain rules on reporting, e.g., that public companies shall include in their business report a governance statement and statement on the conformity with the Management Code (also see our answer to question 7.b. above on ESG considerations in reporting).

9.2. Ad hoc disclosures

Public companies are required to disclose information (on an ad hoc basis) that are considered controlled information pursuant to ZTFI-1 and the MAR.

In addition to the annual and semi-annual reports, controlled information is especially information on (i) any changes to major holdings notified to the public company by the shareholder or other entity; (ii) change in the share of the own (treasury) shares held by the public company; (iii) change in the total number of voting shares; (iv) change in the content of the rights arising from securities; and (v) inside information (as defined in the MAR). Public companies shall also publish the information on its general meetings and certain other information.

The controlled information should be disclosed by the issuer as soon as possible and at the latest within the time limits prescribed for each type of controlled information by ZTFI-1 and theMAR, in a manner that ensures rapid access to that information on a non-discriminatory basis. The disclosure of controlled information must contain all information that enables investors to assess the position of the public company and to assess the impact of the controlled information on the price of the issuing financial instrument. When a public company or other person who has requested the listing of securities on a regulated market without the consent of the public company discloses controlled information, it shall at the same time submit the contents of that disclosure to ATVP. It should be noted that, under certain conditions set forth in the MAR, the issuer may (on its own responsibility) delay disclosure to the public of inside information. The issuer should also inform the competent authority, i.e., ATVP, on the delayed disclosure of inside information in accordance with Article 17 of the MAR.

Finally, ad hoc disclosures are also regulated in applicable legally non-binding documents. The Management Code prescribes that public companies shall ensure timely and accurate public disclosure of all controlled and other relevant business information. Such information includes e.g. information about the company, financial position, business, ownership, management of the company and future expectations, as well as other information that has an impact on the position of investors). Furthermore, Ljubljana Stock Exchange has issued Recommendations on Reporting of Public Companies (Priporocila javnim druzbam za obvescanje, or the “Recommendations”). The purpose of the Recommendations is to define the disclosure standards of public companies holding listed shares in the Ljubljana Stock Exchange’s Prime market and they are intended to set forth good practices with regard to disclosure of inside information and other types of controlled information. Note that, despite the general non-binding nature of the Recommendations, some of the provisions of the Recommendations are nevertheless binding for public companies holding listed shares in the Ljubljana Stock Exchange’s Prime market (e.g., mandatory quarterly reporting, reporting in English, statement on the compliance with the Management Code).

Contributed by Karanovic & Partners.

1. Market Overview

1.1. Biggest ECM and DCM transactions over the past 2-3 years

The capital market in Bosnia and Herzegovina (“BH”) is still in the development process and there is still more to do in order to have a reputable capital market.  In BH, there are currently two stock exchanges, the Sarajevo Stock Exchange (“SASE”) and the Banjaluka Stock Exchange (“BLSE”), both established in 2001. Prior to that, the BH did not have a market-based economy but its economy was governed by the socialist principles.

In 2019, the SASE recorded a total turnover in approx. amount of EUR 220 million. Through 4,562 transactions, a total of 19,580,404 securities were traded. Using the SASE infrastructure, eight public offers were successfully completed in the 2019, totalling approx. EUR 116 million.

In the same period, BLSE recorded a total turnover in the amount of approx. EUR 240 million. On the BLSE during 2019, the most traded shares on the ECM market were Telekom Srpske shares. On the BLSE, bonds and treasury bills in the primary and secondary markets accounted for 84% of the total turnover. The most traded securities are RS bonds which means that the longstanding trend of shifting investors’ focus from shares to bonds continued.

2. Overview of the local Stock Exchange and listing segments (Regulated and Non-regulated markets)

The capital market in BH is primarily regulated by the FBH Securities Market Law and related by-laws (“FBH Law”) applicable on the FBH territory and by the RS Securities Market Law and the related by-laws (“RS Law”) applicable on the RS territory. The regulator in FBH is the FBH Securities Commission (“FBH Commission”), and in RS the regulator is the RS Securities Commission (“RS Commission”).

2.1. Listing segments (markets)

The Stock Market in FBH is structured as:

1. A Regulated market:

Official Stock Exchange Market (“FBH Market”) which consist of:

•     Companies shares market,
•     Investment fund shares markets,
•     Bonds market, and
•     Market for other securities.

Free Market (“FBH Free Market”) which consists of:

•     Companies shares market, divided into the following sub-segments:
  • Free-market sub-segment 1 (ST1),
  • Free market sub-segment 2 (ST2),
  • Free-market sub-segment 3 (ST3), and
  • Sub-segment for shares of the issuer undergoing    bankruptcy proceedings
•     Bonds market
•     Market for other securities.

2. An Over-the counter (“OTC”) market.

The FBH Market is the place where “blue-chips” are being traded. In order to be listed at this market segment, an issuer has to meet certain requirements, as listed below.

The FBH Free market is the segment of the Stock Market that arranges the connection between the supply and demand aimed at trading with securities that were not listed at the Stock Market. TheST1 sub-segment lists the shares of the 30 most liquid issuers of the Free Market which also have a free-float factor of at least 25% or alternatively, have a free-float market capitalization available for the investors of at least approx. EUR 1 million. These issuers regularly fulfil their reporting obligations. Shares are initially listed on the sub-segment ST2, where they stay until they fulfil the criteria for transfer to another sub-segment. Shares of issuers which fulfil their reporting requirements irregularly or not at all, are transferred to the ST3 sub-segment. Investing in these shares is considered risky, given the fact that no or limited financial information about those issuers exist and that therefore an (accurate) market price cannot be defined. Investors are urged to pay increased attention when trading in those securities. Shares of an issuer are transferred from ST2 to ST3 in case that the issuer ignores a written warning sent to him seven days after the proposed deadline, and after a temporary suspension of trading in his shares as an additional measure. The trading suspension in this case is used to warn possible investors about dangers of investing in these shares.

The return of an issuer from ST3 to ST2 is only possible if all following conditions are met:

•     The issuer applied for the pre-segmentation back to ST2,
•     The issuer has signed an agreement regarding the publication of his disclosure reports with SASE, and
•     The issuer delivers the missing reports for the last three (3) business years.

The Stock Market in RS is structured as:

•     Official Stock Exchange Market (“RS Market”) which comprises the following segments:
  • Prime Shares Market – List A,
  • Standard Shares Market – List B,
  • Starting Shares Market – List C,
  • Closed Investment Funds,
  • Open Investment Funds,
  • Bonds and other debt securities,
  • EU Connect Market, and , and
  • other securities.
•     The Free Market (“RS Free Market”) comprises the following segments:
  • Shares,
  • Closed Investment Funds,
  • Open Investment Funds,
  • Bonds,
  • Share Packages,
  • Shares of Issuers in Delay with Financial Reporting;
  • Shares of Issuers undergoing Bankruptcy or Liquidation Procedure, and
  • other securities.

The RS Market is established to perform activities on connecting supply and demand in securities trade; to determine and publish information on demand, supply, price lists and any other data on securities, i.e. for organized, transparent, liquid and efficient trading in securities and provision of relevant information, in compliance with the law and other regulations.

The RS Free Market means an organized securities market where the securities not listed on the RS Market are being traded.

The RS Market is an important part of the market where, in addition to the general conditions, it is necessary to meet specific criteria related to the size of capital, ownership dispersion, business performance and objectivity of financial reporting. Considering the current situation regarding the capital market in RS, the RS Free Market is emerging as the segment that comprises most of the securities that arise in privatization processes since the issuer has to fulfil only the general conditions related to securities in order to be issue securities on the RS Free Market. The RS Free Market also consist of the securities which are excluded from the RS market in cases where such securities are not withdraw completely.

3. Key Listing Requirements

3.1. FBH

In accordance with the Rules of SASE an unlimited number of transferable securities which are fully paid, and which meet the following criteria can be listed on the FBH Market:

3.1.1. for shares:

•     the issuer is a joint stock company established and operating in accordance with the regulations of the FBH,
•     the sum of the share capital and the capital reserves of the issuer including the profit or loss in the previous fiscal year amounts to a minimum of approx. EUR 22 million,
•     Financial reports of the issuer have to be audited and available for minimum of 3 years,
•     at least 25% of the share class that stands as the subject of the listing request needs to be issued by a public offer, unless the market is operating satisfactorily with a lower percentage, in which case the approval of the Commission is required,
•     minimum share class size (considered to be the book-keeping value of share if the securities are not listed in organized trading, otherwise market capitalization) in the amount of approx. EUR 1 million, and
•     share class owners – at least 150.

3.1.2. for bonds:

•     the issuer is a joint stock company established and operating in accordance with the regulations of the FBH;
•     the sum of the share capital and the capital reserves of the issuer, including the profit or loss in the previous fiscal year amounts to a minimum of EUR 2 million,
•     Financial reports of the issuer have to be audited and available for minimum of 3 years, and
•     the minimum nominal value of the bond series must be approx. EUR 1,5 million.

3.1.3. for other securities:

•     the issuer is a joint stock company established and operating in accordance with the regulations of the FBH;
•     the sum of the capital stock and the capital reserves of the issuer including the profit or loss in the previous fiscal year amounts to minimum of approx. EUR 2 million, and
•     Financial reports of the issuer have to be audited and available for minimum of 3 years.

A security can be listed on the FBH Market even if it does not meet the criteria of the minimum value of class / series of securities or the number of owners of securities if those differences are not important or if there is a reasonable expectation that these requirements will be met shortly upon listing.

The FBH Commission can approve the listing of securities of a newly established company incorporated by merger, in which case it will be considered that all requirements have been duly met, regardless of the fact that the securities of at least one merged or one divided company were listed on the FBH Market prior to the restructuring procedure.

3.2. RS

In order to be listed on the RS Market, the securities must fulfil the general following conditions:

•     that they are fully paid in,
•     that they are freely transferable,
•     that they are issued in non-materialized form.

3.2.1 for shares

The shares will be listed on the List A of the RS Market if the issuer (in addition to the above listed general conditions), fulfils the following special criteria:

•     Three years of operation,
•     shares book value, or market capitalization if the shares have already been listed in the organized market, is at least EUR 20 million for ordinary shares and EUR 2.5 million for preference shares
•     the free float is at least 15% or EUR 5 million,
•     the minimum number of shareholders is 300,
•     issuer has adopted a own written code of conduct or accepted the standards of corporate governance passed by the RS Commission,
•     issuer has an Internet pages where the information on an issuer is available in English language as well,
•     audited annual financial statements have been prepared in accordance with law – with unqualified or qualified auditor’s opinion,
•     shares have been traded at least on 30% of trading days for the last six months with average daily turnover of at least EUR 2,500,
•     issuer has not continually reported losses for the last three business years according to audited financial statements.

When determining the percentage of the shares in public ownership, the following securities shall not be considered: 

•     shares owned by the Management Board of the issuer,
•     shares owned by those shareholders holding more than 10% of shares.

When determining the percentage of shares in public ownership, the shares owned by investment funds will not deducted. Shares may be listed on the  List A, even if it fails to comply with one of the special conditions, provided such failure is not deemed as a  material discrepancy or if there are reasonable expectations that such a requirement will be met shortly after the security has been listed.

The RS Commission may also list on the List A of the RS Market, the securities of a new joint stock company that has been established by a merger of two or more companies, or by the division of an existing company if the shares of any of those companies have already been listed on the official Stock Exchange market.

In order to be included on the List B of the RS market, the following conditions must be fulfilled:

•     Two years of operation,
•     Audited financial statements,
•     shares book value, or market capitalization if the shares have already been listed in the organized market, is at least EUR 5 million for ordinary shares and EUR 500,000.00 for preference shares,
•     the free float is at least 10% or EUR 500,000.00
•     The minimum percentage of the stock in public ownership is 15%,
•     the minimum number of shareholders is 200.
•     issuer has adopted a own written code of conduct or accepted the standards of corporate governance passed by the RS Commission

On the List C shares of issuers that do not fulfil or ceased to fulfil listing criteria for the List A or List B shall be listed. In order to be included on the List C of the RS market, the following conditions must be fulfilled:

•     two years of operation,
•     audited annual financial statements have been prepared in accordance with law – with unqualified or qualified auditor’s opinion,
•     shares book value, or market capitalization if the shares have already been listed in the organized market, is at least EUR 500,000.00,
•     the free float is at least 10% or EUR 250,000,
•     the minimum number of shareholders is 10,
•     issuer has adopted own written code of conduct or accepted the standards of corporate governance passed by the RS Commission.

On the Market for Securities of the issuers from the EU shares, bonds and depository receipts shall be listed. Special criteria for the listing on EU Connect Market are:

•     that issuer has already listed shares on the Stock Exchange from the EU or that the issuer is a subsidiary of the company that has already listed shares on the Stock Exchange from the EU,
•     that the issuer is seated in EU country,
•     that the value of listing is at least EUR 500.000,
•     that issuer has audited annual financial statements with unqualified or qualified auditor’s opinion,
•     that issuer has at least 10 shareholders,
•     that issuer has the prospectus which is approved by the RS Commission and
•     to have written agreement with the listing sponsor while it is listed on the Stock Exchange.

3.2.2. Bonds and other securities

Bonds and other long- and short-term debt securities can be listed on the RS Market, if in addition to general criteria, the insurer have to fulfil the following special criteria’:

•     Two years of operation;
•     Audited financial statements;
•     The total nominal value of the listing amounts to EUR 500,000.

4. Prospectus Disclosure

4.1. Regulatory regimes (Prospectus Regulation or similar) – equity and debt

The prospectus is governed by the FBH and the RS Securities Law and related by-laws. The publication of the prospectus is a mandatory step in the process of issuing securities by public offering.

4.2. Local market practice

4.2.1. FBH

Issuer in the sense of FBH Law is a legal entity that, by virtue of the law, may issue securities for the purpose of raising funds and which, has obligations specified in the security towards the owners.

The issuer is obliged to prepare a prospectus which should contain enough information for the investor to evaluate the status of the assets, liabilities, losses and profits, financial position of the issuer, and the rights contained in the securities to which the prospectus relates. The prospectus must be approved by the FBH Commission.

The prospectus used in the public offering of shares must contain information on:

•     the issuer;
•     the securities that are the subject of the issue (indication of the type, class, number of and the total number and rights they contain),
•     the price or method of determining the price of the securities, and a description of the manner in which the securities are distributed,
•     the place, manner, term and time of registration and payment,
•     the agent and the sponsor, if the emission is performed with the mediation, and the guarantor if the issuance is guaranteed,
•     investment risk and risk causes,
•     pre-emptive rights and the proxies, if applicable,
•     restrictions on purchases, the scope of the restrictions and the persons concerned, if applicable;
•     the activities and business operations of the issuer,
•     authorized representative of the issuer,
•     a signed statement of the issuer’s authorized representative;
•     the depositary bank of the issuer, and
•     investment statement.

The prospectus for the issuance of debt securities must also contain statements on the calculation of interest, payment of interest, delay with payment of interest, consequences in case of delay with payment of principal and interest and possible early redemption of debt securities.

In case the bonds that are being issued give the right to exchange for other securities (conversion) this must be stated in the prospectus as well.

In the closed issuance of shares, the issuer prepares the abbreviated prospectus. The FBH Commission approves the listing on the basis of the submitted application and the abbreviated prospectus and other documentation but does not give an opinion on the proposed investment, nor is it responsible for the completeness and accuracy of the information contained in the abbreviated prospectus.

4.2.2. RS

When issuing new securities in RS with public offer the issuer is obliged to prepare and publish the prospectus. In case of a public offer, the issuer may publish the preliminary prospectus with the aim to feel the interest of the investors.

The prospectus and the preliminary prospectus must contain complete, accurate and objective information about the assets and liabilities, financial position, purpose of raising funds, risk factors, and rights the securities provide on the basis of which the potential investor can objectively assess the investment risks and make an investment decision. The preliminary prospectus and prospectus shall be published upon approval by the RS Commission.

The accuracy and completeness of the information published in the preliminary prospectus are the responsibility of the issuer, the authorized persons of the issuer and the auditor.

The prospectus must contain the following:

•     information on the issuer,
•     information on the securities that are the subject of the issue,
•     information about the issuer’s business operations,
•     information on the place, manner, term and time of subscription and payment of securities,
•     a statement on investment,
•     information on the authorized representatives of the issuer,
•     information on the issuance guarantor,
•     statement of the authorized representatives of the issuer, and
•     the data and signature of the agent of issuance, if engaged.

The preliminary prospectus contains all above mentioned information, except for information on the place, method, term and time of subscription and payment of securities.

4.3. Language of the prospectus for local and international offerings

Local Stock Exchange regulations do not differentiate between domestic and international securities offerings in terms of language. The prospectus should be submitted in one of the official languages of BH (Bosnian/Serbian/Croatian), as well as in English if the issuer has more than 100 shareholders – applicable in FBH, while in RS the prospectus will be delivered in English only if it relates to List A and investment funds.

5. Prospectus Approval Process

5.1. Competent Regulator

5.1.1. FBH Commission

Functioning under a number of local pieces of legislation, the mission of the FBH Commission is: (i) to support the establishment and the development of the capital market; (ii) to regulate, maintain and promote a fair, secure and transparent capital market; (iii) to protect and promote investor protection; to build trust in the efficiency and fairness of the local capital market.

Based on the provisions of the local legislation there is a basic division of jurisdiction between the FBH Commission and the SASE. The FBH Commission may freely inspect books, letters and other documents of brokerage firms and banks, referring to dealing in securities. It may also authorise the SASE or another legal person to carry out individual tasks related to monitoring.

The monitoring of SASE focuses mainly on detection of members’ malpractices such as insider trading, price manipulation, dishonest applications and cancellations of trades, front running, and on finding acts contrary to good business practice. 

5.1.2. RS Commission

Established under the local securities legislation, the RS Commission is the financial services regulator. It is a permanent and independent legal entity, which through regulation, promotion and monitoring shall attempt to achieve its primary objectives of: supporting the establishment and the development of the capital market; the efficient functioning of a regulated, fair, open securities market in order to gain the confidence of all market participants; protection of investor and other market participants’ interests. Timeline, number of draft submissions, review and approval process

5.2. Timeline, number of draft submissions, review and approval process

The procedure of approval of the prospectus is performed within the procedure of approval of the request for emission of securities (“Request”). The Request must be submitted within 90 days as of the date of issuance of the decision on emission to the FBH Securitas Commission. The Request must be submitted 60 days before the date determined by the issuer as the date for registration of the securities. Together with the Request the following documentation must be delivered:

•     the decision on emission;
•     the Articles of Association;
•     excerpt from the court registry of companies;
•     an agreement between the issuer and the depositary bank;
•     agreement between the issuer and the registry of issuers;
•     financial and audit reports in accordance;
•     the proposal of the prospectus;
•     proof of payment of the fee;
•     the opinion or consent of the body competent to supervise the operations of financial organizations, if the issuer is a financial organization;
•     other documents as requested by the FBH Commission.

The FBH Commission must decide on the Request within 60 days as of the date of the receipt of the Request. With the decision on approval of the Request, the FBH Commission confirms that the issuer acted in accordance with the law and other regulations and that the prospectus contains all necessary elements.

RS

The request for approval of the prospectus is submitted by the issuer or stockbroker on behalf and for the account of the issuer. Together with the prospectus, the issuer must submit:

•     the proposal of the prospectus;
•     the decision of the competent authority to include a particular security in the trading system on the RS Market;
•     the Memorandum of Association;
•     excerpt from the court registry of companies,
•     annual financial statements (individual and consolidated if prepared) for the preceding two years and the corresponding reports of the certified auditor, and the last periodic statement if the prospectus approval application is submitted after 31 July of the current year,
•     the financial statement and the corresponding report of the certified auditor for a period shorter than the period specified in previous item, if the issuer operates for a shorter period,
•     the relevant document of the RS Commission on the assignment of an ISIN and CFI number,
•     proof of payment of the fee.

In case that the issuer requests approval of the unique prospectus, both for the issuance of the securities and for listing of the securities to the RS market, the following documentation must be submitted, together with the prospectus proposal:

•     the decision on issuance of the securities,
•     the minutes of the meeting of the competent body at which the decision on the issue was made, with the list of members present, and if the decision on the issue was made by the shareholders assembly, the minutes should contain the list of present and represented shareholders, as well as the individual number of votes used in determining the quorum for the work,
•     the decision of the competent authority to include a particular security in the trading system on the RS Market,
•     Memorandum of Association,
•     excerpt from the court registry of companies,
•     the agreement between the issuer and the bank on the opening of a temporary account for the deposit of payments based on the purchase of the issued securities;
•     annual financial statements (individual and consolidated if prepared) for the preceding two years and the corresponding reports of the certified auditor, and the last periodic statement if the prospectus approval application is submitted after 31 July of the current year;
•     the financial statement and the corresponding report of the certified auditor for a period shorter than the period specified in previous item, if the issuer operates for a shorter period,
•     confirmation of the authorized bank for payment operations on the balance of the issuer’s business accounts for the last 60 days until the day of application (liquidity certificate);
•     the agreement concluded between the issuer and the stockbroker for the purpose of sale of the issued securities on the RS Market,
•     the agreement concluded between the issuer and the agent, the transferee or the guarantor of the issuer, if such agreement is concluded,
•     the relevant document of the RS Commission on the assignment of an ISIN and CFI, and
•     proof of payment of the fee.

If the issuer is a bank or other financial organization, the written approval of the competent regulatory authority for the issuance in question shall be also delivered.

The foreign issuer, when requesting the approval of the prospectus, besides the above listed documents, must deliver the written confirmation from the its country’s competent authority that the securities for which the request is submitted are the same class as the securities offered in the issuer’s home country, based on the approved prospectus, that is, traded on the regulated market in the home country.

6. Listing Process

a. Timeline, process with the stock exchange

FBH

The procedure for issuance of the securities in the FBH Market is initiated based on the request by the issuer or by the authorized person together with the following documents:

•     copy of the decision on registration of the issuer at the FBH Commission,
•     Article of Association,
•     copy of audit reports for the last three business years,
•     the proof of registration of securities,
•     list of the top ten security owners and their shares,
•     list of securities in the ownership of the issuer’s Managements board,
•     the prospectus,
•     evidence on payment of fee.

Upon the submission of the request, the FBH Commission must review whether all assumptions for the decision-making on the request are completed within seven days:

•     if the request was submitted by an authorized individual,
•     if the request template comprises prescribed information,
•     if attachments listed above are attached to the request template.

It the request is complete, the FBH Commission within 15 days initiates the procedure for detailed examination of the request. The decision on the approval or rejection of issuance of securities is delivered to the applicant within five days after the decision. The decision should contain an introduction, the enacting terms, explanation and legal remedy.

The Rules of BLSE stipulate the following:

The procedure for listing on the BLSE shall start upon a request by the issuer or a person authorized by the issuer. The application form shall be accompanied by:

•     document of registration securities in the registry of RS Commission,
•     prospectus in electronic form,
•     Articles of Association in electronic form,
•     excerpt from the court register certified by the issuer,
•     audited financial statements in electronic form,
•     report of the percentage of securities held by the management and supervisory body of the issuer,
•     a list of authorized people for communication with the Exchange,
•     fee payment evidence,
•     written code of conduct or decision to accept the standards of corporate governance passed by the RS Commission.

The RS Commission shall decide on the listing on the Stock Exchange within 30 days after the application is submitted. The RS Commission may reject application for listing if:

•     the issuer does not fulfil listing requirements,
•     the issuer has not submitted the required documentation,
•     there are circumstances that could threaten the interests of investors.

When the RS Commission determines that the requirements for listing have been fulfilled, it shall decide to list the securities to the Stock Exchange.

7. Corporate Governance

7.1. Corporate governance code / rules (INED, board and supervisory composition, committees)

7.1.1. FBH:

The FBH Company Law, which governs the corporate governance, stipulates that joint stock company organizes its work through the following corporate bodies:

•     General Assembly,
•     Management, and
•     Supervisory Board.

According to the FBH Company Law, the Management of a joint stock company organizes the work and manages the business, represents the company and is responsible for the legality of the business. The Management of a joint stock company consists of a director or a director and one or more executive directors. The procedure for election, appointment, dismissal, composition and decision-making of the Management shall be determined by the company’s Articles of Association.

The director acts as a chairman of the Management, manages the business, represents the joint stock company and is responsible for the legality of the business. The Management is appointed for the period of four years. The rights and obligations between the members of the management board and the company are regulated by a special agreement.

Since they fall into the category of persons with special duties towards a joint stock company, the director and the executive directors are obliged to report to the Supervisory Board any direct or indirect interest in the legal entity with which the joint stock company has or intends to enter into business relations. In the event that the director resigns, he / she shall continue to perform his / her duties within the notice period set by the Supervisory Board, and which may not be less than 30 days.

The Supervisory Board consists of the president and at least two members appointed and dismissed by the Company’ Assembly, whereby the total number of Supervisory Board members must be odd. The members of the Supervisory Board are appointed at the same time for a period of four years, but after the expiration of a period of two years from the date of appointment, the Company Assembly votes on confidence of the Supervisory Board.

The Supervisory Board is in charge for supervision of the business of the joint stock company, supervises the Management Board, appoints the Management Board and the Secretary of the company, submits the annual report to the Company Assembly etc.

Of course, a person who has been convicted of a criminal offense and an offense incompatible with the duty of the duty of Supervisory Board member,  may not be appointed, five years from the date of the final verdict, excluding the time of imprisonment, nor by a person who is prohibited by the court’s judgment from performing activities as a Supervisory Board member.

The joint stock company has the Secretary appointed by the Supervisory Board. The Secretary is responsible for keeping the minutes of the Company Assembly and the documents determined by the FBH Company Law and the Articles of Association. The Secretary is also authorized to implement the decision of the Company Assembly, Supervisory Board and the Management Board.

Additionally, the Audit Committee is formed in the joint stock company with at least three members. The Audit Committee is obliged to audit the semi-annual and annual accounts and at the same time to control the compliance of the Company’s business operations and the functioning of the Company’s bodies in line with the FBH Company Law, other relevant regulations and basic principles of corporate governance, and to report to the Assembly and the Supervisory Board at the latest eight days after the completion of the audit.

7.1.2. RS:

RS Company Law stipulates that open joint stock company organizes its work through the following corporate bodies:

• General Assembly;
• Management Board, and
• Supervisory Board.

The number of members Management Board of an open joint stock company is determined by the Memorandum of Association. The Management Board has at least three members and a maximum of 15 members. These members are appointed for a maximum term of five years with the possibility of re-election, but their engagement may be terminated at each annual meeting of General Assembly if the annual business report is not adopted.

Open joint stock companies whose shares are listed on the official stock market must have a majority of non-executive members of the Management Board, of which at least two are independent members.

An independent member of Management Board is a person who, alone or with family members, in the two previous years:

• was not employed by the company,
• did not paid to the company or received from the company payments of more than EUR 10,0001,
• does not own more than 10% of the shares or interests, directly or indirectly, in the entity who paid or received from the company an amount greater than EUR 10,000,
• does not directly or indirectly (including other related parties within the meaning of this Law) own the shares of the company representing more than 10% of the share capital of the company,
• was not a director of the company or a member of the Management Board, unless he / she was an independent member and,
• was not an independent auditor of the company.

The chairman of the Management Board is elected by the members, i.e. by a majority of the total number, unless a Memorandum of Association or Articles of Association specifies a different majority.

The company may have one or more executive directors which act as representatives of the company. In case there are more than one executive directors, the Management Board appoints one executive director as General Director and the Executive Board is being formed. The General Director represents the company. The General Director of a joint stock company convenes and chairs the Executive Board, organizes its work and takes care of keeping minutes of those sessions.

8. Documentation and Other Process Matters

8.1. Over-allotment (greenshoe or brownshoe structure)

The respective laws contain limited provisions on underwriting – it recognizes the underwriter as an investment company which provides underwriting services in relation to placing of financial instruments on the firm commitment basis.

While over-allotment is not clearly regulated under BH laws, it could be deemed as possible and available, since there is no explicit ban with that respect.

8.2. Stabilisation – whether allowed and on what terms (MAR, local regimes)

Stabilisation is not defined by the respective BH laws as they do not contain adequate provisions related to the stabilisation. However, stabilisation is listed as a section of a prospectus but there are no additional definitions and terms of the stabilisation in that respect.

9. Ongoing Reporting Obligations (Life as a Public Company)

9.1. Annual and interim financials

In accordance with FBH Law, the issuer is obliged to submit to the SASE the following reports by the 30 April of the current year for the previous year:

• a semi-annual and annual reports on its business operations,
• reports on events that significantly affect financial business of the issuer,
• prospect of any new security issued,
• reports on the results of each new public offer of securities.

In cases when the accounting standards or other regulation requests drafting of consolidated accounting reports the following information must be included in the annual report:

• The name of companies included in the consolidation;
• Auditor opinion on consolidation accounting report,
• Consolidated Balance Sheet, Consolidated Income Statement and Consolidated Statement of Cash Flows on the same items as those indicated in the Audit Report or Prospectus, respectively, for the business year to which the annual report relates and for the previous financial year.

The semi-annual and annual report must contain the following information on:

• members of the Supervisory Board and the Management Board and the number of shares they own;
• shareholders holding more than 5% of the voting shares;
• legal entities in which the issuer holds more than 10% of the shares;
• representative offices of the issuer;
• the Shareholders meeting held during the reporting period;
• balance sheet and income statement at the end of the period;
• the use of capital acquired through the previous issue of securities through a public offering;
• decrease or increase of the issuer’s assets by more than 10% compared to the situation in the previous report, with the facts that influenced it;
• reduction or increase of the incompetence or loss of the issuer by more than 10% compared to the situation in the previous report, with the facts that affected on it;
• transactions in assets exceeding 10% of the value of the total assets of the issuer at the date of the transaction;
• the issue of securities performed during the reporting period indicating the type and class of securities; and
• Issuers whose securities are listed are obliged to submit to the SASE quarterly financial reports on their operations within 30 days after the end of the accounting period. The complete report of the external auditor on the performed audit of the annual report on the Issuer’s business operations shall be submitted electronically by the date of the general meeting of the issuer at which the report will be considered, and not later than six months after the end of the business year.

The events that significantly affect financial business of the issuer are:

• reorganization of the issuer and related parties;
• the decision to issue and any initiated, suspended or terminated issue of the securities;
• the acquisition of more than 5% of the voting shares of a single shareholder;
• payment of financial liabilities to shareholders;
• the decision to convene a Shareholders meeting;
• change of auditor;
• a one-time increase or decrease of the issuer’s assets by more than 10%; and
• a one-time transaction in the amount exceeding 10% of the value of the total assets of the issuer.

The RS Law provides an obligation to the issuer to submit the following reports:

• a semi-annual and annual reports;
• reports on events that significantly affect financial business of the issuer;
• the audit report if applicable;

Furthermore,  in case an issuer fulfils the following conditions: a) issues shares by public offering, b) has more than 100 shareholders, c) has a share capital of at least EUR 5 million, and d) has a total annual income of at least EUR 5 million, additional following reports are to be submitted:

• quarterly financial statements within 30 days of the last day of the quarter,
• annual financial and business reports, including consolidated financial statements within 60 days after the end of the business year,
• the audit report within 5 days from the date of receipt of that report.

Additionally, the events that affect the financial business year of the issuer in RS are:

• the decision to convene a shareholders meeting,
• change of name or reorganization of the issuer,
• proposals for decisions regarding status changes merger and division), and a change in the principal activity of the issuer,
• establishment of a subsidiary or joint venture in which the issuer would participate with more than 10% of the total value of its fixed assets,
• sale, transfer or pledge of fixed assets in excess of 10% of the total fixed value of the property,
• borrowing that exceeds 10% of the total assets of the issuer,
• conclusion of agreements that could possibly lead to the increase in the value of revenue or expense in excess of 10% of the value of revenue or expenses of the issuer in the current accounting period,
• initiation of liquidation or bankruptcy proceedings,
• proceedings before the courts and other state bodies, with an assessment of the outcome of the proceedings,
• obtaining or losing a concession, patent, license or similar right,
• business events that result in a decrease or increase in total assets as a percentage greater than 10% of its value,
• the decision to issue securities, except in the case of a public offering,
• the decision to acquire its own shares,
• resignation or dismissal of members of the Management Board, Supervisory Board and auditors,
• the final judgment of the court against members of the Management Board and the Supervisory Board,
• development plans and their impact on the economic and social position of employees,
• related party transactions,
• measures to improve working conditions and changes in employee earnings,
• the decision to allocate retained earnings and
• other decisions of the issuer’s shareholders assembly, and other events that may have a significant impact on the value of the securities of the issuer.

9.2. Ad hoc disclosures

9.2.1. FBH

The issuer shall, as soon as possible but no later than eight days after the occurrence of the event, inform the SASE on the event which significantly affects the financial operations of the issuer. Additionally, the issuer must submit the following information:

1. Data on business and other events, changed business conditions and events from the environment which might influence the legal and financial position of the company and issued securities’ price with the emphasis on:

• business interruptions,
• relevant changes in the main business activity,
• intended relevant changes in the company’s accounting policy,
• changes in the Management Board,
• relevant legal procedures before the state institutions, arbitrage and similar institutions,
• significant changes on the market,
• previous company’s business result perspectives, as well as possible relevant perspective alterations,
• gained or lost patents, licences, brands of importance which are of the high importance for the main activity,
• new products, i.e. services or parties which influence the business activity and the derived business results.

2. Decisions and resolutions, as well as other events which might influence the capital structure, such as:

• intended increase or reduction of share capital,
• changes in the content of the class right of securities admitted to the Stock Exchange listing and securities in which securities admitted to the Stock Exchange are replaceable,
• pre-emptive right at the new issue of securities
• conducted purchase or sale of the issuer’s own shares,
• revocation of debt securities admitted to the Stock Exchange listing, before they are due,
• inability to fulfil the obligations due to the issued debt securities
• inability to pay dividends.

3. Projected data changes with the issuer and the amendment of the issuer’s legal and organizational structure which might influence the issued securities’ price, such as:

• acquisition of the issuer to the other company or vice versa,
• merging with another company,
• change of legal form,
• other changed circumstances and events which cause the change of data stated in the leaflet for admission of securities to the listing, considering the issuer’s later announcements.

4. Other events and circumstances not well known which might have significant influence on the issued securities’ price.

9.2.2. RS

The issuer is required to disclose to BLSE the following events:

1. changes in financial and legal position,

2. changes of issuer’s equity,

3. convening general shareholders meetings,

4. decisions of general shareholders meetings,

5. Management and Supervisory Boards’ decisions,

6. changes in the status of issuers,

7. acquisition of significant ownership in other entities,

8. acquisition of securities by the issuer’s management,

9. press conferences,

10. other events that may affect the price of securities or upon the request of the Exchange.

Contributed by Paksoy.

1. Market Overview

There has been a slowdown debt and equity capital markets activities in Turkey since mid-2018. Global uncertainties and geopolitical factors have had an impact on the emerging markets, including Turkey. There was a marked slowdown in growth in the second half of 2018 due to significant volatility in foreign exchange rates and increases in interest rates, particularly in the third quarter. With negative growth of 2.8% in the final quarter of 2018, the Turkish economy only grew by 2.8% in 2018. The first two quarters of 2019 also experienced negative gross domestic product growth, though growth in the second half of the year recovered, resulting in a positive growth in GDP of 0.9% during 2019.

The annual consumer price index (CPI) inflation rate was 20.3% in 2018, while annual domestic producer price inflation during the year was 33.6%, both increasing significantly due principally to the depreciation of the Turkish Lira. However, the rate gradually declined and Turkey ended the year with an annual inflation rate of 11.8%.

1.1. Regulators

1.1.1. The Capital Markets Board

The principal functions of the Capital Markets Board (CMB) are: (i) to foster the development of the securities markets in Turkey and thereby contribute to the efficient allocation of financial resources in the Turkish economy; and (ii) to ensure adequate protection for investors.

The CMB supervises and regulates, among others, public companies and issuers of capital markets instruments, market infrastructure institutions including stock exchanges and central custody and settlement institutions, banks and other financial intermediaries, mutual funds, investment corporations, investment consulting firms, real estate appraisal companies and rating firms that offer their services to institutions operating in the capital markets. The CMB is authorized to request any kind of information and documents to determine the compliance of the entities it oversees with the Capital Markets Law No. 6362 (CML) and with its own regulations, communiqués, and decisions.

As the capital markets regulator, the CMB promulgates regulations relating to Turkish capital markets. The CMB regulations set out a regulatory approval process for all securities to be publicly offered in Turkey, as well as certain private placements. In connection with its supervisory role, the CMB requires companies subject to its jurisdiction to prepare and publish balance sheets, income statements and annual reports, all of which must be prepared in accordance with the accounting principles and standards promulgated by the CMB. Moreover, unaudited quarterly reports must be filed in respect of each financial period ending in March and September, and a semi-annual report, subject to limited review by the independent auditors, must be filed with the CMB in respect of the first six months of each year. Upon the occurrence of any special events (such as a merger or acquisition), the CMB may require that additional information be disclosed by a public company or by directors or major shareholders of a public company. Furthermore, each situation that may have a material effect on the operations and the financial situation of a company participating in the capital markets must be immediately disclosed to the CMB.

The CMB is governed by a decision-making body comprised of seven members, including the chairman, who are all appointed by the government of Turkey. The term of office of the members of the CMB is six years. Members whose terms have expired can be re-appointed.

1.1.2. Borsa Istanbul

The establishment of Borsa Istanbul A.S. (“Borsa Istanbul” or BIST) was envisaged in the CML, as the successor to the Istanbul Stock Exchange and other securities exchanges in Turkey, for the purposes of creating a single platform. Upon registration of its articles of association with the Istanbul Trade Registry on 3 April 2013, Borsa Istanbul automatically assumed all of the assets, rights and obligations of the Istanbul Stock Exchange and the Istanbul Gold Exchange. Pursuant to the CML, shareholders of Turkish Derivatives Exchange were granted an option right to subscribe for Borsa Istanbul’s share capital in return for Turkdex’s take-over by Borsa Istanbul. This option right was exercised by Turkdex shareholders.

1.2. Biggest ECM and DCM transactions over the past 2-3 years

ECM: Turkey had a good start in 2018. The most important initial public offerings on Borsa Istanbul were (i) Enerjisa Enerji, Turkey’s energy conglomerate and controlled by Turkish Sabancı Holding and German E.ON.; (ii) MLP Saglık (Medical Park Hospitals), one of the leading hospital chains in Turkey; and (iii) Sok Marketler, one of the leading FMCG retail store chains in Turkey. Additionally, Aselsan, a company of the Turkish Armed Forces Foundation, and Yapı Kredi Bank, one of the largest private banks in Turkey, increased its capital in June 2019. Total funds raised from these deals were TRY 2.9 billion and TRY 4.11 billion, respectively.

Showing a trend similar to global equity markets, the Turkish IPO market was slow in 2019. Volume of IPOs decreased by 95% in 2019 compared to 2018. The most important initial public offerings were (i) Naturel Enerji, renewables and energy company; and (ii) Yukselen Çelik, a company active in steel business, in 2019. Additionally, Odas, Sasa Polyester, Gunes Sigorta, Ihlas Gayrimenkul and Karsan Oto increased its capital.

DCM: Similar to previous years, banks were the most active players in the debt market, while non-bank financial institutions come second in 2018 and 2019. At the end of 2018, the bonds issued by Turkish issuers amounted to TRY 90.7 billion. In 2019, debt issuances rose by 18% compared to the previous year and the total amount issued by Turkish issuers was TRY 210 billion.

2. Overview of the local stock exchange and listing segments (markets)

Borsa Istanbul is the sole exchange entity in Turkey in the form of a joint-stock company, bringing together all the exchanges operating in Turkey (i.e., the former Istanbul Stock Exchange, the Istanbul Gold Exchange, and the Derivatives Exchange of Turkey). Borsa Istanbul mainly consists of four markets: the Equity Market, the Debt Securities Market, the Derivatives Market, and the Precious Metals and Diamond Market.

Publicly-held companies from various sectors are traded in the Equity Market, and this trading is carried out in the following sub-markets:

a. the BIST Stars market, on which the shares of large-sized companies with a market value of free-float shares of at least 150 million Turkish lira are traded;

b. Structured Products and Fund Market  (formerly the Collective and Structured Products Market), on which the shares of securities investment companies, real estate investment companies, venture capital investment companies, warrants issued by intermediary institutions and exchange-traded funds are traded;

c. the BIST Main market, on which the shares of medium-sized companies with a market value of free-float shares under 150 million Turkish lira are quoted;

d. the BIST Emerging Companies Market, on which the shares of emerging companies are traded;

e. the Pre-Market Trading Platform, on which the shares of certain companies determined by the CMB pursuant to its Decision No. 17/519, dated 3 June 2011, have been admitted to trading;

f. the Watchlist Market, on which the shares of companies under special surveillance and investigation owing to extraordinary situations with regard to transactions on Borsa Istanbul, insufficient compliance with disclosure requirements, or other events that may necessitate a temporary or permanent suspension of the trading are traded; and

g. the Equity Market for Qualified Investors, where the shares of companies are;

•   issued for direct sale to qualified investors as defined under relevant legislation of the CMB (CMB-qualified investors) without being publicly offered; and
•   traded only among qualified investors of the CMB.

In addition to these market segments, an Official Auction Market may be opened when necessary, allowing the trading of stocks by courts, executive offices and other official entities in a separate market.

There is one other market – the Primary Market – on which the shares in companies being publicly offered and listed for the first time on Borsa Istanbul, and any additional shares offered following rights offerings of companies listed on Borsa Istanbul, are traded. In addition to these markets, there are two different transaction structures that are conducted on the Equity Market. Block trades of listed stocks are conducted as specifically regulated wholesale transactions, and pre-emption rights during rights issues (granting the right to subscribe for newly issued shares) are traded separately as pre-emption right transactions.

3. Key Listing Requirements

3.1. ECM

The issuer shall prepare a prospectus used for domestic offering, submit it to the CMB for approval and also apply to Borsa Istanbul to get the offered shares listed. The major requirements for launching an IPO and getting the offered shares listed are as follows:

a. the company’s articles of association must be amended to comply with the CMB rules and regulations;

b. there must be nothing that restricts the transfer or trading of the equity securities to be traded on Borsa Istanbul, or prevents shareholders from exercising their rights; and

c. the issuer’s share capital must:

•   be fully paid in;
•   except for the funds specifically permitted by law, have been free from any revaluation funds or similar funds in the two years preceding the application for the public offering; and
•   regarding the total amount of non-trade related party receivables, not exceed 20% of the issuer’s total receivables or 10% of its total assets.

The issuer must pay to the CMB a fee that is equal to the sum of 0.1% of the difference between the nominal value of the offering shares and their offering price in the IPO, and 0.2% of the nominal value of any shares that are not being publicly offered.

The Listing Directive of Borsa Istanbul (the “Listing Directive”) regulates the listing and trading of securities through a public offering, through a private placement without a public offering and to qualified investors. Under the CMB, only joint-stock companies can become public companies and list their shares on Borsa Istanbul. To list and trade securities on Borsa Istanbul, a company must have been incorporated for at least two years in accordance with the relevant CMB regulations.

The company must meet all the conditions of the group of the market to which it belongs, and the groups are generally determined by the value of the shares offered to the public.

3.1.1. Star Market Group 1

•   Free-float market value of shares must be at least TRY1 billion.
•   The total market cap of shares in free float must be at least TRY750 million.
•   Profit must have been earned in the past two years.
•   The minimum ratio of shareholders’ equity to the capital according to the most recent independently audited financial statements must be more than 0.75.

3.1.2. Star Market Group 2

•   Free-float market value of shares must be at least TRY150 million.
•   The total market cap of shares in free float must be at least TRY75 million.
•   Profit must have been earned in the past two years.
•   The minimum ratio of shareholders’ equity to the capital according to the most recent independently audited financial statements must be more than 1.

3.1.3. Main Market Group 1

•   Free-float market value of shares must be at least TRY30 million.
•   The total market cap of shares in free float must be at least TRY5 million.
•   Profit must have been earned in the past two years.
•   The ratio of shareholders’ equity to the capital according to the most recent independently audited financial statements must be more than 1.25.

Companies that do not meet the minimum market value of TL 30 million criteria are listed in Main Market Group 2.

3.1.4. Other requirements

Under the Listing Directive, the following requirements also apply:

a. two years must have elapsed since the company’s establishment (however, this is not applied for holding companies that have been established for less than two years but own a minimum of 51% in shares of a company that has been established for more than two years);

b. the exchange management must have had the corporation’s financial structure examined and accepted its ability to continue as a going concern;

c. the company must have obtained confirmation from Borsa Istanbul that its financial structure is sufficient for its operations;

d. the shares must not contain any clauses prohibiting the shareholders to use their rights;

e. the company’s articles of association must not include anything restricting the transfer or trading of the securities to be traded on Borsa Istanbul, or preventing shareholders from exercising their rights;

f. there must be no major or material legal disputes that may adversely affect the production, operation or commercial activities of the company;

g. there must be an independent legal report confirming that the establishment and the operation are in compliance with the relevant laws;

h. there must be no material legal dispute that could adversely affect production or other commercial activities;

i. the company must not have:

•   suspended its operations for more than three months during the past two years, except for the causes accepted by the exchange management;
•   applied for liquidation or concordat (a formal project regarding the liquidation of debts, prepared and presented by the debtor to the court for its approval, under which the debtor is released from his or her debts once the partial payments are completely made); and
•   taken part in any other similar activity specified by the Borsa Istanbul board without the board’s permission;

j. the company’s securities must comply with Borsa Istanbul’s criteria on current and potential trading volumes; and

k. the company’s legal status in terms of its establishment, activities and shares must comply with the applicable law.

If an application is to be filed for an initial listing of shares, the listing application shall be made for the whole amount of capital of the relevant company.

3.2. DCM

The issuer must submit the following before trading debt instruments on Borsa Istanbul:

•   A listing or registration application with Borsa Istanbul; and
•   An application for the approval of the prospectus or issue certificate with the CMB.

The issuer can file the applications to Borsa Istanbul and the CMB using either one of the following methods:

•   A filing covering all debt securities to be issued within one year; or
•   A filing covering a certain amount of debt securities concerning a standalone issuance.

Debt securities which have been listed or registered for issuance and sold within one year under a Borsa Istanbul resolution can be traded on the debt securities market once an announcement through the Public Disclosure Platform of the Central Registry Agency has been made. Debt instruments which are issued solely to qualified investors can be listed by Borsa Istanbul once the CMB’s approves the issuance certificate.

The issuer must satisfy the following criteria:

•   The “operating term criterion”, which states that a minimum of two calendar years must have passed since the company’s establishment date.
•   The “audit criterion”, which states that the company must submit financial statements and independent audit reports to Borsa Istanbul.
•   The “profitability criterion”, which states that profits before tax must have been earned in at least one of the last two years, as evidenced by its financial statements prior to the application date.
•   The “shareholders’ equity criterion”, which states that the total shareholders’ equity in the most recent independently audited financial statement of the company must be more than its paid-in capital.
•   The “sound financial structure criterion”, which states that Borsa Istanbul management must have examined the company’s financial structure and accepted its ability to continue as an ongoing concern.

The company must document its purpose in terms of its establishment and activities, together with the legal status of its debt securities representing indebtedness, in order to verify that they are compliant with the respective legislation.

The company’s articles of association must not include any provisions that restrict the transfer and circulation of the securities to be traded on Borsa Istanbul or prevent the shareholders from exercising their rights.

The above application procedure for the listing of stocks also applies to private sector bonds listed on Borsa Istanbul.

4. Prospectus Disclosure

4.1. Regulatory regimes (Prospectus Regulation or similar) – equity and debt

The CMB, Borsa Istanbul, the Central Registry Agency and Istanbul Clearing, Settlement and Custody Bank (in Turkish: Istanbul Takas ve Saklama Bankası A.S.)  (“Takasbank”) are the main rule-making and enforcing authorities on IPOs in Turkey. The main legislation applicable to companies considering going public in Turkey are the:

•   The CML;
•   Communiqué on Shares No. VII-128.1 (the “Share Communiqué”);
•   Communiqué on Prospectus and Issuance Document No. II-5.1;
•   Communiqué on Sales of Capital Market Instruments No. II-5.2;
•   Communiqué on Material Events No. II-15.1 (the “Disclosure Communiqué”);
•   Communiqué on Corporate Governance No. II-17.1 (the “Corporate Governance Communiqué”);
•   Listing Directive; and
•   relevant directives, general letters and announcements of Takasbank and the Central Registry Agency.

Debt securities markets are regulated by the following legislation:

•   Turkish Commercial Code (TCC);
•   The CML;
•   Communiqué No VII-128.8 on Debt Instruments;
•   Communiqué No II-5.2 on Sales of Capital Market Instruments;
•   Communiqué No II-5.1 on Prospectus and Issuance Certificates; and
•   Listing Directive.

4.2. Local market practice

The company whose shares are offered to the public shall complete the offering process with the assistance of an internal working group and external advisers. An internal working group must be set up within the company to carry out the required IPO process. In general, finance and public relations divisions, and other relevant mid-level managers of the company, are included in the internal working group.

In order to complete the full IPO process in a diligent, professional and adequate manner, professional external advisers shall also be appointed. In practice, the main external advisers are as follows:

•   an intermediary institution shall be appointed by the company whose shares will be offered to the public and there shall be an agreement with the intermediary institution. There may also be a consortium (for example, in a relatively large IPO) rather than a single intermediary institution to take advantage of the syndicated efforts of several brokerage firms;
•   an independent auditor shall prepare the financial statements of the company whose shares are offered to the public in accordance with capital markets regulations. These statements must be audited by an independent audit firm selected from the CMB’s authorised list. The company must sign an audit contract with the selected audit firm;
•   a financial adviser who generally advises on the timetable, structuring, valuation, price determination and so on shall also be appointed by the company whose shares are offered to the public;
•   a research analyst is adequate for publishing research on the company;
•   legal advisers shall be appointed to handle the legal aspects of the full IPO process (e.g., preparing the CMB application documents in line with the CMB and Borsa Istanbul regulations, carrying out legal due diligence, and negotiating the agreements between the company and external advisers); and
•   public relations advisers are crucial for attracting as many investors as possible. They publish marketing materials and press releases that explain the company’s core business activities.

4.3. Language of the prospectus for local and international offerings

The prospectus in ECM and DCM deals must be prepared and submitted in Turkish. In IPOs where both domestic and international investors are targeted, an English version of the prospectus is also prepared. The issuers must reflect all material information in English prospectus to Turkish prospectus to enable all investors to reach same level of information.

5. Prospectus Approval Process

5.1. Competent Regulator

Borsa Istanbul and the CMB are the competent regulators in ECM deals.

CMB is the competent regulator in DCM deals. Additionally, if the issuer is active in a regulated sector such as banking or energy, the consent of the relevant regulatory authority should also be obtained before the application to the CMB.

5.2. Timelime, number of draft submissions, review and approval process

ECM: The issuer must prepare a prospectus used for a domestic offering and submit it to the CMB for approval of the primary listing of its shares. Additionally, the following steps are expected to be initially conducted by the company that is considering going public:

•   organisation of an internal working group;
•   articles of association amendment;
•   due diligence work for the IPO;
•   preparation of the prospectus;
•   selection of an intermediary institution and execution of a market advisory agreement;
•   selection of an independent auditor and preparation of financial statements;
•   agreement on comfort packages and legal opinions;
•   drafting of the marketing presentations, followed by marketing and book-building;
•   pricing and allocation of shares;
•   simultaneous application to the CMB and Borsa Istanbul;
•   approval of the CMB;
•   settlement;
•   commencement of trading on the relevant market of Borsa Istanbul upon its approval; and
•   exercise of any over-allotment and price stabilisation.

Although each deal is different, an indicative timetable for an IPO is set out below, where ‘T’ signifies the first day of trading on Borsa Istanbul.

5.2.1. Timeline

T minus 6 months to T minus 3 months:  

•   Preparation for the IPO:
•   The company’s articles of association must be amended to comply with the CMB;
•   Requirements for public companies must be considered;
•   Advisers must be appointed;
•   Eligibility for an IPO and listing is discussed; and   Due diligence is started.   Prospectus drafting commences.

T minus 3 months:

•   First submission of the prospectus to the CMB.

T minus 2 months to T minus 1 month:

•   First draft reports circulated
•   Announcement of intention to float made.

T minus 5 weeks:

•   Connected brokers’ research is published and the research blackout period starts.

T minus 4 weeks:

•   Borsa Istanbul approval of listing is received and the price range is set. The underwriting agreement is signed and the final valuation report is submitted to the CMB. Updated prospectus with price range (subject to approval by the CMB) is made available on the issuer’s and domestic underwriter’s websites. There is a management briefing to syndicate sales. The preliminary immediate or cancel (International Offering Circular) order with price range (subject to approval by the CMB) is distributed. The management roadshow starts.

T minus 3 weeks:

•   Submission of final documents to the CMB. End of the period for informing investors of the IPO.

T minus 2 weeks:

•   Prospectus approved by the CMB. International book-building starts and announcement of sales.

T minus 9 days:

•   Domestic book-building starts.

T minus 6 days:

•   The pricing decision is made. Domestic and international book-building ends.

T minus 4 days:

•   If requested, the distribution list is sent to the CMB. Offer price and allocations announced. New shares are created, and shares can be sold or transferred.

T minus 1 day:

•   Settlement and publication of final International Offering Circular.

T:

•   First day of trading and start of price stabilisation (if any).

DCM: issuers must initially pass a resolution setting out the terms and conditions of the issue. A general assembly resolution is required for the CMB application to request an issuance limit. However, the issuer may authorise its board of directors to pass the requisite resolution by way of a general assembly resolution (and that authorisation is valid for 15 months), or through a provision under its articles of association where the articles of association permit this (there is no time limit on this type of authorisation). However, the issuer must make the application for CMB approval within one year from the date of the applicable resolution.

Prior to each domestic offering in Turkey without a public offering, the issuer must also apply to the Central Registry Agency after obtaining the CMB approval on the issuance certificate. However, this application requirement was removed for international offerings on 18 February 2017. While debt instruments issued outside Turkey are no longer required to be registered with the Central Registry Agency, information on the amount, issue date, ISIN, interest commencement date, maturity date, interest rate, name of the custodian, currency of the bonds, and the country of issuance must be submitted to the Central Registry Agency within three business days following the issuance. Any changes to that information must be reported to the Central Registry Agency within three business days following the date of the change.

The CMB fee to be paid by the issuer varies between 0.05% and 0.15% of the offering amount, depending on the maturity of the instrument. Only 75% of those rates apply to issuers other than banks, financial institutions and foreign entities. The approval process of the issuance certificate before the CMB usually takes around three weeks.

In debt securities sales through a private placement, it is sufficient for the issuer to prepare an issuance certificate to be approved by the CMB. However, in a public offering of debt securities sales, the issuer must prepare a prospectus to be approved by the CMB and apply to the stock exchange, Borsa Istanbul to trade the securities.

Debt securities issued for sale to qualified investors can be listed and quoted on Borsa Istanbul only for trading among qualified investors within the framework of the relevant regulations. Debt securities issued for sale through a private placement are generally not listed or traded on Borsa Istanbul. Qualified investors must either register with the Central Registry Agency or sign a statement which contains a clause stating that they are qualified investors.

Except for secondary market transactions of shares, the total number of investors holding the debt securities sold on a private placement basis during a certain period of time cannot exceed 150. This limit does not apply to debt securities sales to qualified investors. Debt instruments sold on a private placement basis can be purchased by both qualified and unqualified investors. In such cases, qualified investors are not taken into consideration when calculating the above cap on investors. Sales to qualified investors can only be affected through a call addressed to those investors or through a process that pre-determines each of those investors.

6. Listing Process

6.1. Timeline, process with the stock exchange

Please refer to sections 3 and 5.

7. Corporate Governance

7.2. Corporate governance code / rules

Certain mandatory and non-mandatory corporate governance rules are set forth in the Corporate Governance Communiqué, the TCC and the CML.

In 2003, the CMB issued a set of recommended principles for public companies, which applied to public companies on a “comply or explain” basis. On December 30, 2011, the CMB published its first piece of legislation, which was subsequently amended from time to time, relating to corporate governance which included certain compulsory and non-mandatory principles applicable to all companies incorporated in Turkey and listed on Borsa Istanbul. The CMB published the Corporate Governance Communiqué in January 2014 which, upon its entry into force, superseded any previous legislation relating to corporate governance.

The Corporate Governance Communiqué contains principles relating to (i) the listed company’s shareholders, (ii) public disclosure and transparency; (iii) the stakeholders of the listed company; (iv) the board of directors of the listed company; and (v) related party transactions (collectively, the “Corporate Governance Principles”). The Corporate Governance Communiqué classifies listed companies into three categories according to their market capitalization and the market value of their free-float shares, subject to recalculation on an annual basis, as determined by the CMB.

The CMB also requires the listed companies to form an audit committee and an early risk detection committee. Formation of nomination committee, corporate governance committee and remuneration committee is advised but optional under the relevant regulations. The CMB also requires independent board members in the board of directors and sets forth detailed qualifications.

7.3. Any other ESG considerations

There are no ESG considerations set forth under the capital markets regulations in Turkey.

8. Documentation and Other Process Matters

8.1. Over-allotment

An over-allotment is an option commonly available to underwriters that allows the sale of additional shares that a company plans to issue in an initial public offering or secondary/follow-on offering. Overallotment option is limited with the issue of as many as 20% more shares than originally planned.

Over-allotment option and price stabilization activities are conducted in accordance with the provisions of the CMB’s Share Communiqué, Borsa Istanbul regulations and the principles as specified in the Prospectus. Disclosure of CMB required announcements are made on the Public Disclosure Platform in relation to the exercise of the overallotment and price stabilization activities as prescribed under the CMB’s Share Communiqué.

Over-allotment is not related to or closely linked with stabilisation. Even if the shares are not over-allotted in a public offering, a stabilisation activity can still be carried out.

8.2. Stock lending agreement

Stock lending agreement can be executed between the selling shareholders and underwriters as regulated under the CMB’s Share Communiqué. However, it is not a common concept in Turkey and the market has not experienced any consequences with this regard.

8.3. Stabilisation

Stabilisation is done by using the monies in the stabilisation account funded by the selling shareholder, the issuer or both. The proceeds from the over-allotment are not necessarily used to buy back the over-allotted shares from the market in order to stabilise the price if that price falls below the IPO price. Therefore, it is available as a legally-permitted and risk-free means for an underwriter to stabilise the price within 30 days following an IPO (though only in cases where the share trade falls below the offering price). The requisite information for stabilisation must be included in the prospectus.

A Turkish lead manager or co-lead manager can engage in price stabilisation activities on its own account or on the account of the company or issuer. The proceeds gained by the company from the offering can be used to finance the price stabilisation, provided that the amount used does not exceed 20% of the gross offering proceeds gained by the company. Further, the nominal value of the shares to be purchased from the market to support the price cannot exceed 20% of the total nominal value of the offered shares, including over-allotted shares.

If there are secondary and primary shares, the proceeds of the secondary and any over-allotted shares will be used to finance the stabilisation activities. The fund which consists of 20% of the proceeds of the primary offering will not be used before the proceeds of the current shareholder’s secondary shares are exhausted. The selling shareholder is also entitled to provide unlimited additional funds into the account.

Under the stabilisation agreements, the stabilisation manager has exclusive discretionary authority to undertake stabilisation activities during the stabilisation period. During the stabilisation period, the stabilisation manager can (but will be under no obligation to do so) use the funds in the stabilisation account, to the extent permitted by the applicable laws, regulations and rules of Borsa Istanbul, to purchase shares, if the market price falls below the offer price, with a view to supporting the market price of the shares at a level higher than that which might otherwise prevail in the open market.

In public offerings involving price stabilisation transactions, the prospectus must include the following statements and information:

•   Price stabilisation transactions aim to support the market price of the shares.
•   No guarantee is given as to the performance of price stabilisation transactions.
•   Transactions can be stopped before the end of the specified stabilisation period.
•   Name and title of the intermediary institution carrying out price stabilisation transactions.
•   Stabilisation period.

Stabilisation is carried out for the limited purpose of preventing or slowing down a decline in the price of the shares. Technically, stabilisation breaches the capital markets rules on market abuse. However, the CMB recognises the need for stabilisation to allow the market to operate more efficiently. Stabilisation must take place under the CMB and Borsa Istanbul rules which state that:

•   Only prescribed stabilisation action is permitted.
•   Only specified securities can be stabilised on Borsa Istanbul within specified time limits.
•   Stabilisation transactions must only take place within specified price limits.
•   The stabilisation manager must carry out adequate prior disclosure and maintain records of stabilising activities.

Breaches of the stabilisation rules can result in Borsa Istanbul and the CMB bringing proceedings against the stabilisation manager.

Ordinary course of the market should not be affected by the price stabilization transactions. Purchase orders at a price above the public offering price should not be submitted within the frame of price stabilization transactions. Additionally, the shares purchased within the frame of price stabilisation transactions should not be sold at a price below the public offering price.

9. Ongoing Reporting Obligations (Life as a Public Company)

9.1. Annual and interim financials

Pursuant to the Communiqué No: II-14.1 on the Principles Regarding Financial Reporting in Capital Markets and the Communiqué on Public Disclosure Platform No: VII-128.6, financial statements must be presented on a quarterly basis in accordance with Turkish Financial Reporting Standards (TFRS):

•   audited year-end consolidated financial statements and reports prepared in accordance with TFRS must be published on the Public Disclosure Platform within a period of 60 days following the end of the accounting period (if companies are required to submit consolidated financial statements, the period is extended to 70 days following the end of the accounting period);
•   interim condensed consolidated six-month financial statements must be published on the Public Disclosure Platform within 40 days following the end of the accounting period (if companies are required to submit consolidated financial statements, the period is extended to 50 days following the end of the accounting period); and
•   unaudited first quarter and third quarter financial statements must be published on the Public Disclosure Platform within 30 days following the end of the accounting period (if companies are required to submit consolidated financial statements, the period is extended to 40 days following the end of the accounting period). If the first and third quarter financial statements are independently audited, then such financial statements must be published on the Public Disclosure Platform within 40 days and 50 days, respectively, for companies preparing unconsolidated and consolidated financial statements.

Companies may make public disclosures relating to future forecasts through a decision of the board of directors or the written consent of the persons authorized by the board of directors. Companies may disclose their future forecasts to public at most four times in a calendar year by either making public disclosures on the Public Disclosure Platform or making relevant explanations under activity reports. If there is a material change within the scope of future forecasts, disclosure of the material change is required.

 

9.2. Ad hoc disclosures

9.2.1. Public Disclosure Platform

The Public Disclosure Platform is an electronic system enabling companies traded on Borsa Istanbul to release any information required to be publicly disclosed such as financial statements or material events via internet and electronic signature technologies.

All listed companies are required to disclose their financial statements, explanatory notes, material events and all other disclosures through the Public Disclosure Platform. The system is operated and managed by the Central Registry Agency.

The system enables all users to access both current and past notifications of a listed company, to obtain current announcements and up-to-date general information about listed companies in an open and timely manner and to make basic comparisons among and analysis of listed companies.

The internet address of the system is www.kap.gov.tr.

9.2.2. Disclosure of Material Events

Disclosure of material events for publicly listed companies is primarily regulated by the CMB’s Disclosure Communiqué. Under the Disclosure Communiqué, the CMB makes a distinction between “inside information” and “continuous information”. Rather than identifying each material event requiring disclosure in the Disclosure Communiqué, the CMB leaves specific disclosure decisions regarding inside information to the companies’ individual discretion on a case-by-case basis; yet disclosure guidelines published on 10 February 2017 clarify the events triggering a disclosure requirement by providing illustrative examples. As per the Disclosure Communiqué, in the event of an existence of any news or rumors relating to the issuer disclosed for the first time through media institutions or by other communication means which is likely to affect the value and/or the price of the issuer’s shares, capital markets instruments or investors’ investment decisions, issuers are obliged to make disclosures on the accuracy and adequacy of such news or rumors. Interpretations, analysis, assessments and predictions made on the issuer company based on the issuer’s public disclosures do not fall within the scope of above principle.

In addition, pursuant to Article 198 of the TCC, persons becoming direct or indirect holders of 5.0%, 10.0%, 20.0%, 25.0%, 33.0%, 50.0%, 67.0% or 100.0% of the issued share capital of a Turkish company are required to notify such company of such an acquisition and, thereafter, to notify the company of their transactions in the shares of such company when the total number of the shares they hold falls below or exceeds such thresholds within ten days following completion of the relevant transactions. Information notified to the company has to be registered within ten days upon receipt of this notification with the relevant trade registry and publicly announced in the Turkish Trade Registry Gazette.

In principle, publicly listed companies are required to make public disclosures in Turkish. However, the CMB requires certain publicly listed companies to make public disclosure in other languages along with Turkish disclosure. We are planning to make public disclosures in English to more effectively communicate with our foreign investors. Further, a board of directors of a publicly listed company is required to adopt disclosure policies to effectively fulfill public disclosure obligations.

9.2.3. Inside Information

The Disclosure Communiqué defines “inside information” as information or any event not disclosed to the public which may impact investors’ investment decisions or is likely to affect the value and price of the shares or relevant capital markets instruments of the issuer. If any inside information comes to the attention of any persons (i) who hold, directly or indirectly, 10.0% or more of the share capital or the voting rights of the issuer company; or (ii) regardless of such threshold, who hold privileged shares which give its holder the right to nominate or elect board members for such issuer (and which the issuer is not itself aware of) such persons must make a public disclosure regarding such inside information. Examples of insider information set out in the disclosure guidelines include the following:

•   material administrative or legal proceedings, extraordinary income and profit, mergers and acquisitions, material changes in the financial position of the company;
•   material changes related to financial assets, such as cases where the total of acquisition or disposal fees of financial fixed assets reach 5% of the value of the assets indicated in the latest disclosed balance sheet of the company; or where the company acquires or disposes of 10% or more of another company’s shares or total voting rights or adds profit to its share capital after the sale of financial assets;
•   an acquisition of shares by non-shareholders or shareholders without management control over the company in a manner which would give them management control; and
•   a change of independent auditors or senior management.

Publicly listed companies may suspend the disclosure of inside information by taking full responsibility for any non-disclosure in order to protect its legitimate interests, provided that (i) such suspension does not mislead investors; (ii) the company is able to keep any related inside information confidential; and (iii) the board of directors resolves on the necessary precautions in order to protect the interests of the issuer and not to mislead investors, or an officer authorized by the board of directors approves such precautions in writing.

Once the suspension conditions are eliminated, the issuer company must disclose the inside information on Public Disclosure Platform. In such disclosure the suspension decision and the reasons for the suspension must be indicated. Inside information must be publicly disclosed if its confidentiality cannot be preserved.

9.2.4. Continuous Information

The following changes in share ownership or management control in a company must be publicly disclosed under the Disclosure Communiqué by persons conducting the relevant transactions:

•   a person or persons acting together becoming direct or indirect holders of 5.0%, 10.0%, 15.0%, 20.0%, 25.0%, 33.0%, 50.0%, 67.0% or 95.0% of the issued share capital or voting rights of a public company in Turkey are required to disclose such acquisitions on the Public Disclosure Platform and, thereafter, to disclose on the Public Disclosure Platform their transactions in the shares or voting rights of such company, when the total number of the shares or voting rights they hold falls below or exceeds such thresholds;
•   the founding shareholder is required to disclose on the Public Disclosure Platform any direct or indirect acquisition of 5.0%, 10.0%, 15.0%, 20.0%, 25.0%, 33.0%, 50.0%, 67.0% or 95.0% of the issued share capital or voting rights of the company by investment funds belonging to a founding shareholder, and also to disclose on the Public Disclosure Platform its transactions in the shares or voting rights of such company, when the total number of the shares or voting rights that it holds falls below such thresholds;
•   persons with managerial responsibility in a publicly listed company or persons with close relations to any such persons must publicly disclose their transactions relating to the shares or other capital markets instruments of such company as at the date when the aggregate value of the transactions performed by such persons reach TL 250,000 in one calendar year;
•   In addition, companies must make necessary updates within two business days notice in respect of any changes relating to the general information on the company disclosed on Public Disclosure Platform. The Central Registry Agency is responsible for updating the shareholding chart indicating a publicly listed company’s real person and legal entity shareholders who hold directly 5.0% or more of the shares or voting rights of such publicly listed company, in case of any changes.

Any changes in rights attached to different classes of shares in publicly listed companies must be disclosed on the Public Disclosure Platform and changes relating to the voting rights must be notified to the Central Registry Agency.

Contributed by Tsvetkova Bebov Komarevski.

1. Market Overview

1.1. Biggest ECM and DCM transactions over the past 2-3 years

The past three years were somewhat flat in terms of major ECM and DCM transactions floating from Bulgaria. There have been notable exceptions, though.

In 2018, Bulgarian Energy Holding, a state-owned holding company which consolidates the participation of the state in the Bulgarian energy business, issued its third EUR 400 million Eurobond issue, which was subsequently tapped to EUR 600 million. The Eurobonds were double listed on Euronext Dublin and Bulgarian Stock Exchange (BSE). In addition, during the past three years a number of local bonds were placed on the domestic market, the biggest of EUR 15 million in size.

On the ECM side, 2018 has seen one relatively sizeable IPO in Bulgaria, the ca. EUR 25 million IPO of Gradus AD, a poultry farm. While no major IPOs have been placed in Bulgaria in 2019, good news came in early 2020: Eleven Capital AD,  venture capital structure, chose to fund its business through the capital market and completed the first Bulgarian IPO since 2018 in March 2020. Even though the IPO was relatively small, it is an important step towards the Bulgarian capital market for the local start-up ecosystem, as Eleven Capital AD is the first venture capital structure in Bulgaria which decided to fund its business through the capital market. TBK assisted as the single legal counsel for this transaction.

Several other ECM transactions scheduled for 2020 have now been postponed due to the COVID–19 pandemic and the uncertainties on the domestic and international markets. Not officially postponed is the most notable of these transactions – a planned up to BGN 200 million (ca. EUR 102 million) capital increase of First Investment Bank AD.

2. Overview of the local stock exchange and listing segments (markets)

2.1. Regulated market

There are two regulated markets in Bulgaria, both operated by the Bulgarian Stock Exchange, the BSE Main Market and BaSE Alternative Market.

BSE Main Market is the main market and is divided in several segments. The prime share segment is called the Premium Segment and the other main segment is Standard Segment. There are also several other special segments, such as the Special Purpose Vehicles Segment, where the shares of REITs are traded, and a Bonds Segment.

Less liquid issues are traded on the BaSE Alternative Market. Their admission is made only ex officio by the Bulgarian Stock Exchange through relocation from the BSE Main Market if the issue or its issuer no longer comply with the requirements of the main market.

2.2. Non-regulated market for equities

Bulgarian Stock Exchange runs also a MiFID II SME Growth Market, called BEAM (Bulgarian Enterprise Accelerator Market). The efforts of BSE in the past year were mainly focused on the development of this multilateral trading facility (MTF) by attracting small and medium sized companies to list their shares on BEAM. This market is quite new which is why there are still no companies listed on BEAM. Some companies have already announced their plans for a listing on BEAM.

3. Key Listing Requirements on the BSE

3.1. ECM

The key listing requirement for equity securities listings on the regulated market segments of the BSE is the publication of a listing prospectus approved by the Bulgarian competent authority, the Financial Supervision Commission (FSC) (see item 4 below). In addition, the following applies:

For the Premium Segment the equity issuer must have been profitable at least for two out of the preceding five years, must comply with the corporate governance standards (including to be disclosing information in English), as well as must meet requirements for:

(i) financial history – at least 5-year of financial history;

(ii) free float – at least 25% free float or free float amounting to at least BGN 5 million (ca. EUR 2.5 million) in market cap;

(iii) total market cap – at least BGN 50 million (ca. EUR 25 million), alternatively the equities to have been previously listed on the Standard Segment for at least one year;

(iv) monthly average turnover – at least BGN 300,000 (ca. EUR 153,000) monthly average turnover in the equities listed on the BSE for the preceding six months; alternatively, the issuer must have an arrangement with a market maker; and

(v) number of transactions – at least a monthly average of 150 transactions in the listed equity securities within the preceding six months; alternatively, the issuer must have an arrangement with a market maker.

The requirements for listing on the Standard Segment of the BSE are less strict and include a monthly average turnover in the listed equity securities within the preceding six months of at least BGN 4,000 (ca. EUR 2,045) and at least a monthly average of 5 transactions in the equity securities within the last six months.

Listings on BEAM require the production of a listing memorandum (instead of a prospectus), the employment of an BSE approved advisor, and compliance with several other requirements.

3.2. DCM

For the listing on the Bonds Segment of BSE, the remaining maturity of the bonds must be at least one year and the total outstanding principal amount under the bonds must be at least (the equivalence of) BGN 1 million, denominated in BGN, EUR or USD.

4. Prospectus Disclosure

4.1. Regulatory regimes (Prospectus Regulation or similar) – equity and debt

The new Prospectus Regulation, i.e. Regulation (EU) 2017/1129, applies in full as of 21 July 2019. This Regulation, together with its supporting legislation (the “New EU Prospectus Legislation”), applies directly across the European Union, including Bulgaria, and in the EEA as a whole, both for equity and debt instruments. A draft bill amending Bulgaria’s Public Offering of Securities Act (POSA), which set out the local prospectus regime under the predecessor Prospectus Directive, was circulated for public discussion in February 2020 and is expected to be enacted in the near future. Until then, the “old national regime” prior to the new Prospectus Regulation, is temporary kept in order to achieve a smooth transition.

According to the New EU Prospectus Legislation, except where certain exemptions apply, a prospectus must be drafted, approved by the competent regulator, the FSC, and published, prior to the beginning of a public offer of securities in Bulgaria and/or the admission of securities to trading on a regulated market.

The prospectus can be drafted either as three separate documents (i.e., a registration document, a securities note, and a summary), or in one single document, which covers the required information from the three aforementioned documents. While the preferred option for issuers in Bulgaria in the last fifteen years has been the preparation of a three-component prospectus, local practices are evolving towards a more commonplace use of a single document prospectus.

The prospectus must contain, as part of the registration document, information about the issuer and its organizational structure and management, the risk factors to which the issuer’s activities are exposed, a business review of the issuer, as well as information on the issuer’s financial condition. In addition, the securities note section of the prospectus must contain information on the terms and conditions of the securities and their offer and the risk factors inherent to the offered securities. The summary must contain a brief resume of the information provided in the registration document and the securities note, and must make it possible for potential investors to understand easily the characteristics of the issuer and the offered securities.

Special rules apply to prospectuses in relation to securities issued by REITs. In addition to the minimum content of the prospectus, as provided in the New EU Prospectus Legislation, the prospectus for REITs must contain information regarding the investment policy, investment restrictions and the characteristics of assets which may be acquired by the respective REIT, as well as data about the custodian bank, the servicing companies and the evaluators of the REIT and applicable management fees and fees for servicing companies.

In relation to debt instruments issuances, where a publication of prospectus is not mandatory (e.g., private offerings), the Bulgarian Commercial Act provides for a minimum content of the offering circular, which must include the most important information about the offered bonds and the terms and conditions for subscription, such as information on the size of the offered bonds, face value and issue value of the bonds, their maturity and repayment schedule, the interest payment structure, the collateral (if any) under the bonds, the terms and conditions for subscription of bonds, et cetera.

The prospectus or offering circular for mortgage-backed bonds (the issuers of which may only be banks) must contain specific additional information to meet the requirements of the Mortgage-Backed Bonds Act of 2000. This includes: an outline of the rules on the cover pool register (ways of making entries into and access to the register), which the issuing bank must maintain for each issue of mortgage bonds; details of the mortgage assets included in the cover pool (including details of the mortgage loans such as remaining term to maturity, interest and fees features, risk qualification of the loans; and details of the mortgaged properties together with valuation); and detailed breakdowns of the cover pool assets in terms of outstanding principal amounts, term to maturity upon issue of the bonds, interest rate levels, risk qualification, ratio between outstanding principal amount on the mortgage loans and the mortgage property valuation. The Mortgage-Backed Bonds Act will be reshuffled in the context of the transposition of the Cover Bonds Directive in Bulgaria.

4.2. Local market practice

After the New EU Prospectus Legislation became applicable, the local market practice follows the new regime. Nonetheless, there are still certain local specifics, which need to be taken into consideration.   

4.2.1. Liability for the information included in the prospectus

The POSA provides, as required under the new Prospectus Regulation, that the members of the management body of the issuer, its procurators, as well as the offeror, the person asking for admission to trading, and (where applicable) the guarantor, are jointly liable for any damages arising out of untrue, misleading or omitted information in the prospectus.

However, it is noteworthy that according to Bulgarian law, in excess of the Prospectus Regulation requirements, the officers responsible for the preparation of the financial statements of the issuer are also jointly liable with the foregoing for any damages arising out of untrue, misleading and omitted data in the financial statements of the issuer. The issuer’s auditors are liable for damages arising out of the audited financial statements of the issuer.

On the other hand, there are no special rules on the liability of experts, whose expertized opinions may be referenced in a prospectus.

In addition to civil liability and administrative sanctions that may be imposed by the FSC, the Penal Code provides that there is a criminal liability for any person who, in relation to public offer of securities, knowingly uses untrue favorable information in a prospectus, or does not disclose unfavorable data, which is of material importance in the making of an investment decision to acquire such securities.

Still, there are no explicit requirements, under Bulgarian law or when it comes to local transactions market practice, for the carrying out of a due diligence of the information included in the prospectus. Following the lead of Bulgaria-originated capital markets transactions, domestic practices are gradually starting to evolve towards the including of due diligence processes with the help of external advisors (legal, tax, technical, etc.), acceptable to the lead managers, aiming at reducing any potential risks of claims by investors against the issuer and/or the managers arising out of deficiencies in the prospectus.

4.2.2. Publication of the prospectus

According to the New EU Prospectus Legislation, the prospectus must be published in an electronic form on the issuer’s website and/or on the websites of the lead managers. Usually the prospectus is not published on the website of the Bulgarian Stock Exchange until the offered securities are listed.

Pursuant to Bulgarian law the FSC must be notified for the place where the prospectus will be published at least two days prior to the publication.

4.2.3. Notice for the public offer

Albeit no explicit requirement exists in the New EU Prospectus Legislation, the local market practice, as well as the “old prospectus regime” under the POSA, requires a notice for the public offer to be published prior to the beginning of the subscription period of the offered securities. This notice must contain the terms and conditions of the public offer and be published at least in one national newspaper or on the web site of an information agency or other eligible media, as well as on the web site of the issuer and the managers. The publication must take place at least 7 days before the initial date of the subscription period. According to the draft Bill of amendment of the Public Offering of Securities Act circulated in February 2020, this rule is expected to continue to apply in the future.

4.3. Language of the prospectus for local and international offerings

The general principles of article 27 of the Prospectus Regulation apply. Absent the practice of the FSC to date with approving prospectuses of non-Bulgarian issuers or of Bulgarian issuers which do not intend to offer their securities in Bulgaria, the FSC reviews draft prospectuses prepared in the Bulgarian language. This practice is likely to evolve towards use of the English language even in the prospectus approval process.

Irrespective of the above rules, the preparation of English (unofficial) versions of Bulgarian prospectuses (even where an offer of securities thereunder will be made only in Bulgaria) has become relatively commonplace expect in the case of smaller issuers or issuers. This trend is encouraged by certain BSE rules and corporate governance rules even though they would strictly apply to the post-IPO disclosure of information by issuers.

5. Prospectus Approval Process

5.1. Competent Regulator

The Financial Supervision Commission is the competent local regulator in relation to the Bulgarian capital market. The FSC approves prospectuses and supervises the trading in financial instruments. The FSC is also the competent regulator and supervisor for public companies. Its powers include ongoing supervision of public companies in relation to their compliance with transparency requirements, the Market Abuse Regulation regime, and corporate governance standards set in Bulgaria and the protection of the rights of the investors in financial instruments at large.

5.2. Timeline, number of draft submissions, review and approval process

The procedure for approval of the prospectus by the FSC usually takes around two months for first-time issuers and around a month and a half for follow-on offerings by more frequent issuers. However, after the introduction of the New EU Prospectus Legislation the practice of the Bulgarian regulator is gradually evolving towards shortening of the terms for prospectus approval to meet the international standards for scrutiny of prospectuses.

As a matter of practice, two submissions of drafts are necessary to obtain the approval of the prospectus by the FSC: after the first draft submission the FSC typically reverts with instructions for revisions and updates of information contained in the draft and subsequently approves the so revised draft prospectus if the FSC finds that the identified deficiencies have been remedied.

The approval procedure is strictly formal and ongoing coordination with the regulator is not possible.

According to the POSA, the FSC has special powers to reject approval of the prospectus also in cases where the public offer of shares will dilute existing shareholders due to the fact that the issue value of the offered shares is lower than the book value of the outstanding shares from the capital of the issuer, as well as where the FSC establishes that the rights of investors are not fully protected.

Notably, as a supporting measure for the development of the Bulgarian capital markets, the FSC does not collect prospectus approval charges until the beginning of 2021.

A decision of the FSC not to approve a prospectus may be appealed before court. The grounds for appeal are, however, limited to breach of procedure or law. In line with general Bulgarian administrative paradigms, the discretion applied by the FSC in the course of approval proceedings is not subject to judicial review.

6. Listing Process

6.1. Timeline, process with the stock exchange

The listing on the BSE typically takes two to three weeks after the public offer is finalized, and is not concurrent with the closing (end of placement and release of proceeds to the issuer) of a capital market transaction. The reason is that the respective securities ought to be registered with the Central Depository AD (Bulgaria’s CSD), as well as with a special register of issues and pubic companies, maintained by the FSC. The listing application with the BSE must be accompanied by (in addition to a copy of the prospectus) the FSC’s approval resolution, and the CSD’s registration certificate. The BSE grands listing by a resolution of its Board of Directors, wherein the first day of trading is determined.

Therefore, the local market is in expectation of reforms, which would make new issues immediately tradeable.

7. Corporate Governance

7.1. Corporate governance code / rules (INED, board and supervisory composition, committees)

Corporate governance of Bulgarian public companies is regulated both at the legislative level, as well as in the National Corporate Governance Code (2016) (NCGC), a soft law document applying the “comply or explain” principle.

Most notably, the applicable law sets out requirements regarding the remuneration and composition of management and supervisory bodies of a public company and the establishment of an audit committee. Various rules are also put in place to ensure the protection of minority shareholders’ rights. For example, the most recent amendments to the POSA transpose certain aspects of the second Shareholder Rights Directive (EU) 2017/828.

According to Ordinance No. 48 of the FSC, issued upon delegation by the POSA, public companies are required to maintain and make public a remuneration policy which sets out details on the conditions for the award of fixed and variable remuneration and the provision of termination compensations to company directors and officers. The Ordinance sets out rules for deferral of variable remuneration, payment in instruments and the claw-back of payments, as well as allows public companies to form a remuneration committee. Furthermore, under the Independent Financial Audit Act, public companies are required to establish an independent audit committee, which is tasked with providing additional oversight over a public company’s business and financials. Finally, under the POSA, public companies must appoint an investor relations officer and ensure that at least one third of the members of their board of directors, respectively supervisory board, is independent. As part of the ongoing obligations under the POSA (see item 9.a below) a public company must issue an annual corporate governance report on its compliance with the NCGC and provide information on the company’s diversity policy or explain the reasons for not maintaining one.

The NCGC supplements the legal requirements with non-binding guidelines for good corporate governance. The NCGC is aligned with the OECD Principles of Corporate Governance and contains recommendations for the composition of corporate bodies, management of conflicts of interest, protection of shareholders and disclosure of information.

A particular feature of corporate governance of Bulgarian public companies is a scrupulous regime on the shareholder approval (or qualified board approval), under threat of nullity, of certain material transaction of the public company. The POSA sets a variety of materiality thresholds (lower if an “interested party” is the counterparty to the transaction with the public company), which trigger the application of the above rules. By way of example, shareholder approval is required where a public company enters into a transaction whereby its exposure to the counterparty will exceed one third of the lower of the values of the public company’s assets according to the two latest balance sheets (which have been publicly disclosed and at least one of which is audited). The threshold is 1 percent. (of the lower of the two values) if the counterparty is an “interested party”, e.g., where the same person directly or indirectly holds at least 25 percent of the votes in both the public company and the counterparty. Some would find this regime overly burdensome on public companies, others would support it in the name of protecting minority shareholders.

Yet another interesting aspect of the Bulgarian regime of public companies, touching upon corporate governance, is that shareholders have a non-waivable preemption right in case of share capital increase. This reflects on the leeway of majority shareholders (or company boards if authorized by the virtue of the company’s bylaws or a general meeting delegation) when planning follow-on offerings, i.e. share capital increases, after the initial going public.

7.2. Any other ESG considerations

Due to the current state of development of the Bulgarian capital market, ESG considerations do not play a key role among issuers and investors. Furthermore, there is currently no dedicated legislation aimed at promoting such considerations. Nonetheless, the NCGC encourages public companies to implement policies on corporate social and environmental responsibility, which promote the development of sustainable business models through dialog with key stakeholders and incorporation of nonfinancial business objectives.

This status quo will change. The continuing implementation of the European Commission’s Action Plan on Financing Sustainable Growth, and the active involvement of IFIs, creates incentives to Bulgarian issuers and investors to engage in sustainable investment opportunities (e.g., Green Bonds). Therefore, in the years ahead ESG considerations could increase their role on the local capital market.

8. Documentation and Other Process Matters

8.1. Over-allotment (greenshoe or brownshoe        structure)

Over-allotment structures, such as greenshoe, have not been used on the Bulgarian capital market regularly in the past years. This is due to the lower liquidity of the local market, which generally hinders oversubscription, and the fact that security issues are generally placed by managers without a firm commitment (best effort placement). Thus, although the use of different over-allotment strategies is legally possible in accordance with general rules, e.g., on stabilization (see lit. c) below) or share buybacks, they have not been tested in practice.

8.2. Stock lending agreement – whether it is used and whether there are any issues (tax, takeover directive)

Under the current market practice, stock lending agreements do not play a role in the offering of securities in Bulgaria.

8.3. Stabilization – whether allowed and on what terms (MAR, local regimes)

Stabilization measures are generally allowed in Bulgaria. The conditions for stabilization follow the general requirements of the Market Abuse Regulation (MAR), as detailed in Commission Delegated Regulation (EU) 2016/1052, including i.a. any such measures/ transactions are subject to appropriate prior and subsequent disclosure and regulatory reporting and stabilization is confined to a 30-day stabilization period (60-days in the case of bonds) with restrictions applicable to the price levels during that period. Bulgarian law does not provide for specific local requirements.

Although allowed by law, stabilization measures are uncommon in domestic capital markets transactions in Bulgaria and therefore the available regulation is heavily underused. This lack of practice results in legal uncertainty as to the application of the rules on the side both of issuers and the competent regulator, the FSC.

9. Ongoing Reporting Obligations (Life as a Public Company)

The ongoing reporting obligations of issuers on the Bulgarian capital market are generally aligned with sectorial EU law and cover the disclosure of financial and other material information on an issuer, as well as the disclosure of information on certain shareholder activities. Most notably, these requirements stem from the Transparency Directive, as transposed in the POSA, and from the MAR.

9.1. Annual and interim financials

Issuers domiciled in Bulgaria that have listed equity or debt securities on a regulated market or have offered such securities to the public in Bulgaria are required to disclose regular financial information in accordance with Title 3, Chapter VIa of the POSA.

These disclosures include the following types of information:

(i) annual financial report (containing, i.a., audited annual financial statements, audit report and a corporate governance report) – to be published on an individual basis within 90 days after the end of the financial year (in general December 31) and – where relevant – on a consolidated basis within 120 days thereafter; for 2020 these terms are extended to July 31 due to the COVID-19 pandemic;

(ii) semi-annual financial report (containing, i.a. six-month financial statements) – to be published on an individual basis within 30 days after the end of Q2 and – where relevant – on a consolidated basis within 60 days thereafter; for 2020 these terms are extended to September 30 due to the COVID-19 pandemic;

(iii) quarterly statement on the financial condition (containing key financials) or a more granular quarterly financial report – to be published on an individual basis within 30 days of the end of Q1, Q3 and Q4 and – where relevant – on a consolidated basis within 60 days thereafter; for 2020 these terms are extended to September 30 due to the COVID-19 pandemic.

In principle, financial information should be prepared in accordance with the IFRS, if the issuer reports based on its consolidated situation, but it can also be prepared following the Bulgarian National Accounting Standards, if the issuer reports on an individual basis only. Disclosures must be made (also) in Bulgarian language if the securities are offered or traded only locally and in the case of dual listings. The biggest issuers, and a number of other issuers report in both Bulgarian and English voluntarily. Where the securities are listed only on a foreign regulated market, the issuer should preferably report its financials in English.

The information must be made public through a news agency ensuring its efficient dissemination to the public in Bulgaria and the other EEA member states. Annual and semi-annual reports must be maintained for a period of at least 10 years, and quarterly reports for a period of at least 5 years.

An important exemption from the disclosure requirements under items (i) and (ii) above applies to issuers exclusively of debt securities admitted to trading on a regulated market, the denomination per unit of which is at least EUR 100,000 or its equivalent in another currency. This exemption, however, does not apply to the requirement under item (iii) above and is also of limited practical value due to obligations of a bond issuer to provide similar information to the bondholders trustee.

Furthermore, Commission Delegated Regulation (EU) 2017/565 sets general requirements for the disclosure of financial information by issuers, whose securities are admitted to trading on a Bulgarian MTF (see item 2.b) above). Under this Regulation MTFs must ensure that issuers publish annual financial reports within 6 months after the end of each financial year, and semi-annual financial reports within 4 months after the end of the first 6 months of each financial year. Operators may exempt debt issuers that have no equity instruments traded on MTF from the requirements to disclose semi-annual financial information. The details on these reporting requirements are left to the rules of each MTF.

9.2. Ad hoc disclosures

Ad hoc disclosures form another important category of ongoing obligations for issuers in Bulgaria. Its most notable example is the ad hoc disclosure of inside information under the MAR. In a broader sense, this category includes also other disclosure requirements triggered by the occurrence of certain circumstances, such as the disclosure of managers’ transactions under the MAR and the disclosure of qualified holdings under the POSA.

9.3. Disclosures under the MAR

Bulgarian issuers of equity or debt securities traded, admitted or applying for admission to trading on a regulated market or an MTF are required to disclose to the public any issuer specific inside information, i.e. price sensitive non-public information, of which they become aware, as soon as possible after identifying a piece of information as such. The public disclosure of inside information can be delayed, where an issuer has legitimate interest in doing so or – in the case of issuers that are credit or financial institutions – due to financial stability considerations. The decision on the delay of disclosure must be properly documented by the issuer and comply with additional requirements aimed at preserving market integrity and confidentiality of the piece of inside information concerned.

In addition, an issuer must disclose certain transactions in or related to its instruments made by persons discharging managerial responsibilities within its structure or persons closely related to the latter, so-called “managers’ transactions”. For this purpose, the above persons are required to notify the issuer for each of their transactions in such issuer’s equity or debt securities (or related derivatives) after reaching an individual threshold of EUR 5,000 in gross transaction value per year. Issuers must fulfill their obligation within three business days of the relevant person entering into a notifiable transaction.

Both types of disclosures should be made through a media (news agency) which ensures the efficient dissemination of the information to as wide a public as possible on a non-discriminatory basis, free of charge and simultaneously throughout the EEA. Issuers are further required to post and maintain on their websites any information made public for a period of at least 5 years.

9.4. Disclosures under POSA

Bulgarian equity issuers, whose securities are listed on a regulated market or have been offered to the public (public companies) are further required to disclose to the public any notifications received from persons who directly and/or indirectly have acquired or transferred voting rights representing 5% or a multiple of 5% of all voting rights in the general meeting of the respective issuer. The disclosure obligation must be fulfilled within three business days of receipt of the respective notification through a new agency ensuring the efficient dissemination of the information to the public throughout the EEA.

Contributed by Avellum.

1. Market Overview

1.1. Biggest ECM and DCM transactions over the past 2-3 years

Historically, the Ukrainian market was not as famous for its national equity capital and debt market as opposed to other financial centres. The situation has not changed much during the last decade and there are still very few national capital markets transactions.

This situation is expected to change once the current securities law reform is enacted (it is expected to happen later in 2020).

1.1.1. Equity Capital Markets Transactions

During the last two years, as the result of the major reform of the banking sector aimed to make the financial system crisis-resistant, there was a large number of private offerings by banks seeking additional capitalisation. During 2018-2019, the volume of issued shares amounted to approximately EUR 2.8 billion. Some large businesses in other sectors also opted for private placements instead of public offerings to improve its capital structure for example, by way of debt-to-equity conversions.

1.1.2. Debt Capital Markets Transactions

The major part of the transactions with debt securities in Ukraine includes transactions with (i) Ukrainian government bonds (in Ukrainian: obligatsii vnutrishnih derzhavnyh pozyk Ukrainy) (ii) municipal bonds (in Ukrainian: obligatsii mistsevyh pozyk), and (iii) corporate bonds.

The most popular debt securities traded in Ukraine are Ukrainian governmental bonds. In 2019, the Ministry of Finance of Ukraine issued Ukrainian government bonds for a total amount of approximately UAH 334 billion (approximately EUR 11.2 billion). To facilitate the purchase of the Ukrainian governmental bonds by foreign investors, Clearstream linked Ukraine to its network in May 2019.

Municipal bonds are also relatively popular instruments. A recent municipal bonds issue was the UAH 300 million (approximately EUR 10 million) 3-year 9.79% municipal bond issued by the Lviv City Council in 2019.

Examples of recent corporate bonds issues include: (i) the UAH 250 million (approximately EUR 8.5 million) 5-year 19% corporate bonds issue by Stock Company “Ukrposhta” (Ukrainian national postal operator) in 2018, and (ii) the UAH 200 million (approximately EUR 6.7 million) issue by Joint Stock Company “TASCOMBANK” (one of the largest Ukrainian banks) in 2019.

Notably, the Tascombank issue was first-ever corporate bonds issue in Ukraine complying with EU standards. The issue provided for two series of bonds equal to UAH 100 million (approximately EUR 3.4 million) each, one to be redeemed in 5 years, and another in 10 years. Each series provides for the annually resettable coupon. This transaction was truly innovative for the Ukrainian market.

Despite there is some movement on the Ukrainian capital market, the Ukrainian blue-chip companies and quasi-sovereigns prefer to raise funds on the international capital markets due to, among others, absence of the sufficient demand for debt securities in Ukraine.

2. Overview of the local stock exchange and listing segments (markets)

The Ukrainian laws provide a number of the requirements applicable to the Ukrainian stock exchanges and other professional participants of the capital market. Trading on the stock exchanges has to comply with the rules of the respective stock exchange that has to be registered with the National Securities and Stock Market Commission of Ukraine (the NSSMC). The NSSMC supervises the Ukrainian stock exchanges and regulates their activities.

As of today, there are only six stock exchanges in Ukraine. Based on the volume of the exchange contracts, the biggest stock exchanges are the Perspectiva Stock Exchange and the PFTS Stock Exchange.

In terms of trading on the stock market, the Ukrainian government bonds accounted for 94.6% of the total volume of the exchange contracts concluded within the Ukrainian stock exchanges in 2019. The volume of traded shares in 2019 was equal to 0.11%. Corporate bonds accounted for 2.9% of the total volume of the exchange contracts on the stock exchanges in 2019.

The total volume of the securities’ exchange contracts made with the securities exchanges amounted to UAH 305 billion (approximately EUR 10 billion) in 2019. Notably, the exchange contracts on the secondary market amounted to 98.9% of the total volume of the exchange contracts in 2019.

There is no concept of regulated and non-regulated markets in Ukraine. Ukrainian stock exchanges divide the securities into two groups: (i) listed securities and (ii) non-listed securities. Both listed and non-listed securities have to be included in the stock list to be traded on the stock exchange. The listed securities should be also included in the stock register of the stock exchange.

Listed securities are considered a more attractive instrument than non-listed securities. At the same time, Ukrainian law establishes strict requirements for the listed securities and their issuers, therefore as of today the biggest part of the listed securities constitute the Ukrainian government bonds.

The non-listed securities can be also freely traded on the stock exchange, however, the requirements to such securities and their issuers are less strict than to the listed securities.

2.1. Admission of the foreign issuers’ securities

Foreign issuers’ securities can be admitted to trading in Ukraine only after obtaining the NSSMC’s decision on admission of such securities to trade in Ukraine.

For the foreign securities to be admitted to trading in Ukraine, the following requirements have to be satisfied:

(i) the issuer has to be registered outside of Ukraine under laws and regulations of the state of registration;

(ii) the securities issue and/or the prospectus has to be registered in the state of registration of the issuer or with the stock exchange of the state, where such securities are traded;

(iii) the securities should be assigned with the ISIN and the CFI codes;

(iv) the securities have to be accepted to trade on at least one stock exchange approved by the NSSMC (which are Nasdaq, Inc, NYSE, the EU stock exchanges, Hong Kong Exchanges, and Clearing);

(v) there should be submitted a written confirmation from the Central Securities Depositary on the possibility to account for the foreign securities on the correspondent account of the Central Securities Depositary opened with the foreign central securities depository or with the international depositary clearing company.

The NSSMC decides on the admission of the foreign securities to trade in Ukraine within 30 calendar days from the day of submission of all required documents.

Once the securities are admitted to trading in Ukraine, the stock exchanges admit them to trading on the stock exchange as the non-listed securities.

3. Key Listing Requirements

Ukrainian law provides that the listed securities are the securities that are listed on the stock exchange and were included in the stock register as corresponding to the listing requirements.

3.1.  ECM

The shares may be listed on the stock exchange provided that the issuer complies with, at least, the following requirements:

(i) it has existed for at least three years;

(ii) its minimum equity capital amounts to UAH 300 million (approximately EUR 10 million);

(iii) its minimum annual net income from the sale of goods, works and services for the last fiscal year amounts to UAH 300 million (approximately EUR 10 million) (excluding banks);

(iv) its minimum market capitalisation amounts to UAH 100 million (approximately EUR 3 million);

(v) the portion of its free float shares constitutes 10% of the share capital or valued at UAH 75 million (approximately EUR 2.5 million);

(vi) the number of its shareholders amounts to 150;

(vii) it has an officer who holds the position of a corporate secretary; and

(viii) it conducts an annual audit under international auditing standards involving an independent external auditor for at least two years.

The stock exchange also may establish a separate segment for non-listing shares for new companies, which may be interesting for the investors aiming to develop medium-sized businesses in Ukraine. Admission to such segment is subject to the compliance by the issuer with the following requirements:

(i) the issuer has existed for at least one year (or at least six months provided that all other requirements during such period have been met);

(ii) minimum market capitalization is UAH 20 million (EUR 670 thousand);

(iii) minimum of 50 shareholders compose the issuer;

(iv) the issuer conducts an annual audit under the international auditing standards;

(v) the issuer is encouraged to follow corporate governance principles and international financial reporting standards.

3.2. DCM

For the debt securities to be included in the stock register, the following conditions have to be satisfied:

(i) the issuer should exist for at least two years (subject to certain exceptions);

(ii) the net assets value of the issuer and/or the security provider should be at least UAH 300 million (approximately EUR 10 million);

(iii) the net profit from the sale of goods, works or services of the issuer and/or the security provider should be not less than UAH 300 million for the last year (except for the banks);

(iv) the issuer and/or the security provider should not have losses for the previous financial year;

(v) no default has occurred;

(vi) the nominal value of the securities issue should be equal to at least UAH 100 million (approximately EUR 3.4 million).

The above requirements do not apply to the issue of (i) Ukrainian government bonds, (ii) municipal bonds, or (iii) bonds of international financial organisations.

Municipal bonds can be included in the stock register if the nominal value of the issue exceeds UAH 50 million (EUR 1.7 million).

Ukrainian government bonds and bonds of international financial organisations are included in the stock register without completion of the listing procedures.

The stock exchange can establish additional requirements for the inclusion of the securities in the stock register (such as compliance with the corporate governance principles, additional requirements to the financial statement of the issuer etc.). The stock exchange further monitors compliance with the listing requirements and in case of violations can decide on the delisting of the securities.

4. Prospectus Disclosure

4.1. Regulatory regimes (Prospectus Regulation or similar)

A public offering of the securities requires the preparation and submission of the prospectus. The Ukrainian prospectus regulations were drafted based on EU Regulation 2017/1129 of the European Parliament and of the Council of 14 June 2017.

The prospectus should provide the investors with all the necessary information to allow an investor to make an investment decision on the purchase of the respective securities.

Ukrainian laws provide that prospectus should contain three parts: (i) a summary, (ii) a registration document, and (iii) a document on the securities. The prospectus may consist of one or more separate documents.

The information that has to be disclosed in the prospectus depends on the type of the offered securities.

For example, the prospectus for the corporate bonds issue should contain information about:

(i) Any risks associated with the public offering, the issuer’s business, and its securities;

(ii) the financial statements of the issuer for the last two years and the last interim financial statements that precede the date of submission of the prospectus to the NSSMC.

(iii) planned or forecasted profit of the issuer;

(iv) officials of the issuer and the persons performing managing functions;

(v) majority shareholders of the issuer;

(vi) any court proceedings involving the issuer that have or may have a significant adverse effect on the issuer and its financial performance;

(vii) any significant changes in the financial position of the issuer and position in the market in which the issuer operates;

(viii) any material transactions of the issuer conducted outside of its ordinary course of business.

In case of any significant changes related to the information contained in the prospectus (for example, (i) change of the issuer’s officials, or (ii) bankruptcy of the issuer), the prospectus should be amended accordingly.

Substantial changes to the prospectus have to be made in the form of an annex to the prospectus and submitted to the NSSMC for approval.

4.2. Local market practice

In the case of a public offering of securities, the information contained in the prospectus and subsequent changes to the prospectus have to be disclosed. Such disclosure has to be made by way of:

(i) publication of the prospectus and changes to the prospectus in the official printed edition of the NSSMC;

(ii) inclusion of the prospectus and changes to the prospectus in the public information database of the NSSMC;

(iii) publication of the prospectus and changes to the prospectus on the webpage of the issuer; and

(iv) publication of the prospectus and changes to the prospectus webpage of the relevant stock exchange.

The issuer should disclose the information contained in the prospectus and changes to the prospectus at least 10 days before entering into the agreements with the first owners of the securities.

4.3. Language of the prospectus for local and international offerings

The prospectus has to be prepared in Ukrainian. If the prospectus contains references to other documents, they should be also prepared in Ukrainian.

The prospectus of the foreign issuers should be prepared in Ukrainian and, upon the discretion of the issuer, can be also prepared in English or in other languages of the European Union state, where the securities are offered for sale or a public offering or admitted to trading on the stock exchange.

5. Prospectus Approval Process

5.1. Competent Regulator

The prospectus has to be submitted to the NSSMC for approval.

5.2. Timeline, number of draft submissions, review and approval process

Once the prospectus is complete, it has to be submitted for approval of the NSSMC in paper form and electronic form together with the supporting documents. The supporting documents include, among others, the issuer’s approval for entering into the transaction, constituent documents of the issuer, the financial statements, and contact details of the people responsible for preparation of the prospectus.

The NSSMC reviews and approves the prospectus or refuses to approve it within 20 business days from the day of the submission of all necessary documents. In certain cases, such terms can be shortened to 10 business days (for example, if the issuer’s securities have been admitted to trading on the stock exchange).

If amendments are made to the prospectus, the NSSMC reviews and approves them within seven business days from the receipt of all necessary documents.

The NSSMC may refuse to approve the prospectus if:

(i) the submitted documents do not comply with requirements of the Ukrainian law;

(ii) there are inconsistencies between the provisions of the submitted documents;

(iii) there is false or incomplete information in the submitted documents;

(iv) the issue of the securities is conducted in bad faith.

The prospectus, which consists of a single document, is valid for the public offering within 12 months from the date of its approval by the NSSMC. If the prospectus consists of a few documents, the period of 12 months must be calculated from the date of the approval of the last document by the NSSMC.

6. Listing Process

The primary placement of the securities can be made either by way of (i) a public offering, or (ii) a private offering.

6.1. Public offering

Ukrainian laws provide that a public offering of securities is an offer addressed to an indefinite number of persons on the purchase of securities at the price and conditions determined by such offer. To make a public offering, it is necessary to apply for the admission of securities to trade on the stock exchange and inclusion of the securities in the stock register administered by the stock exchange.

The public offering of the debt securities can take from three to six months. The stages of the public offering are described below.

6.1.1. Preparatory steps

The process of the issue of the securities starts from the adoption of a resolution of the issuer’s competent body approving the contemplated issue of the securities (the “Approval”). Once the Approval is available, the issuer should proceed with the engagement of the underwriter (if it plans to engage one). The issuer should be mindful that the audited financial statements for the last two financial years would be necessary for the issue.

6.1.2. Preparation of the prospectus and other documents for the approval by the NSSMC

A separate work-stream required for the public offering is a preparation of the prospectus. The final version of the prospectus has to be signed by the issuer, the auditor, the stock exchange and the underwriter (if engaged for the transaction). Despite this step is not expressly required by the Ukrainian law, it is usually done so.

The issuer has to submit the prospectus and other documents to the NSSMC within 60 days from the adoption of the Approval. The NSSMC has 20 business days (10 business days in certain cases) for review of the submitted documents. If the prospectus and other submitted documents are in good order, the NSSMC issues a temporary certificate on registration of the issue and approves the prospectus.

After the prospectus is approved, the issuer has to publish the prospectus and the notification on the publication of the prospectus for the review of the potential investors.

6.1.3. Further steps

Upon publication of the prospectus, the issuer has to agree on the servicing of the securities’ issue with the Central Securities Depositary. Furthermore, the ISIN code has to be assigned to the notes.

After completion of the above steps, it is necessary to prepare and depose the temporary global notes certificated with the Central Securities Depositary.

Afterward, the issuer has to submit the documents on the public offering to the NSSMC and to make a publication on a public offering. Upon completion of these formalities, the issuer places the securities by way of the public offering.

6.1.4. Closing formalities

The issuer has to approve the results of the issue within 60 days from the date of termination of the term for the placement of securities. Within 15 days from the approval of the results of the issue, the issuer has to submit to the NSSMC the report on the results of the securities’ issue. The NSSMC has 25 business days to (i) register the submitted report and (ii) issue the certificate on registration of the securities.

The issuer has to publish the report on the results of the securities’ issue within three business days from the registration of the respective report by the NSSMC. The global notes certificate has to be obtained and deposited with the Central Securities Depositary within seven business days from the day of the receiving of the certificate on registration of the corporate bonds.

6.2. Private offering

A private offering is placement of securities that is carried out among a predetermined circle of persons, the number of non-qualified investors among which may not exceed 150 persons. Preparation of the prospectus is not required for private placement.

The private offering of the debt securities can take from two to five months. The term for the placement of bonds by way of private offering is shorter than in the case of the public offering due to the absence of the requirement to prepare a prospectus. The stages of the private placement of securities are similar to the stages of the public placement (except for the requirement of the preparation and approval of the prospectus).

6.3. Ukrainian government bonds

The Ministry of Finance of Ukraine acts as the issuer and conducts the placement of the Ukrainian government bonds. The National Bank of Ukraine acts as the agent for servicing of the issue and redemption of the Ukrainian government bonds. The Ministry of Finance of Ukraine determines the amount and conditions for each issue of Ukrainian government bonds per the framework terms of issue and the procedure for placement approved by the Cabinet of Ministers of Ukraine.

Ukrainian government bonds are placed at auctions conducted by the National Bank of Ukraine at the initiative of the Ministry of Finance of Ukraine. Only primary dealers (Ukrainian banks approved by the Ministry of Finance of Ukraine) can participate in the auction and purchase Ukrainian government bonds on the primary market.

Primary dealers can participate in the placement of Ukrainian government bonds on their own and at their own expense or to act as brokers for their clients. The placement of Ukrainian government bonds is carried out by electronic trading systems and takes the form of (i) auction and (ii) the fixed-income sales.

7. Corporate Governance

Listed companies are subject to a more prudent corporate governance requirements. In particular, such companies must establish a supervisory board, consisting of at least 1/3 of the independent directors. Moreover, certain mandatory committees (audit committee, remuneration committee etc.) must be established. While the supervisory board itself is subject to a number of regular reporting requirements, including for the purpose of evaluation of the supervisory board’s performance.

Additionally, earlier this year the NSSMC adopted the Corporate Governance Code of Ukraine (the “Code”), which reflects the latest developments in the field of environmental, social and corporate governance by securities issuers.

This Code was developed under the G20/OECD Principles of Corporate Governance, which are the international benchmark for good corporate governance. Besides, the Code reflects the recommendations of the Growth and Emerging Markets Committee IOSCO Final Report on Corporate Governance. The disclosure recommendations are consistent with those set out in the United Nations Conference on Trade and Development (UNCTAD) Guidance on Good Practices in Corporate Governance Disclosure. The provisions of the IFC’s corporate governance standards and various national codes have also been taken into account and inspired the drafters of this Code.

The provisions of the Code are not mandatory. Thus, the issuers are not obligated to comply with it. As in many other countries, in Ukraine, it is an instrument of soft law. However, compliance with the Code is highly recommended to companies entering capital markets.

In addition to the requirements established by law, the Code provides best practices aimed to provide potential investors with the necessary comfort. The document clearly defines the role of the shareholders, the supervisory board and the executive body in managing the company. Finally, it highlights the role of the company’s other stakeholders and its commitment to achieving sustainable development.

8. Documentation and Other Process Matters

N/A

9. Ongoing Reporting Obligations (Life as a Public Company)

Listed companies should comply with various ongoing reporting obligations established by applicable regulations, in particular, disclose regular and special information about the issuer, insider information, information about the owners of voting shares above, whose shareholding exceeds respective thresholds. The scope of disclosure requirements is extensive and includes most areas of company’s activities (among others, information on granting consent to significant transactions; changes in the composition of the issuer’s officers; the decision of the issuer on reduction of the share capital; initiation of bankruptcy proceedings against the issuer; changes in the rights of issuer’s shareholders etc.)

From a technical standpoint, such disclosure is made either by placing such information in the publicly accessible information database of the NSSMC (http://stockmarket.gov.ua) or through a person dealing with the disclosure if regulated information on behalf of stock market participants.

9.1. Annual and interim financials

The regular information includes annual and interim one.

Annual financials include, in particular, the annual financial statements certified by the auditor supplemented with the auditor’s report made by an independent auditor.

The reporting period for preparing annual information is a calendar year. Disclosure of annual information must be made not later than 30 April of the year following the reporting one.

Interim financials include interim financial statements (either audited or not).

The obligation to disclose interim information applies to joint stock companies whose shares have been publicly offered and/or admitted to trading on a stock exchange by inclusion in the exchange register, banks and issuers, whose securities other than shares have been publicly offered and/or admitted to trading on a stock exchange by inclusion in the exchange register.

Interim information is to be prepared at the end of each quarter and disclosed no later than the 30th of the month following the reporting quarter.

9.2. Ad hoc disclosures

Ad hoc disclosures concern the special information, i.e., information that has changed in comparison to the one disclosed within the regular disclosure.

It includes, among others, information on granting consent to significant transactions; changes in the composition of the issuer’s officers; the decision of the issuer on reduction of the share capital; initiation of bankruptcy proceedings against the issuer; changes in the rights of issuer’s shareholders, etc.

Such information should be disclosed in the form of notification either (i) on the website of the issuer whose securities are admitted to trading on the stock exchange, (ii) in the publicly accessible information database of the NSSMC (http://stockmarket.gov.ua) or (iii) through a person dealing with the disclosure if regulated information on behalf of stock market participants.

Contributed by Divjak, Topic & Bahtijarevic.

1. Market Overview

The Zagreb Stock Exchange (ZSE) was established in 1991 by 25 banks and 2 insurance companies. Currently, the ZSE is owned by around 40 banks and brokerages. In 2007, the Varazdin Stock Exchange merged into the ZSE and since then the ZSE has been the sole Croatian securities market. In 2015, the ZSE acquired shares in the only Slovenian stock exchange – the Ljubljana Stock Exchange – and subsequently introduced a common trading system to enhance trading on these two markets and enable simultaneous floating of shares.

Despite the fact that from 1995 to 2000 market capitalization of the ZSE increased ten times (982.6%), the market was severely hit by the 2008 crisis and was not as strong as it was before the crisis. The current COVID-19-related economic turmoil hit the market again and it remains to be seen when and how the market will be at least remotely close to what it was immediately before.

In the past few years, the market was dominated by trading of shares in some Croatian blue-chip companies, whilst IPOs were almost unknown. The main drivers of trading were high-profile takeovers which spur speculative trading in expectation of gains in mandatory takeover offers which followed such takeovers. Trading of bonds and other debt securities was very modest, with only one or two notable issuances per year. The main players on the market have been pension funds, which are loaded with cash and which have constantly been putting pressure on the local securities regulator to ease conditions for their investments because their demand for investment was higher than the potential of the market. The reason for this shallow market situation was a large number of sizeable companies which decided to delist because of widespread sentiment that the downsides of the listing were greater than its benefits. Another blow to the market was the collapse of the largest Croatian private company, Agrokor, whose subsidiaries accounted for a significant portion of the most attractive companies listed.

2. Overview of the local stock exchange and listing segments (markets)

Trading of securities on the ZSE is conducted through an electronic trading system – Xetra – which enables all participants to trade in real time. Trading hours on business days are from 9:00-16:30 CET, with pre-trading period from 8:00-9:00 CET.

ZSE operates the Regulated Market and multilateral trading platform (CE Enter Market).

2.1. Regulated market

On the Regulated Market, transparency requirements encompass publication and delivery of all the important information regarding issuers and listed securities which may have an effect on traded instruments, as prescribed by law and the ZSE Rules. In addition, listing on the Regulated Market generally involves the publication of listing prospectus, as previously approved by the local financial services regulator.

Financial instruments which may be traded on the regulated market are those for which the ZSE has obtained the regulator’s approval or in respect of which the approval stems from the provisions of the Capital Markets Act (CMA), specifically:

• shares or other securities equivalent to shares which represent an interest in the capital or in the shareholders’ rights in a company, as well as depositary receipts;
• bonds and other types of securitised debt, also including depositary receipts related to such securities;
• any other securities which entitle their holders to acquire or sell such negotiable securities or which constitute the grounds for a cash payment of the amount determined on the basis of negotiable securities, currencies, interest rate or yields, commodities, indices or other measures of size;
• money market instruments: treasury bills, central bank bills and commercial paper, certificates of deposit, and other instruments which are customarily traded on the money market; and
• units in collective investment undertakings, in accordance with the provisions of the CMA.

2.1.1. Listing Segments

The Regulated Market has the following listing segments (in order of rank and transparency):

• Prime Market
• Official Market
• Regular Market

The Prime Market is the most demanding market segment with regard to the requirements imposed on the issuer, especially in relation to transparency. The issuers on the Official and Regular markets must submit only a minimum of information stipulated by the CMA, plus additional requirements as set out in the ZSE Rules.

2.2. Multilateral trading platform

The CE Enter Market is a multilateral trading facility consisting of the following segments:

• CE Enter – Alter
• CE Enter – Fortis
• CE Enter – X

The CE Enter Market is an alternative market managed by the ZSE. The main characteristics of the CE Enter Market are lower transparency requirements for the issuers and financial instruments compared to the regulated market and, consequently, a higher associated risk of investing in the financial instruments traded on the CE Enter Market. The ZSE provides a sufficient level of publicly available information on the financial instruments traded on the CE Enter Market to ensure orderly trading and pricing. The provisions of the CMA, other regulations and subordinated legislation adopted pursuant to such regulations concerning market abuse shall apply to trading on the CE Enter Market.

3. Key Listing Requirements

The listing requirements for the admission of equity and debt securities can be divided into general requirements, applicable on all listed securities, and specific (per segment) requirements.

The general terms for regulated market listing on the ZSE are:

• the financial instruments being listed on the regulated market shall be those which may be traded in a fair, orderly and efficient manner;
• the issuer shall be duly registered or otherwise validly established in accordance with the regulations of the Republic of Croatia or the country of the issuer’s domicile;
• the applicant shall comply with the obligation to publish the prospectus and disclose other information, in accordance with the provisions of the CMA;
• financial instruments must be freely negotiable;
• efficient transaction settlement must be provided in respect of any financial instruments for which an application for listing on the regulated market has been submitted (this criterion will be deemed to be met if a financial instrument is issued in a dematerialised form and registered with the central depository or central register and included in the clearing and/or settlement system);
• the use of LEI is mandatory for issuers of financial instruments listed on regulated market; and
• pre-bankruptcy, bankruptcy or liquidation proceedings have not been instituted against the issuer of a financial instrument.

3.1. Equity Capital Markets

When it comes to listing of shares on the Prime Market (in addition to the general requirements listed above), the following requirements must be met:

• the issuer must have an investor relations function in place;
• free float min. 35%;
• at least 1000 shareholders;
• market capitalization of min. HRK 500,000,000.00;
• the issuer of shares shall enter into a market making contact with at least one market maker;
• the supervisory board of the issuer must have at least one independent member;
• at least one member of the audit committee shall be independent of the issuer;
• the audit report must not contain modifications of the auditor’s opinion;
• total fees received by the statutory auditor or the audit firm from the issuer do not exceed the threshold laid down in Article 4(3) of Regulation (EU) No 537/2014;
• the issuer of shares must not have imposed a market protection measure under the ZSE Rules for a period of 1 (one) year prior to the date of submission of the Prime Market listing application; and
• the issuer shall develop and disclose its dividend policy to the public.
• The requirements for listing of shares on the Official Market (in addition to the general requirements listed above) are:
• at least 25% of the shares shall be distributed to at least 30 shareholders. In exceptional cases, shares may be listed even if they do not meet the free float requirement, if at least 10% of the issue or total value of shares is held by 50 shareholders;
• market capitalization min. HRK 8,000,000.00; and
• the issuer must have an investor relations function in place.

For the shares to be listed on the Regular Market (in addition to the general requirements listed above), at least 15% of the shares must be distributed to the public. In exceptional cases, shares may be listed even if they do not meet the free float requirement, since, considering a large number of same-class shares and the free float ratio, this does not compromise orderly market functioning.

3.2. Debt Instruments

Debt instruments may be traded on the Regular Market and on the Official Market. In addition to the general requirements for listing all securities (referred to above), for debt instruments to be listed on the Official Market, the nominal amount of the loan for debt securities may not be less than HRK 1,500,000.00.

4. Prospectus Disclosure

4.1. Regulatory regimes and local market practice

Rights and obligations pertaining to offering of securities to the public and admitting securities to trading on the regulated market in the Republic of Croatia (RoC), including the obligation to publish a prospectus and exemptions related thereto, are regulated by the Capital Market Act (CMA), as well as the European Union legislation.

The Commission Regulation (EC) No. 809/2004 of 29 April 2004 implementing Directive 2003/71/EC of the European Parliament and of the Council as regards information contained in prospectuses lays down the rules for the preparation of prospectus and, in Croatian legislation, was implemented through the provisions of CMA. The respective Regulation was fully replaced by the Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on the regulated market, and repealing Directive 2003/71/EC (the “Prospectus Regulation”), representing a new prospectus regime in the European Union.

Since the Prospectus Regulation is directly applicable in all EU Member States since July 2019, CMA also needed to be amended and supplemented in order to meet the requirements set out in the Prospectus Regulation. In the light thereof, in February 2020 amendments to CMA have entered into force in order to ensure full application of the Prospectus Regulation, appointing the Croatian Financial Services Supervisory Agency (CFSSA) as the Croatian competent authority and providing other novelties related to prospectuses within the new European Union regulation. A novelty related to the obligation to publish prospectus for public offerings of securities was introduced by raising threshold to EUR 8,000,000 (previously EUR 5,000,000), thus lowering the costs of the issuance of the securities in RoC and unburdening the issuers and the CFSAA.

Furthermore, the prospectus regime in RoC is governed by the delegated legislation which includes the Commission Delegated Regulation (EU) 2019/980 relevant for the format, content, scrutiny and approval of the prospectus (the “PR Regulation”) and the Commission Delegated Regulation (EU) 2019/979 relevant for the technical standards on key financial information in the summary of a prospectus, the publication and classification of prospectuses, advertisements for securities, supplements to a prospectus, and the notification portal (RTS Regulation). When drafting a prospectus, it is also necessary to take into account documents issued by the European Securities Markets Authority (ESMA), such as ESMA Guidelines on Alternative Performance Measures and bylaws issued by the CFSAA. 

The Prospectus Regulation lays down that prospectus is to be published in two cases: (i) when the securities are offered to the public in the territory of RoC and (ii) when the securities are admitted to trading on the regulated market in RoC. Based on the issuer’s nature, type of the securities offered to the public or admitted to trading on the regulated market and circumstances of the issuer, prospectus contains all necessary information to enable investors to make an informed assessment of the assets and liabilities, financial position, profit and losses and prospects of the issuer and of any guarantor, as well as of the rights related to the respective securities. Therefore, information contained in the prospectus must be accurate and complete and presented in an easily analysable and comprehensible form.

Prospectus may be drawn up as: (i) a single document (containing all the information in one document), (ii) separate documents (information is contained in several separate documents), composed of: registration document (containing information on the issuer) and securities note (containing information on securities to be offered to the public or admitted to trading on the  regulated market), and summary (providing, in a brief manner and in non-technical language, the essential information enabling investors to make an informed assessment of the characteristics  and risks associated with the issuer, any guarantor and the securities).

Among other, the Prospectus Regulation requires the following information to be included in prospectus:

(i) information on the issuer, issuer’s business operations, organisational structure and assets, and details on the products and services it provides and the factors which affect the issuer’s business;

(ii) risk factors specific for the issuer and offered securities in a limited number of categories, informing potential investors of the material risks. The risk factors need to be specific for the issuer’s industry and defined by taking into account the probability of their occurrence;

(iii) audited financial information covering the latest three financial years prepared in accordance with IFRS or in accordance with national accounting standards where these standards are considered equivalent to IFRS for a third country issuer;

(iv) details of any legal proceedings having a significant effect on the issuer’s and or group’s financial situation, involving the issuer in the last year;

(v) information on significant changes in trends or financial position of the issuer since the last financial period for which financial information has been published;

(vi) listed information on the members of the administrative, management or supervisory bodies, senior management and founders of the issuer with remuneration, benefits and interests in the shares of the issuer and with respect to the company’s corporate governance;

(vii)  details of any major shareholders of the issuer, whose interest must be notified under the issuer’s national laws;

(viii) details of related party transactions that the issuer has entered into since the date of the last financial statements and up to the date of the prospectus;

(ix) description of the issuer’s policy on dividend distributions and any restrictions thereon;

(x) brief summary of material contracts entered into outside of the ordinary course of business by the issuer’s group in the past two years preceding publication; and

(xi) responsibility statements from the company, the directors and any proposed directors, confirming that they accept responsibility for the information contained in the prospectus and that, to the best of their knowledge (having taken all reasonable care to ensure that such is the case), such information is in accordance with the facts and contains no omission likely to affect its import.

4.2. Language of the prospectus for local and international offerings

General information about the language of the prospectus in relation to offer of securities to the public or the admission of securities on the regulated market and the language of publication of regulated information is provided in the Prospectus Regulation and the CMA. In this section, overview of the requirements related to the prospectus language under the CMA will be set out.

Local offering of the securities to the public or admission to the trading on the regulated market necessitates a prospectus to be drawn up in the Croatian language.

With respect to the language for international offerings or admissions, provisions of the CMA generally provide choice between Croatian and English to the issuer, the offeror or the person asking for admission to trading on the regulated market, with certain obligations to make prospectus summary available in the Croatian language.

Regarding international offerings within the EU, when an offer of securities to the public is made or admission to trading on the regulated market is sought in one or more Member States, excluding the RoC as a home Member State, a prospectus for the purpose of security and approval by the CFSAA may be drawn up in Croatian or English language, at the choice of the issuer, the offeror or the person asking for admission to trading on the regulated market. In case of international offerings in which the RoC is a host Member State, but where the prospectus has not been drawn up in Croatian, the prospectus summary must be available in Croatian language.

In case of international offerings in more than one Member State including RoC as a home Member State, the prospectus may also be drawn up by choice in Croatian or English language. However, if English is opted for, the CFSAA requires the prospectus summary to be available in Croatian, as is the case where the RoC is a host Member State and the prospectus has not been drawn up in Croatian language.

A general rule for the final terms and the summary of the individual issue is they shall be drawn up in the same language as the language of the approved base prospectus. In the event final terms are communicated to the CFSAA, as the competent authority in the host Member State, the summary of the individual issue annexed to the final terms must be made available in Croatian (when base prospectus, final terms and the summary have not been drafted in Croatian). In case the RoC is a home Member State, regardless of the fact whether an offer or an admission is related also to the Croatian market, base prospectus, final terms and the summary of the individual issue annexed to the final terms can be drawn up in Croatian or English language. Provided the Croatian market is included and English language is opted for, summary of the individual issue annexed to the final terms needs to be made available in Croatian language.

Prospectuses for admission to trading on the regulated market of non-equity securities and admission to trading on the regulated market in one or more Member States may be drawn up in Croatian or English, at the choice of the issuer or the offeror, regardless of whether the admission is carried out in the RoC as a home Member State. The same applies in case the RoC is a host Member State.

5. Prospectus Approval Process

5.1. Competent Regulator

Competent authority for reviewing and approving prospectuses in the RoC, as well as for supervision of the Prospectus Regulation application, is the CFSAA. The CFSAA is authorised for the approval of a prospectus, supplement to a prospectus, registration document, securities note and summary note relating to securities to be offered to the public or admitted to trading on the regulated market in the RoC. In order to facilitate efficient and timely approval of prospectuses, CFSAA prepared guidelines for the scrutiny and approval process.

5.2. Timeline, number of draft submissions, review and approval process

A prospectus approval process begins with submission of an application for approval to the CFSAA via its electronic submission system. Technical part of the procedure is governed by the CFSAA’s Technical instruction for the drafting and submission of an application for approval of a prospectus in electronic format via electronic means which provides rules for the registration process and modes of operations of the persons authorised to access CFSAA’s system. Along with application, all documents and other information relevant for the review of the prospectus need to be submitted (e.g., brief with explanation of application for approval, registration document, or a securities note and a summary).

The duration of the first review by the CFSAA is limited to 10 business days from the submission of the draft prospectus or to 20 business days in case the offer to the public involves securities issued by an issuer that does not have any securities admitted to trading on the regulated market and has not previously offered securities to the public (prolongation is only applicable to the initial submission of the draft prospectus). When reviewed, the CFSAA will notify the issuer, the offeror or the person asking for admission to trading on the regulated market of its decision regarding the approval of the prospectus within.

If the draft prospectus does not meet the prescribed standards necessary for its approval, or where supplementary information is needed or amendment of the prospectus is required, the CFSAA will promptly (or within the time limits set above at the latest) inform the issuer, the offeror or the person asking for admission to trading on the regulated market thereof, and clearly specify the changes or supplementary information that are needed.

The approval of the prospectus can follow once the CFSAA clears the prospectus of comments that need to be resolved.

Throughout the process, applicants have the possibility to directly communicate and interact with the authorised persons of the CFSAA.

Once approved, the prospectus shall be made available to the public by the issuer, offeror or a person demanding admission to trading on the regulated market, at the latest at the beginning of the offer to the public or the admission to trading of the securities on the regulated market. In the case of an initial public offer of a class of shares not already admitted to trading on the regulated market that is to be admitted to trading for the first time, the prospectus shall be available at least six business days before the end of the offer.

After the approval of the prospectus, the CFSAA shall notify ESMA about the approval, as well as about any supplement thereto as soon as possible but no later than by the close of the first business day after that approval has been notified to the issuer, offeror or other person seeking admission to trading on the regulated market.

Prospectus, whether a single document or consisting of separate documents, is valid for 12 months after the day of its approval, if a prospectus is completed by any supplement containing new information on the issuer and securities to be offered to the public or admitted to trading on the regulated market. Where a prospectus consists of separate documents, the period of validity shall begin upon approval of the securities note.

6. Listing Process

6.1. Timeline, process with the stock exchange

As prescribed by the CMA and further regulated by the ZSE’s Exchange Rules (ER), the ZSE is responsible for deciding on the listing / admission of financial instruments to trading on the regulated market. As mentioned above, financial instruments may be listed on three different segments of the regulated market: the Official Market, the Regular Market, and the Prime Market.

As a general rule, the issuer (or a person authorised by the issuer) may submit an application to the ZSE for admission of financial instruments to trading. Exceptionally, an application for admission to trading may be submitted by another person, in accordance with the provisions regulating the resolution of credit institutions and investment companies. Furthermore, an application for listing an open-end investment fund on the regulated market is submitted by the management company. Transferable securities may be listed without an approval from the issuer, in accordance with the provisions of the CMA, the ER, and other ZSE acts.

Where an application for listing on the Official or Regular market relates to financial instruments which are already listed on the regulated market of another EU Member State, ZSE may refuse the application if the issuer of financial instruments fails to fulfil its obligations arising from listing on the regulated market of another EU Member State.

An application for admission of financial instruments to trading must be submitted by using a form which is published online on the ZSE website. The content of the form and the obligatory accompanying documentation differs depending on the financial instrument and the segment of the regulated market in question. There are five forms for application for listing different financial instruments on the regulated market which are published online on ZSE website – application for listing of: (1) stocks; (2) debt securities; (3) money market instruments; (4) ETF units; (5) structured products.  The application for admission to trading refers to any and all shares of the same class, with the exception of the cases laid down in the CMA, and to all equally ranked debt securities.

General provisions with regard to the requisite documents are laid down in Article 78 of the ER; however, the ER also prescribes additional requisite documents and/or information for each specific financial instrument and segment of the regulated market. In general, the applicant must enclose the following documentation:

(i) a prospectus and/or other information, or a declaration to the effect that the applicant is exercising a right to an exemption from the obligation to prepare the prospectus and/or other information;

(ii) a declaration to the effect that the applicant is complying fully with the provisions of the CMA and other regulations, and that it has obtained all requisite permissions, licences and approvals from competent authorities;

(iii)  copies of all permissions, licences and approvals issued by the competent authority with regard to the listing / admission to trading procedure;

(iv)  a declaration to the effect that it has been informed by the ZSE about the requirements arising from the listing / admission of its financial instruments to trading on the regulated market, at first admission of the financial instrument to trading on the regulated market;

(v) a statement confirming that the applicant has an appropriate internal organisation, systems and procedures in place to ensure timely availability of information to the market, also stating data on the person responsible for investor relations;

(vi)  proof of payment of the listing fee according to the price list.

The ZSE will deem an application orderly if it is submitted by the authorised person, duly signed by the authorised person and accompanied by all requisite documents and information, as well as those requested by ZSE. ZSE may, in the interest of investor protection, subject the listing to any appropriate special condition, however, the applicant must be explicitly notified thereof.

On the other hand, the ZSE will reject an application if it has not been submitted and signed by the authorised person, if some of the requisite documents and/or information and those requested by the ZSE which are necessary for deciding have not been enclosed, or if the information available to the ZSE indicated that the listing might damage the investors’ interest or the orderly functioning of the market.

According to CMA, the ZSE is obliged to inform CFSSA of any received requests for listing of financial instruments, as well as of its decision regarding the listing or rejection of the request for listing. The deadline for the ZSE’s decision on the listing must be reached and the applicant must be notified within 30 days from the day of receipt of the application. In exceptional cases, the deadline is prolonged to 60 days. If the decision of the ZSE is not reached within the prescribed deadline, the request for listing is considered to be rejected. The applicant may challenge such refusal before a competent commercial court. Financial instruments are deemed listed / admitted to trading on the regulated market on the day of adoption of the ZSE’s decision, which must be sent to the CFSSA without delay and published on the ZSE website. In its decision, the ZSE must specify the first day of trading. In cases where the decision is adopted pursuant to an application which was submitted by a person without the approval of the issuer, the ZSE must inform the issuer within three days from the admission to trading that its transferable securities are being traded on the regulated market managed by the ZSE.

7. Corporate Governance

7.1. Corporate governance code / rules (INED, board and supervisory composition, committees)

All companies with a listing on the ZSE must apply the Corporate Governance Code (CGC). The current version of CGC became effective on 1 January 2020. The CGC was drafted and endorsed by the ZSE and the financial services regulator (HANFA), and with the support of the European Bank for Reconstruction and Development. Certain parts of the CGS overlap with the CMA and the ZSE Rules. However, the CGC provides more detailed and more demanding standards of corporate governance. The most important novelties introduced in the last version of the CGC relate to responsibilities and liabilities of management and supervisory boards, diversity (particularly gender diversity) and their independence.

The companies which apply the CGC must report their compliance it twice a year in the form of pre-set questionnaires. One questionnaire comprises the statement of the relevant company on adhering to the CGC rules (compliance questionnaire) and in the second they have to present detailed information on their practices in corporate governance (corporate governance practices questionnaire). These reports must be submitted to the financial services regulator and the compliance questionnaires are published on ZSE web page.

The CGC covers matters such as the selection, composition and responsibilities of the board and its committees and executive remuneration. It also deals with matters such as risk management, internal control and audit practices, transparency and reporting requirements, as well as social responsibility. Each of the aforementioned topics is dealt with in a separate chapter, and within each chapter the CGC elaborates on the purposes which are deemed to be achieved, the main principles applicable on the respective topic and operative clauses.

The supervisory and management boards should have enough members to enable them to carry out their responsibilities effectively. The supervisory board should develop a supervisory board profile and a management board profile which specifies the minimum number of members and the combination of skills, knowledge and education, as well as required professional and practical experience. The supervisory board should include members of different gender, age, background and experience to ensure it brings different perspectives to its decision-making, with the majority of all supervisory board members being independent – either president or deputy president of the supervisory board should be independent.

With regard to the board committees, the supervisory board should establish at least a nomination committee, a remuneration committee and an audit committee, and stipulate the mandate and activities of each committee. 

7.2. Any other Environmental, Social, and Governance (ESG) considerations

According to the Code, supervisory and management boards must ensure that the company’s strategy takes account of the potential environmental and social impact of its activities, and that its policies, culture and values promote ethical behaviour, respect for human rights, and a stimulating working environment. Therefore, the supervisory and management boards should adopt policies on assessment of environmental and social impacts of the company’s activities and on management of the associated risks, as well as on safeguarding human rights and the rights of employees, and prevention of corruption and bribery.

When the management board seeks the supervisory board’s prior approval on resolutions, the supporting documents should explain how the recommended action is consistent with the policies. Furthermore, the supervisory and management boards should jointly identify who they consider to be the company’s key stakeholders. The management board should ensure that there are effective mechanisms in place for regular engagement with those stakeholders, and that the supervisory board is informed of the results of the engagement.

The supervisory board should be allowed to organise meetings with external stakeholders in cases where it considers it necessary to improve its understanding of matters relevant to the company, including their views on the company’s performance and reputation; however, the president of the management board should be notified in advance.

8. Documentation and Other Process Matters

8.1. Over-allotment

An over-allotment is an option available to the underwriters allowing the sale of additional shares from what a company plans to issue in an initial public offering or a secondary/follow-on offering. The underwriters may elect to exercise the over-allotment option, but the exercise of such right is not obligatory. Therefore, the underwriters may purchase from the issuer or the selling shareholder a specified number of additional shares beyond the number in the original offering at the offering price.

There are two types of over-allotment structure:

(i) greenshoe structure –  when the underwriter exercises its option to obtain additional shares at the initial offering price; and

(ii) brownshoe structure – when the option gives the underwriter the right to sell the shares to the issuer at a later date.

The greenshoe option (a type of the call option) is convenient for the underwriters in case the market price exceeds the offering price because under such market conditions they cannot buy the shares back without incurring loss. In such circumstances, the greenshoe option makes it possible for the underwriters to buy back shares at the offering price. The option to acquire additional shares is limited to 15% of the size of the original offering and the option can be exercised within 30 days of the equity offering.

Under a brownshoe (“reverse green shoe”) option, the underwriter is allowed to sell the shares back to the issuer, but only if the share price falls below the offering price. This option represents a form of put option and basically has the same effect on share price as the greenshoe option. 

8.2. Stabilisation

Stabilisation refers to any purchase or offer to buy relevant securities, or any transaction in related instruments equivalent to them, by investment firms or credit institutions, undertaken in connection with the significant distribution of such relevant securities, solely for the purpose of maintaining the market price of the relevant securities for a predetermined period of time, due to selling pressure.

Stabilisation will not be considered market abuse if certain conditions are met. Firstly, stabilisation may be undertaken only for a limited period of time. Secondly, issuers, offerors or persons undertaking the stabilisation must publish the following information:

(i) that stabilisation may be undertaken, with no assurance that it will be undertaken, and that it may be stopped at any time;

(ii) that stabilisation transactions are aimed to support the market price of the relevant securities;

(iii)  the beginning and the end of the period during which stabilisation may occur;

(iv)  the identity of the stabilisation manager;

(v) the existence and maximum size of any overallotment facility or greenshoe option, and any conditions for the use of the overallotment facility or exercise of the greenshoe option.

Exceptionally, the above described information does not need to be published if it is contained in the prospectus. Finally, issuers, offerors or persons undertaking the stabilisation are obliged to notify the CFSSA about the details of the stabilisation transactions. They must also notify the public whether the stabilisation took place, disclose the date of its commencement and last occurrence, and the price range.

Finally, in cases of offers of shares (or other equivalent securities), stabilisation cannot be executed above the offering price. Also, in cases of offers of securitised debt convertible or exchangeable into shares (or equivalent securities), stabilisation cannot be executed above the market price of those instruments at the time of the public disclosure of the final terms of the new offer.

9. Ongoing Reporting Obligations (Life as a Public Company)

Shareholders and potential investors should have regular access to consistent information regarding listed companies, all in order to be able to assess results and management of such companies and make their investment decision on the basis of reliable sources. Inadequate or unclear information hinders such decision-making and attraction of investors. Therefore, the listed companies are required to comply with various ongoing reporting obligations, which vary based on the market segment in which the securities are included on the ZSE, and the nature of the securities offered.

In addition to the statutory provisions, there are other rules that apply to issuers, such as rules stemming out of the prospectus rules, corporate governance code, the MAR and so forth.

9.1. Annual Financial Statements

All companies with listed shares must publish audited annual financial statements within four months of the end of financial year. The annual financial statements must comprise annual accounts, the management report and statements of persons responsible for preparation of the financial statements concerned. Contemporaneously with the publication of annual reports, the company must publish resolution of a corporate body in charge for approval of financial statements (usually, shareholders’ meeting resolution) and its resolution on dividend distribution or coverage of losses, as the case may be.

The content of the reports is governed by the applicable accounting rules of financial reporting (IFRS).

The issuers of securities traded on the ZSE must publish annual overview of all information published in the previous 12-month period.

The issuers listed on the Premium Market of the ZSE must, before the beginning of the financial year, publish information on the date of publication of financial statements, date of shareholders meeting and date of dividend payment.

9.2. Periodic Reporting

Issuers whose shares or debt instruments are traded on the ZSE must publish their interim accounts within two months of the end of the interim financial period. In addition, issuers of shares traded on the ZSE must also publish quarterly reports within 30 days of the end of the financial quarter.

The information on change in shareholding structure must be published by the shareholders who either reached or fell below certain shareholding thresholds (5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%) and by issuers who have received such information.

Issuers must inform on any disposal or acquisition of its treasury shares, any change in shareholding rights, any new debt securities issuance and any change in its constitutional documents.

Issuers listed on the Premium Market of the ZSE must publish information on any acquisition of shares in other companies and information on the sources and purpose of acquiring treasury shares, as well as the applicable purchase price.

Contributed by Shearman & Sterling.

1. Market Overview

London has long been considered one of the preeminent locations for a company considering listing of equity or debt securities. The London Stock Exchange’s (LSE) Main Market is the world’s most international market for the admission and trading of equity, debt and other securities, and despite the difficult market conditions, challenges of Brexit and current conditions relating to the spread of COVID-19, London has retained its leading position in 2019 and 2020 in terms of initial public offering (IPO) deal count, debt listings and deal volume as compared to all other European listing venues. The city’s deep and knowledgeable pool of institutional investors and stable and developed legal environment have laid the foundation for a thriving venue for primary and secondary offerings.

London’s equity and debt markets are relatively sector-agnostic and attract companies from a broad range of industries and geographies. In April 2019, Saudi Arabian Oil Company issued its inaugural USD 12 billion of bonds on the Main Market of the LSE, which is thought to be the most oversubscribed debt offering in history, while Abu Dhabi’s sovereign bond issuance raised USD 10 billion a few months later. Also in 2019, Airtel Africa plc, Trainline plc, Network International plc, Huatai Securities Co, Ltd, Finablr plc and Helios Towers plc each debuted on the LSE, with IPO pegging their initial valuations in excess of GBP1 billion.

However, despite a string of large IPOs, 2019 was generally a slow year for the equity markets in London, with PwC’s IPO Watch Europe 2019, reporting a 60% decrease in the number of IPOs reported on the LSE from 68 in 2018 to 27 in 2019. Similarly, the amount raised through those IPOs fell by 39% over the same period, from GBP9.6 billion in 2018 to £5.9 billion. This was largely precipitated by a significant reduction in the number of companies joining the LSE’s AIM, with only 10 admissions in 2019 compared to 34 in 2018, reflecting political instability surrounding Brexit, increased risk aversion on the part of investors and greater availability of growth capital in private markets. In contrast to slow IPO activity, the secondary equity markets were relatively active with placings increasing 19% year-on-year.

In 2019, 897 bonds were issued on the London Stock exchange with $377.4 billion in debt capital raised. These figures represent a slight increase in the number of bonds issued compared to 2018, but a corresponding decrease in the volume of debt capital raised year-over-year. That being said, 2019 saw a greater share of international debt issuers on the London Stock Exchange, with 53% of debt capital raised being for international companies, compared to only 48% in 2018. Moreover, listings on the LSE’s newly formed International Securities Market (ISM) have risen substantially since the ISM’s inception in 2017. In 2019, 131 bonds were listed on the ISM, with debt capital raised on the exchange increasing by 127% year-over-year to £36.6 billion.

2. Overview of the local stock exchange and listing segments (markets)

The LSE is the primary stock exchange in the United Kingdom, although there are also a small number of companies listed on other exchanges, including NEX Exchange and Euronext London (which is primarily used in cases where a company is pursuing a dual IPO on one of Euronext’s other European exchanges).

The LSE operates four main markets: the Main Market, the Alternative Investment Market (AIM), the Professional Securities Market (PSM) and the ISM. Equity securities are primarily listed on the Main Market or the AIM, while debt securities are primarily listed on the Main Market, PSM or the ISM.

The Main Market is the LSE’s flagship market and is a “regulated market” under the EU Directive on Markets in Financial Instruments (No. 2014/65/EC) (MiFID II). Issuers seeking admission to trade securities on the Main Market must ensure that the prospectus is approved by the U.K. Listing Authority (UKLA) and that the securities are admitted to the Financial Conduct Authority’s (FCA) Official List.

The AIM operates as a multilateral trading facility under MiFID II, rather than a regulated market, and currently qualifies as an EU SME Growth Market (which confers on companies traded on such markets certain relaxations under the EU’s prospectus and market abuse regimes). The AIM has a less prescriptive regulatory and governance regime. The AIM is the preferred London market for smaller and/or growth companies looking to list equity securities that will have a small free float as there is no formal minimum free float requirement on AIM, whereas companies seeking admission to the Main Market will ordinarily need at least a 25% free float. Issuers seeking admission to the AIM are not required to seek admission to the FCA’s Official List.

The PSM and the ISM are exchange-regulated markets which are outside of the scope of the Transparency Directive 2004/109/EC (the “Transparency Directive”) and the Prospectus Regulation (EU) 2017/1129 (the “Prospectus Regulation”), however the issuers with securities admitted to the trading on the PSM or ISM are subject to the Market Abuse Regulation ((EU) 596/2014) (MAR).

Like the Main Market, application for admission to trading on the PSM is a two-stage parallel process in which application must also be made to the UKLA for approval of the listing particulars and admission of the securities to the FCA’s Official List.

The ISM was established in 2017 to provide a simplified admission process for issuers seeking to either restrict their offering to qualified investors or offer a high denomination of debt securities, which therefor affords them the ability to rely on certain exemptions in the prospectus regime. Admission to the ISM does not require that a prospectus or listing particulars are approved by the UKLA, but rather, the offering document need only comply the ISM rules and be approved by the LSE. For these reasons, issuers listing on the ISM are required to comply with a far less stringent regulatory scheme.

2.1. Listing Segments

As noted above, issuers seeking admission to trading on the Main Market or PSM generally undertake a two-stage parallel process in which application is contemporaneously made to list the securities on the FCA’s Official List. However, in certain instances, issuer’s seeking admission to the Main Market may forego the Official List requirements by seeking admission to the “high growth” segment (HGS) or the “specialist fund” segment of the Main Market. The HGS is a transitional segment designed to attract high growth companies, in particular internet and technology businesses, seeking access to the Main Market due to their size and stage of development, but who are not able to meet all the requirements for being on the FCA’s Official List at the time of their IPO. A HGS company is typically larger than an AIM company and is contemplating to ultimately join the premium segment of the Main Market. In order to be admitted to the HGS, the company must be incorporated in the U.K. or the European Economic Area (EEA), must have a minimum free float of 10% at IPO and must demonstrate historic revenue of compound annual growth rate (CAGR) over the past three years of 20% or more, among other requirements.

An issuer seeking admission to the Official List must decide early in the process whether to seek admission to the “premium” listing segment of the Official List or to the “standard” listing segment. A premium listing is only available to equity shares issued by trading companies or closed or open-ended investment entities, while standard listings cover the issuance of equity securities, Global Depositary Receipts (GDRs), debt securities and securitised derivatives that are required to comply with the minimum requirements in the European Union (EU). Both segments are available to U.K. and non-U.K. incorporated companies; however, a ‘premium’ listing will require the company adhere to the U.K.’s super-equivalent rules which are more stringent than the EU minimum requirements, both in terms of eligibility criteria and continuing obligations. On the other hand, a standard listing allows issuers to access the Main Market by meeting EU harmonised standards only rather than the U.K. ‘super-equivalent’ requirements.

As the premium listing requirements mandate that a company meet the U.K.’s highest standards of regulation and corporate governance, companies that achieve a premium listing may take advantage of a lower cost of capital through greater transparency and investor confidence. In addition, a premium listing is one of the necessary criteria for inclusion in the FTSE U.K. indices, which may be an important consideration for a company in deciding whether to seek a premium listing.

3. Key Listing Requirements

The listing requirements for the admission of equity and debt securities vary depending on the market. For instance, the HGS and AIM are tailored specifically to permit smaller and growing issuers to access public markets, with lower thresholds for admission and less stringent continuous disclosure requirements. The following table outlines some of the key listing requirements for listing equity and securities on the various markets.

3.1. Equity Capital Markets

The following list outlines some, but not all, of the key listing requirements for premium listings and standard listings and for admission to the HGS and AIM:

• Domicile: Issuers applying for admission to the HGS must be domiciled in the U.K., whereas issuers applying for a premium listing, standard listing or for admission to the AIM may be domiciled in any country. It is worth noting however that for companies planning to undertake a premium listing in order to gain the benefit of inclusion in the FTSE indices, the FTSE index rules may require the issuer be incorporated in the U.K. or a ‘developed country’ as defined under the FTSE index rules.
• Minimum Capitalization and Free Float: For premium listings and standard listings, issuers must have a minimum market capitalization of £700,000 and provide a minimum float of 25% of the securities. The HGS imposes no market capitalisation requirement, but requires a minimum free float of 10% with a value of at least £30 million (the majority of which must be raised at admission). The minimum capitalization and free float for an AIM issuer is subject only to the Nomad’s assessment of appropriateness.
• Historical Financial Information: The requirements for a premium listing, standard listing and admission to the HGS each mandate that three years of audited unqualified accounts are provided. However, applications for a premium listing state that the age of the latest audited financials must be no more than six months before the date of the prospectus or nine months before admission, while the requirements for standard listings and admission to the HGS require that the age of the latest audited financial information is no more than 18 months before the approval of the prospectus where audited interim financials are included or 15 months where unaudited interim financials are included. Issuers applying to the AIM must only provide three years of audited financial information (if available), with the age of the latest audited financial information being no more than 18 months before the approval of the admission document if audited interim financial information is included or 15 months if unaudited interim financial information is included.
• Trading Record: An issuer applying for a premium listing must have published or filed historical financial information that covers at least three years and represents at least 75% of the issuer’s business for that three-year period. Issuers seeking admission to the HGS must demonstrate a 20% CAGR in revenue over a three-year period. There is no trading record or revenue criteria applicable for standard listings or for admission to the AIM.
• Sufficient Working Capital (Main Market (Premium Listing and Standard Listing)): An issuer applying for a standard listing must include a statement that the issuer and its subsidiary undertakings have sufficient working capital available for the group’s requirements for at least the next 12 months from the date the prospectus is published and this statement may be qualified. An issuer applying for a premium listing must also include a similar statement which can be qualified.
• In light of COVID-19 crisis and the imposed public health measures, on 8 April 2020 the FCA issued a Technical Supplement related to the working capital statements in prospectuses and circulars during the COVID-19. The FCA recognizes the significant uncertainty and disruptions that the COVID-19 is causing. The FCA advised issuers preparing working capital statements and model a “reasonable worst-case scenario” to highlight the underlying assumptions related to the disruptions caused by the COVID-19 to their business and such assumptions can be disclosed in an unqualified working capital statement.
• Sponsor: An issuer applying for a premium listing must appoint a sponsor approved by the FCA to act as an adviser in its application for a premium listing and on certain subsequent events.

For issuers applying to the HGS, a “Key Adviser” is required to provide confirmation of the company’s eligibility and in the case of specific transactions, but there is no need to maintain a Key Adviser on a continuous basis. Issuer’s seeking admission to the AIM must appoint a nominated adviser (“Nomad”) for admission and throughout the issuer’s life on AIM.

• Free Transferability: The requirements for a premium listing, standard listing and admission to the HGS each stipulate that securities must be freely transferable, fully paid and free from any liens or restrictions on the right of transfer. The AIM rules stipulate that Securities must be freely transferable except where: (i) in any jurisdiction, statute or regulation places restrictions upon transferability or (ii) the company is seeking to limit the number of shareholders domiciled in a particular country to ensure that it does not become subject to statute or regulation.
• Electronic Settlements: Each market requires that securities are eligible for electronic settlement.
• Directors’ Independence: An issuer applying for admission to each of the segments of the main market must ensure that the election of independent directors is approved by majority of shareholders, and the majority of non-controlling shareholders. There is no such requirement for the election of independent directors for AIM listed companies.
• Additional requirements applicable to premium listing issuers: Issuers that have a premium listing must carry on an independent business as its main activity at all times, and must demonstrate that it exercises operational control over the business it carries on as its main activity. Moreover, whereas each of the other segments or markets allow for the domestic law of the issuer to govern pre-emption rights, premium listed issuers must comply with U.K. law requirements related to pre-emption rights. In addition, the total of all issued warrants or options to subscribe for equity shares in a premium listing (excluding rights under employees; share schemes) must not exceed 20% of the issued equity share capital. Finally, applicants for a premium listing with a controlling shareholder must enter into a relationship agreement with that shareholder, whereas applicants for a standard listing, or to the HGS or AIM are not required to enter into any such agreements.

3.2. Debt Capital Markets

For the admission of debt securities to the Main Market, the UKLA must approve securities and prospectus to the Official List, while the LSE must admit the debt securities to trading on the Main Market. For the admission of debt securities to the PSM, the UKLA must approve securities and listing particulars to the Official List, while the LSE must admit the debt securities to trading on the PSM. The admission of debt securities to the ISM is significantly different, as the LSE only approves the admission particulars, while the securities are not listed on the Official List.

The following list outlines some, but not all, of the key listing requirements for admission to the Main Market, PSM and ISM:

• Historical Financial Information: For admission to the Main Market, issuers must have audited IFRS accounts, published or filed for a two-year period. The date of the latest audited financials must be no more than six months before the planned issuance. For admission to the PSM, issuers must have audited accounts, published or filed for a two-year period (or shorter where the issuer has not been in operation). Where the issuer does not have IFRS accounts, a narrative description of the differences between IFRS and the local accounting principles adopted by the issuer should be provided (although this requirement may be waived). The date of the latest audited financials must be no more than six months before the planned issuance. For admission to the ISM, an issuer must have published audited financial statements that cover two years at a minimum. The date of the latest audited financials may not be more than 18 months before the date of the admission particulars. The LSE may, in certain circumstances, accept financial statements for a shorter period or waive the requirement for financial statements.
• Electronic Settlements: Each market requires that securities are eligible for electronic settlement.
• Disclosure Regime: Where a prospectus is submitted for admission to the Main Market, that prospectus is governed by the Prospectus Regulation (which is fully implemented in the U.K. law) and the FCA’s Prospectus Rules, which differ depending upon the minimum denomination of the debt securities. Where listing particulars are submitted for application to the PSM, the disclosure rules are based on the wholesale regime of the Prospectus Regulation. The admission particulars submitted in connection with an application to the ISM should contain all information prescribed by the ISM Rulebook.

4. Prospectus Disclosure

4.1. Regulatory regimes and local market practice

For the purposes of this section, we will focus on the disclosure requirements applicable to a company seeking listing of its securities on the Official List of the FCA and admission to trading on Main Market. The AIM Rules for Companies are applicable to companies seeking admission to AIM (assuming that they do not conduct an ‘offer to the public’) and in which case the key disclosure document is an ‘admission document’.

When the company is seeking admission to the Main Market the key disclosure document is a prospectus. The prospectus regime in the U.K. is currently governed by the Prospectus Regulation (which is fully implemented in the U.K. law) and the delegated legislation which includes the Commission Delegated Regulation (EU) 2019/980  (PR Delegated Regulation) relevant for the format, content, scrutiny and approval of the prospectus and the Commission Delegated Regulation (EU) 2019/979 (Prospectus RTS Regulation) relevant for the technical standards on key financial information in the summary of a prospectus, the publication and classification of prospectuses, advertisements for securities, supplements to a prospectus, and the notification portal. In addition, the PR Delegated Regulation imposes specific minimum information requirements for a prospectus as set out in the Annexes of the PR Delegated Regulation. The relevant Annexes that will apply in each particular case are prescribed by Articles 2 to 23 of the PR Delegated Regulation and will depend on, among others, the type of securities being issued, the type of issue (in certain cases), the nature of the issuer, whether the issuer has a complex financial history or has made a significant financial commitment. The U.K. government has made a large number of changes to U.K. law (as it currently implements and includes EU law), including in relation to the prospectus, listing, transparency and market abuse regimes to ensure that, in the absence of some new legal and regulatory relationship with the EU taking their place, those regimes will continue to operate effectively and broadly in line with the way in which they operated before the U.K. left the EU. In addition, following the full implementation of the Prospectus Regulation, the FCA has replaced much of the content of the Prospectus Rules in its Handbook (which also contains the FCA’s Listing Rules, Transparency Rules and disclosure requirements with respect to MAR (together, the “Listing, Transparency and Disclosure Rules” or LTDRs)) with appropriate extracts from the relevant, directly applicable EU regulations. These FCA rules are now referred to as the Prospectus Regulation Rules (PRRs).

The Prospectus Regulation requires a prospectus to be written in an easily analysable, concise and comprehensible form and to contain the necessary information which is material to an investor for making an informed assessment of the financial position, etc., of the issuer, the rights attaching to the securities being offered and the reasons for the issue and impact on the issuer. It may be published in a single document (which is the typical U.K. practice) or in three separate documents comprising a registration document (containing information relating to the issuer), a securities note (containing information concerning the securities being offered) and a prospectus summary.

Key information that the Prospectus Regulation requires to be included in a prospectus includes:

• risk factors informing potential investors of the material risks to the issuer, its industry and the securities being offered. These should be specific to the issuer or shares being offered, be grouped into a limited number of categories with the most material factor listed first and, where possible, there should be a quantitative assessment of each risk;
• the last three years’ audited financial information prepared in accordance with IFRS or, in the case of a non-EEA issuer, in accordance with national accounting standards where these standards are considered equivalent to IFRS, such as US GAAP. This minimum three-year period can be relaxed by the FCA for certain mineral or scientific research-based companies seeking a premium listing and which have been operating for a shorter period of time, subject to certain conditions and does not apply to companies seeking a standard listing;
• details of any significant changes in the financial or trading position of the company since the date of the latest published audited or interim financial information included in the prospectus;
• a working capital statement covering the 12-month period from the date of the prospectus, although in practice the company and its sponsor will normally ask the reporting accountants to cover a period of 18 to 24 months in its working capital exercise as a precaution;
• an operating and financial review (OFR) describing the company’s financial condition, changes in financial condition and results of operations for the periods covered by the historical financial information included in the prospectus. This is similar to, but not quite as broad as, the management discussion and analysis required in a US IPO;
• summaries of material contracts entered into outside of the ordinary course of business by the company’s group in the past two years (or longer if material obligations or entitlements remain outstanding);
• details of any significant shareholders of the issuer, whose interest is notifiable under the issuer’s national laws;
• details of any related party transactions that the company has entered into during the period covered by the historical financial information and up to the date of the prospectus;
• details of any legal proceedings that the company has been party to in the last year;
• prescribed information on the company’s directors and senior management, including remuneration, benefits and interests in the shares of the company (including share options) and also with respect to the company’s corporate governance; and
• responsibility statements from the company, the directors and any proposed directors, confirming that they accept responsibility for the information contained in the prospectus and that, to the best of their knowledge (having taken all reasonable care to ensure that such is the case), such information is in accordance with the facts and contains no omission likely to affect its import.

The prospective issuers can omit information from a prospectus in limited circumstances where the FCA may authorise that disclosure of such information would be contrary to the public interest, seriously detrimental to the issuer (provided that the omission would not be likely to be misleading the public) or the information is of minor importance in the specific situation and would not influence the assessment of the financial position and prospects of the issuer.

A supplementary prospectus will need to be published if any significant new factor, material mistake or inaccuracy relating to the information included in the original prospectus arises during the period after publication of the original prospectus but before the later of the securities being admitted to trading and the closing of the offer to the public. Significantly, the issuance of a supplementary prospectus triggers withdrawal rights for any investor who had previously agreed to purchase shares in the offering. Such rights are exercisable before the end of the second working day after the day on which the supplementary prospectus was published.

5. Prospectus Approval Process

5.1. Competent Regulator

The FCA is the ‘competent authority’ in the U.K. for reviewing and approving prospectuses and the company will need to follow the formal admission requirements set out in the London Stock Exchange’s Admission and Disclosure Standards (ADSs) Chapter 3 of the Listing Rules.

With respect to an AIM IPO, the applicants must submit to LSE an admission document disclosing certain information required by the AIM Rules and they must comply with the admission requirements as set out in Rules 2 to 6 of the AIM Rules (as discussed in further detail below).

5.2. Timeline, number of draft submissions, review and approval process

The IPO prospectus review and approval process takes approximately 3-4 months, assuming 3-4 submission of drafts. Each submission of the draft prospectus should be made by no later than 16:00 in electronic form via the Electronic Submission System of the FCA. The review of the initial submission will be subject to ten clear working days and each subsequent submission will take five clear working days. As a matter of practice, the objective will be for the issuer’s counsel to submit an advanced initial draft of the prospectus to minimise the number of comments and turns of the draft while each subsequent submission will also include a blackline showing changes from the previous draft to facilitate the review process. For a premium listing IPO, the appointed sponsors will be submitting the review package as opposed to the issuer’s counsel in the standard IPO process. In the case of an AIM IPO, the NOMAD is responsible for the submission.

Issuers contemplating drawdowns under approved prospectuses, submission of supplemental prospectuses or further issuances of GDRs will benefit from a shorter review process as it takes five clear working days for FCA to review the initial draft and three clear working days for each subsequent submission. On the other hand, debt offerings (plain vanilla) and Medium Term Note Programmes are subject to four clear working days for the initial submission and two clear working days for each subsequent submission.

The approval of the prospectus can follow once the FCA clears the prospectus of comments.

6. Listing Process

6.1. Timeline, process with the stock exchange

As mentioned above a company seeking listing should follow the formal admission requirements. The LSE regulates the admission of securities to trading on the Main Market, and in doing so it is responsible for publishing the ADSs. The listing approval process runs in parallel with the prospectus approval process and has no effect on the overall timetable of the offering.

In the case of an AIM IPO, the Listing Rules and the ADSs will not be applicable. Instead, applicants will be required to comply with the AIM Rules for Companies published by the LSE and their Nomads with the LSE’s AIM Rules for Nominated Advisers. The PRRs will generally not be relevant to an AIM IPO, since it will usually be structured so as to avoid being an ‘offer to the public’ under FSMA (i.e. it will be an offer which, under the Prospectus Regulation, is exempt from the obligation for a prospectus to be published because it is only made to ‘qualified investors’ (e.g. institutional investors)). The eligibility criteria for an AIM admission are similar to those for a standard listing on the Main Market; however, as mentioned above there is no formal minimum free float for an AIM admission.

The ADSs require that an issuer contacts the LSE no later than 10 business days before the application for admission is to be considered, using a prescribed form titled ‘Form 1’ and accompanied by a draft copy of the prospectus. The application will, however, be considered provisional at this stage and will only be deemed to be a formal application once the prospectus has been approved by the FCA. The formal application and the final prospectus must be submitted to the LSE by no later than midday at least two business days prior to the consideration of the application for admission. Written confirmation of the number of securities to be allotted must also be provided by no later than 16:00 on the day before admission is expected to become effective, unless the LSE has agreed in advance to extend this to no later than 07:00 on the day of admission.

The requirements of Chapter 3 of the Listing Rules include submitting certain documents by midday two days before the FCA is to consider the application for admission (the ‘48 hour documents’). These include a prescribed form of application for admission and a copy of the prospectus that has been approved by the FCA (or another relevant authority in the company’s ‘home member state’ (ordinarily the member state of the EEA in which the company has its registered office), in which case a certificate of approval from such authority and a translation of the summary of the prospectus will be required) and written confirmation of the number of shares to be allotted. In addition, a prescribed Shareholder Statement, confirming the number of shares to be admitted and the number of those shares which are in public hands, and a prescribed Pricing Statement, confirming the pricing of the new shares being issued, will need to be signed by the sponsor and submitted to the FCA on the day of admission.

For a premium listing IPO, in accordance with Listing Rule 8.4.3R the company’s sponsor will also need to make a declaration to the FCA in the prescribed form (the “Sponsor Declaration”) either on the day the FCA is to consider the application for approving the company’s prospectus (prior to its approval) or at another time agreed with the FCA in certain circumstances. The Sponsor Declaration will (as mentioned above), among other things, confirm that: (i) the sponsor has taken reasonable steps to satisfy itself that the directors of the company understand their responsibilities and obligations under LTDRs; (ii) the company has satisfied all requirements of the Listing Rules relevant to an application for listing; (iii) that the applicant has satisfied all applicable requirements set out in the PRRs; (iv) the directors have established procedures which will enable the company to comply with the LTDRs on an ongoing basis; (v) the directors have established procedures which will provide a reasonable basis for them to make proper judgments on an ongoing basis as to the financial position and prospects of the company and its group; and (vi) the directors of the company have a reasonable basis on which to make the required working capital statement. In order to support this declaration, the sponsor will require the reporting accountants and the legal advisers to provide it with various comfort letters (which will also be addressed to the company) on the matters covered by the Sponsor Declaration.

Rules 2 to 6 of the AIM Rules for Companies require that the company provides the LSE with certain information at least 10 business days before the expected date of admission. This covers similar information to that required by Form 1 for a Main Market IPO but also includes additional information such as a brief description of the business, the names and functions of directors and proposed directors and details, insofar as they are known, of any significant shareholders (i.e. holding 3% or more of any class of shares in the company). At least three business days prior to admission, the company must submit a completed application for admission, in the LSE’s prescribed form, and an electronic copy of its admission document. These final documents must be accompanied by a declaration from the company’s Nomad (“Nomad Declaration”), similar to a Sponsor Declaration, confirming matters such as the company’s appropriateness for admission on AIM and that the AIM Rules for Companies and the AIM Rules for Nominated Advisers have been complied with, in particular that the admission document complies with the content requirements set out in Schedule Two of the AIM Rules for Companies. As with the Sponsor Declaration, the Nomad will obtain comfort letters from the reporting accountants and the legal advisers to support its declaration.

In the case of either a Main Market IPO or an AIM IPO, admission to trading will only become effective once the LSE has announced this on a regulatory information service.

7. Documentation and Other Process Matters

7.1. Over-allotment

7.1.1. What is over-allotment

An over-allotment is an option available to the underwriters/managers that allows the sale of (i) additional shares or (ii) certain additional debt securities such as convertible and exchangeable debt securities (“Debt Securities”) (as applicable) from what a company plans to issue in (i) an initial public offering or secondary/follow-on offering or (b) debt offering (as applicable).

The over-allotment option gives the underwriters/managers the right, but not the obligation, to purchase from the issuer or the selling shareholder a specified number of additional shares/Debt Securities beyond the number in the original offering at the offering price.

7.1.2. Greenshoe vs Brownshoe structure

There are two different types of over-allotment structures: (i) greenshoe structure and (ii) brownshoe structure, otherwise known as “reverse greenshoe”. In summary, a greenshoe is when the underwriter/manager exercises its option to obtain additional shares/Debt Securities at the initial offering price whilst the brownshoe option gives the underwriter/manager the put right to sell the shares/Debt Securities to the issuer at a later date but only if the share/Debt Security price falls below the offering price.

The greenshoe option customarily used in the United Kingdom is limited to 15% of the size of the original offering and the option can be exercised within 30 days of the relevant offering.

7.2. Stock lending agreement

A stock lending agreement is entered into between one or more of the shareholders and the stabilisation manager and it allows the stabilisation manager to borrow up to 15% of the total number of shares comprised in the offer. The purpose of the stock lending agreement is to allow the stabilisation manager to settle, on admission any over-allotments made in connection to the offer. If the stabilisation manager borrows any shares pursuant to the stock lending agreement, it will be required to return to the shareholder either equivalent securities or the cash equivalent in case the over-allotment option is exercised (“set-off” mechanism).

7.3. Stabilisation

7.3.1. What is stabilisation?

Stabilisation is the process whereby the market price of a security is supported through the buying of securities up to a certain level for the limited purpose of preventing or slowing down the price decline. A stabilisation manager is appointed to act on behalf of the syndicate, in respect of a new issue of shares or bonds, by buying and selling the securities in the open market. The terms of the stabilisation are usually agreed in the underwriting agreement and are subject to the requirements set out in MAR.

It is important to note that stabilisation may only be used to support the market price of the shares and not to increase the price in excess of the offering. For example, if the price of shares in the aftermarket drops below the offering price, the stabilisation manager, acting on behalf of the syndicate, purchases securities in the market, thereby supporting the share price. However, if the price of the shares in the aftermarket increases above the offering price, the stabilisation manager will not engage in stabilisation. Instead, in the case of equity deals, the underwriters in this case will close their short position by exercising the over-allotment option referred to in 8(a) above.

7.3.2. Stabilisation and MAR

Under MAR, stabilisation is exempted from the prohibition on insider dealing, market manipulation and unlawful disclosure of inside information so long as:

• the undertaking of the stabilisation is for a limited period (in respect of shares the time period is no longer than 30 calendar days whilst in respect of bonds it is no longer than 60 days) ;
• relevant information is disclosed to the competent authority;
• disclosure is made in the offering documents; and
• the undertaking is in compliance with adequate limits with regard to price.

The European Securities and Markets Authority (“ESMA”) indicated that disclosure obligations will include further requirements, namely that (i) prior to the stabilisation, issuers must disclose where the stabilisation measure may occur (whether it be on or outside a trading venue); and (ii) after the stabilisation, issuers must disclose the trading venue on which the stabilisation transactions were carried out.

The government of the United Kingdom has published the U.K. implementation of MAR (the “U.K. MAR”) that will apply following Brexit. The changes are designed to ensure that the U.K. markets and financial instruments continue to be subject to the same level of requirements as under MAR. The FCA will be the U.K. regulator for purposes of U.K. MAR to which the ESMA’ s powers and functions will also be transferred.

8. Corporate Governance

8.1. Corporate governance code / rules (INED, board and supervisory composition, committees)

For a company with a premium listing on the Main Market, this will include either complying with the U.K. Corporate Governance Code (the “Code”) (which is expected by the investor community) or, alternatively, explaining in its annual report why it does not comply. The Code covers matters such as the composition and responsibilities of the board and its committees and executive remuneration. The Code prescribes certain independence requirements for the directors of companies seeking premium listing. Under the Code at least half of the board must be composed of independent non-executive directors. In addition, the chairman should be separate from the Chief Executive Director, independent on appointment and should not act as chair when the committee is dealing with the appointment of his or her successor. In addition, the nomination committee should also comprise a majority of independent non-executive directors, while the remuneration and audit committees should be comprised entirely of independent non-executive directors and have at least three members.

The Code does not apply to companies with a standard listing or companies admitted to trading on AIM; however, they are still required to make disclosures about the corporate governance regime they follow. These companies may choose to follow a specified corporate governance code voluntarily, as investors will often expect them to do so. For example, AIM companies often follow the Corporate Governance Guidelines for Small and Mid-size Quoted Companies published by the Quoted Companies Alliance.

8.2. Any other Environmental, Social, and Governance (“ESG”) considerations

The revised U.K. Stewardship Code 2020 that took effect on 1 January 2020 highlighted the importance of ESG criteria which are becoming more relevant for investors. Investors are expected to consider material ESG matters, including climate change, as part of their investment which is going to have an impact on the corporate governance and internal policies of the issuers. Given the investors increased focus on the ESG criteria, certain issuers, in particular in the context of bond offerings, will typically seek ‘ESG rating’ provided by a third party, such as MSCI, for the purposes of increasing the marketability of the bonds.

9. Ongoing Reporting Obligations (Life as a Public Company)

Listed companies are required to comply with various ongoing reporting obligations, which vary based on whether the securities are included on the Official List, the market on which the securities trade, and the nature of the securities offered. Once a company has been admitted to trading on the Main Market of the LSE and listed on the Official List of the FCA, it will be subject to an additional layer of regulation. Even where the company has not been listed on the Official List, or where has been admitted to trading on the PSM, AIM or ISM, certain ongoing reporting obligations will apply.

In addition to the statutory and common law provisions applicable to all U.K. companies, there are a variety of rules that apply to issuers on U.K. regulated exchanges, including the UKLA Listing Rules (which form part of the FCA Handbook), the LTDRs, Corporate Governance Rules, the PRRs and the ADSs. Issuers admitted to the premium or standard listing segments must comply with each of the above obligations, while issuers on the PSM must comply only with the LTDRs and the PRRs. These rules do not apply to AIM, ISM or HGS companies.

Moreover, both listed and unlisted companies will need to ensure that they meet the ongoing obligations under MAR, as a breach of MAR by an individual or legal person is a civil offence punishable by a fine and administrative sanction. As such, companies admitted to the ISM will be obliged to comply with MAR, although such companies will not be obliged to comply with the LTDRs, Corporate Governance Rules, PRRs and the ADSs. However, the rules prescribed under the ISM rulebook impose similar obligations on ISM companies.

9.1. Annual Reports

For all companies with listed shares, and those with a retail listing of debt, the rules on financial statements are set out in the LTDRs. The LTDRs provide that an issuer must publish audited annual accounts within four months of its financial year end and unaudited interim accounts within three months of the end of the interim financial period. Both annual and interim accounts must be compliant with the requirements set out in the LTDRs. Where a company is domiciled in the EU, the financial statements must be prepared in accordance with IFRS as adopted by the EU.

Issuers of wholesale debt and issuers who only have securities listed on the PSM or ISM are subject to a somewhat more relaxed regulatory framework which provides an extended six-month period for issuers to produce their annual reports and permits the issuer to prepare their reports in accordance with national accounting standards. Issuers on the ISM and PSM are exempted from the requirement to prepare interim reports.

9.2. Periodic Reporting

Periodic reporting requirements for companies listed on the LSE’s main markets vary depending on the market. The following list outlines some, but not all, of the key periodic reporting requirements for premium listings and standard listings and for admission to the HGS, AIM, PSM and ISM:

• Corporate Governance: Issuers with securities admitted to the premium segment of the Main Market must comply with the Code. Issuers with securities that are admitted to the standard segment, the HGS or the PSM are not by virtue of being admitted to these markets subject to the Code, but must disclose (i) the corporate governance code to which they are subject, (ii) the extent of compliance with such code (iii) and a description of internal controls and risk management arrangements. Issuers with securities that are admitted to the PSM must include similar disclosure, but are not required to disclose the internal controls and risk management arrangements. There are no specific corporate governance requirements that attach to issuers under the ISM rules.
• Cancellation: 75% shareholder approval is required for the cancellation of premium listed securities and for securities on the AIM. No shareholder approval is required for securities on the other listing markets and segments.
• Transfer Between Listing Categories: 75% shareholder approval is required to transfer securities from a company with a premium listing. No shareholder approval for transfer between listing categories of any of the other aforementioned listing segments and markets, save for the fact that 75% shareholder approval is required when transferring from the HGS to a listing segment other than the premium segment of the Main Market.
• Prospectus Supplement: Where greater than 10% of the securities of same class are admitted to trading, a prospectus supplement is required for securities listed on the Main Market, including premium listings, standard listings, and securities on the HGS. No such requirement exists for securities on the AIM, PSM or ISM, subject to the caveat that a prospectus is required where a public offer is made under the Prospectus Regulation.
• Significant Transactions: There are no specific disclosure requirements for significant transactions for ISM or PSM issuers. Issuers with securities admitted to the standard segment and high growth segment of the Main Market also generally do not have any specific requirements for significant transactions, although reverse takeovers require re-admission to the respective market.

Where securities have been admitted to the premium segment of the Main Market: (i) an announcement is required for significant transactions exceeding 5% of any class tests, (ii) shareholder approval, a circular and appointment of a sponsor is required for significant transactions exceeding 25% of any class tests and (iii) shareholder approval, a circular and appointment of a sponsor is required for related party transactions exceeding 5% of any class tests. All reverse takeovers require re-admission.

Where securities have been admitted to the AIM: (i) an announcement is required for significant transactions exceeding 10% of any class tests or related party transactions exceeding 5% of any class test and (ii) disposals in a 12-month period exceeding 75% in any class tests require publication of a circular and shareholder approval. All reverse takeovers require re-admission.

The Shearman & Sterling team also included Michael Scargill, a counsel and a Head of UK Knowledge Management in the London M&A practice, as well as the associates Evangelia Andronikou and Alex Despotovic (both London-Capital Markets).