Listing offshore

 

Historically, the word ‘offshore’ brought one concept to mind: tax advantages. Offshore jurisdictions typically offer low, or sometimes zero, taxation platforms for companies that choose to incorporate there.

 

Due to the trend of using a vehicle incorporated in certain offshore jurisdictions to list a business on a foreign exchange, for many companies operating within emerging markets ‘offshore’ now means ‘access to investors’. This has resulted in boom times for offshore law firms, and much of the work is coming from China.

 

Explains a partner with a Beijing based PRC law firm: “Chinese state-owned enterprises are able to access domestic bank loans with ease. For privately owned companies, however, these loans are not as easy to obtain. As a result, private companies must look to the public markets or private equity to access the capital they need in order to grow.” For many reasons, they look to foreign public markets.

 

“Tax advantages are a given, but tax alone isn’t a sufficient reason to list offshore. You need to find a jurisdiction accepted by the capital markets,” says Christopher Bickley, a partner based in the Hong Kong office of offshore firm Conyers Dill & Pearman.

 

Foreign investors want to invest using exchanges they know and feel comfortable with. The London, New York and Hong Kong markets in particular offer political and economic stability, and established legal and regulatory systems. Comfort is also important to underwriters and ratings agencies involved in the listing process. Practical requirements dictate other important considerations. A foreign listing can be completed more quickly using an offshore vehicle rather than a PRC company.

 

Regulators in offshore jurisdictions are very responsive, in some cases meeting every day to consider and respond to issues. PRC lawyers believe that a foreign listing offers greater safety if the listed company plans on a secondary offering or a refinancing in the future. On some exchanges and using certain jurisdictions, shares can be listed in an uncertificated form, while others offer access to well-regarded settlement and clearing systems such as CREST.

 

A foreign listing can bring exposure to the globalised business world and help a company develop a platform for international expansion. Other business issues may make the flexibility and control offered by offshore jurisdictions more attractive. In contrast, PRC law may render rights desired by investors – such as shareholder, management, voting or pre-emptive rights – unenforceable. Similarly, JVs cannot be listed on PRC exchanges, and neither can different classes of shares, eg, preference shares. Compared to the legal framework offered by offshore jurisdictions and foreign exchanges, PRC company law is, in Bickley’s words, “not as flexible and user friendly”.

 

Tailoring a listing to appeal to an appropriate investor base is well illustrated by the admission of Beijing based China Boqi Environmental Solutions Technology to the Tokyo Stock Exchange in August 2007. Advised by Guantao Law Firm, China Boqi was the first Mainland China based company to go public on the Tokyo bourse’s first section.

 

The technology at the core of the company was developed in Japan and, due to both Japanese investors being familiar with it and the company’s desire to cooperate with Japanese technology companies, Tokyo was a natural market.

 

The company’s stock soared 61% in its first day of trading. China Boqi used a Cayman Islands-domiciled company as the listing vehicle, and Guantao used Conyers Dill & Pearman for advice and services in respect of the corporate structure.

 

The Tokyo Stock Exchange is just one foreign exchange that hopes to attract more Chinese companies. As noted by Greg Knowles, a partner in the Hong Kong office of Caymans firm Maples and Calder, the Tokyo exchange’s Mother’s Index, a secondary board, has generated some interest for Asian companies, with Maples and Calder advising several Cayman-incorporated companies looking to list there.

 

At the time of China Boqi’s listing in Tokyo, neither the creation of the Caymans holding company nor the listing required approval from China’s securities regulator. However, a PRC lawyer interviewed by ALB believes the process would not be as straightforward if the same transaction were being considered today.

 

This is due to the promulgation of the Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors issued by China’s Ministry of Commerce (MOFCOM) and five other ministries, which came into effect on 8 September 2006.

 

These provisions permit a share exchange between a PRC company and an offshore company (a key part of establishing the listing vehicle), but make it difficult for the offshore vehicle to list on a foreign exchange. In addition to other approvals, the provisions require the listing company to receive pre-approval for the foreign listing from China’s securities regulator. Further, the pre-approval period is a relatively short 12 months. If the offshore company fails to complete its listing within that time, the pre-approval expires. Given the time these transactions take to complete and the delays often caused by market conditions, this time period is considered by Chinese lawyers as extremely short.

 

The rationale behind the recent rule change is being hotly debated by PRC lawyers. Suggested reasons range from a heavy-handed attempt to bolster the size and liquidity of China’s domestic exchanges through to a desire to meet international standards and better understand the source of foreign investment in China within the context of the recent increase in inflow of foreign capital.

 

Regardless of the policy behind the new provisions, Bickley predicts that the change in the rules will have an impact on the ability of PRC companies to list overseas but notes that the slowdown has not yet been felt: “If the PRC company’s shares are not already located in an offshore entity, the process is going to be more difficult.”

 

Meanwhile, one PRC lawyer who spoke to ALB believes that Chinese companies are waiting to see how the rules play out. “It’s a quiet period, but it doesn’t mean that PRC companies will give up pursuing an offshore listing,” they say, conceding that because of the restrictions, the time-consuming nature of an offshore listing and the likelihood that any pre-approval period will expire before the listing is completed, one outcome may be that fewer PRC companies will seek a foreign listing.

 

A domestic listing of a PRC company may prove easier and more appropriate once demand improves and onshore exchanges offer a more attractive price/earnings multiples. “China is like any other emerging market” says Marc Yates, an Ogier partner based in Jersey. “They really want to build their own structure and get it recognised, but the reality is that it takes time.”

 

The differing opinions held by offshore law firms about which offshore jurisdictions are preferred by Chinese companies tend to reflect each firm’s strengths, location, history and marketing strategy. However, the differences between each jurisdiction are many, and geography and time zones do matter.

 

Depending on the particular circumstances and objectives of the business seeking a foreign listing, there will be a “best fit” in terms of foreign exchange and offshore vehicle. Chinese companies must rely on their domestic legal, tax and accounting advisors to help them identify the best offshore jurisdiction through which to access their preferred exchange.

 

Globally, the competition between exchanges to attract listings is fierce, particularly between those in the major financial centres – London, New York and Hong Kong. NASDAQ, the New York Stock Exchange (NYSE) and the Singapore Stock Exchange (SGX) have opened offices in Beijing to better compete against the Hong Kong Stock Exchange (HKEX), reflecting China as a major source of new listings.

 

Yates for one, however, does not expect to see a big change in the main exchanges used. “A major shift away from the status quo is unlikely … ultimately it’s [dependent on] where your investors are,” he says.

 

 London: LSE, AIM and SFM

 

The Alternative Investment Market (AIM) is a junior market of the London Stock Exchange (LSE) and the most common London exchange for offshore listings. AIM now has over 1,600 members, 20% of which are either domiciled or have their main business operations outside of the UK. Some 48 Chinese companies are listed on AIM.

 

Nominated Advisors, or NOMADs, are responsible for ensuring that companies are suitable for admission and must continue to monitor regulatory compliance. According to a study by the LSE in 2007, 9.6% of AIM companies were incorporated in the Caymans, 9.6% in BVI and 7.8% in Bermuda. Similar numbers of Jersey, Guernsey and Isle of Man companies are listed on AIM.

 

Several PRC lawyers stated a tendency for PRC companies to look to the AIM market. Companies choosing to list shares on AIM typically use Jersey or Guernsey structures, since BVI and Cayman companies can only list GDRs. In the experience of John Rainer, a Mourant du Feu & Jeune partner based in Jersey, Jersey, Guernsey and Cayman are the best jurisdictions in which to locate a listing vehicle for a London listing.

 

There is consensus that the London market also appeals to Indian companies, which have a reputation of using Isle of Man companies as listing vehicles. “Several Indian companies started the trend and others have adopted the same structure. We noticed this trend at an early stage” says Mike Edwards, an Isle of Man partner at Cains. Edwards observes that the “appeal of AIM is the massive pool of liquidity. Access to capital through London is huge. Even in these turbulent times, there is huge interest in AIM.”

 

Mourant recently advised on the first listing of a Malaysian company on AIM – Peninsular Gold Limited, a Jersey-incorporated company. In January 2008, meanwhile, Carey Olsen advised on the AIM listing of China Eastsea Business Software Ltd, an IT outsourcing service provider for the petrochemical and petroleum industries. Harneys acted on 10 AIM listings last year, including the US$368m AIM flotation of Canton Property Investment Limited, as well as two listings on the main market.

 

In addition, the LSE’s new secondary market – the Specialised Fund Market – aims to target hedge funds, feeder funds and private equity vehicles. Jason Romer, a Guernsey partner with Collas Day, believes that the SFM will handle listings in a more “fund-friendly manner” than would AIM, which tends to attract operating companies.

 

To that end, several admission requirements have been relaxed, relying in part on the fact that investors should be confident that the listed funds are sufficiently regulated by their home jurisdictions.

 

Market participants cite several concerns related to listing in the US, eg, costs associated with Sarbannes- Oxley compliance and the threat of shareholder class actions. However, the prestige and the robust corporate governance offered by a US listing remains attractive to Asian companies.

 

As to which offshore jurisdictions are preferred, Yates of Ogier, which has a substantial presence in each of the four main offshore jurisdictions (Jersey, Cayman, Guernsey and BVI) says the Asia market is more familiar with BVI and Cayman companies. He says: “It’s a quirk of history, arising from the demands of the colonial Hong Kong market for an offshore solution, the ease of incorporation and the familiarity among the US market. Much replicated, this created a dominant standard across the region.”

 

Bickley, on the other hand, sees more Bermuda and Cayman companies listing on NASDAQ and the NYSE but also sometimes BVI companies.

 

As of April 2008, the NYSE Group (which now includes Euronext exchanges) has 52 companies from Greater China listed, including 42 from Mainland China, five from Hong Kong, and five from Taiwan.

 

The total market capitalisation of the 42 NYSE-listed Mainland Chinese companies was US$1.5trn. There are approximately 46 companies from Greater China listed on NASDAQ, the second-largest overseas market for the exchange.

 

HKSE has become a natural choice for Chinese companies, particularly for SOEs. Increasingly, companies that list on the H-Share market are doing so in connection with an A-share listing on the Shanghai Stock Exchange.

 

Seventy-five percent of the companies admitted to the HKSE are offshore companies. “It’s a well-travelled path”, says Bickley. “Investors are familiar with the Hong Kong market.”

 

Michael Gagie, a partner in the Hong Kong office of BVI-headquartered firm Harneys, notes that, until recently, BVI companies were not approved for listings in Hong Kong.

 

Traditionally, Bermuda and Cayman companies were the listing vehicles, although BVI companies were often part of the corporate structure. HKSE has special rules for offshore companies that require, among other things, extra provisions to be included in incorporation documents to bring them up to the standard accepted by the HKSE. Another heavily oversubscribed IPO was the US$140m listing of Tianjin Port Development Holdings Limited on HKSE, on which Applebys advised.

 

In the past, NASDAQ was the preferred exchange for China-based technology companies, but a major shift began to occur in 2006 as the NYSE and HKSE began to aggressively court Chinese companies. The decision by B2B portal alibaba.com to list in Hong Kong rather than on NASDAQ was something of a watershed.

 

The company believed it could achieve a higher valuation because Hong Kong was closer to the operation and investors there better understood Alibaba’s business model. The company raised US$2.7bn and the listing was 251% oversubscribed.

 

Foreign listings account for about onethird of listings on SGX and its junior Sesdaq board, by number and market capitalisation. Forty-eight percent of the foreign listings are by Chinese companies. SGX senior executive vicepresident and head of markets Gan Seow Ann reported that in 2007 new foreign listings accounted for about 70% of the total number of listings on SGX. SGX hopes that by 2012 more than half of its listings will be foreign companies.

 

One of the largest recent deals for Cains was the listing of Genting International, the first Isle of Man company to list in Singapore. The region is a focus for Cains, which recently opened a Singapore office. “We hope to be able to replicate the success we have had on AIM,” says the firm’s Mike Edwards.

 

Yates of Ogier says that his firm’s strategy is based on the convergence that they see happening within the offshore world. As the benefits of each jurisdiction become more homogeneous, “the driver for determining where a structure is located will depend on client factors: convenience, location – of both the business operations and management – and location of their investor base,” he says.

 

Offshore firms that focus on only one jurisdiction recognise the need to broaden their scope. Collas Day, in particular, with its focus on the UK capital markets, is looking to build in London, Jersey and more broadly offshore and beyond to the emerging markets. Offshore firms, given their size and the friendly competition that exists among them, are reluctant to reveal financial information. However, all firms contacted for this overview reported revenue growth, particularly in relation to work from emerging markets. Cains revealed that its revenues had increased by 33% over the last three years, and profitability was up 37%, due in large part to the growth it is experiencing in advising on international AIM admissions. Mike Gagin of Harneys said that in revenue terms the firm as a whole had had its “best year ever”, the Hong Kong office’s revenue almost doubling.

 

Cains’ growth, meanwhile, is also coming from the east, mainly the emerging markets of India, Kazakhstan and China, which is the rationale behind their recent opening of an office in Singapore. Says partner Michael Edwards: “We realised that you can’t build an Asian practice from Europe. We looked at various locations, including Dubai and Shanghai, but chose Singapore because it’s increasingly being used as a hub for South East Asia and it has a very close relationship with India.”

 

Any effects of the new Chinese laws are yet to be felt. Market volatility, on the other hand, is already making an impact. Hugh O’Loughlin at Walkers has seen a huge amount of listing activity in the last 12 months, although a few transactions have been delayed.

 

Bickley observes: “This year there has been a strong deal flow, but not like last year, which was very hectic. People are taking a bit more time to get their deals done and to get the timing right.”

 

Knowles says his firm has a steady flow of work for listings on AIM, HK and NYSE, but that there is “no doubt that some people are holding off until later in the year”. Recent instructions on the proposed listing of a Malaysian biofuels business on AIM have been aborted due to market conditions, “like many others” noted John Rainer of Mourant.

 

It may be that strong domestic PRC markets become another threat to offshore business. The realities of the greater transparency and accountability that comes with an offshore listing, including possible personal liability of directors and officers, in addition to the new regulatory hurdles, may make a domestic listing more attractive. This concern was underlined by Yates: “The issue for PRC companies [when listing abroad] is the adoption of the necessary corporate governance regime and the rules that they have to comply with. In most cases it’s a step up … Some companies may not be ready for that level of regulation and scrutiny.”