The Float Guide How to float a company on the New Zealand Securities Exchange

Contact:

Amon Nunns Bell Gully, New Zealand [email protected]

INTRODUCTION

This guide gives an overview of what is involved in a New Zealand incorporated company conducting an initial public offering (IPO) in its securities together with a listing on the NZSX market operated by NZX Limited (NZX). An IPO can mark a new stage in a company’s life. It can allow the company to raise capital, allow existing shareholders to realise some or all of their investment, raise the public profile of the company and provide the company with easier ongoing access to the capital markets. Implementing an IPO can be a timeintensive and expensive exercise and it is important to ensure that the IPO team has the expertise to deal with issues that arise as quickly and efficiently as possible.

Disclaimer: this publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

Contents Executive Summary

3

Initial considerations

5

Prerequisites to an IPO

7

IPO team

10

Getting the company ready

12

Pre-registrations marketing

15

Offer documents

16

Due diligence

19

Pricing

22

Dealing with regulators

23

Offer period

24

After the IPO

25

Securities Law reform

27

Trans-Tasman mutual recognition

28

Indicative IPO timetable

29

EXECUTIVE SUMMARY What is an IPO? An IPO typically involves a public offering of securities and listing of the company and quotation of its securities on the NZSX.

Why do an IPO? There are a range of reasons that a company may want to implement an IPO, including to raise capital, to allow existing shareholders to realise some or all of their investment, to raise the public profile of the company and to provide the company with easier ongoing access to the capital markets.

How long does it take? A relatively straightforward domestic IPO should take around four to five months from the date a decision is made to proceed.

What are the costs? The total costs will depend on the size of the offer. The range is relatively wide; between three and ten per cent of the total offer size, with larger offers likely to be more cost effective. An IPO will also absorb considerable management time, which is a cost often overlooked.

What companies qualify? A company must apply to NZX to be listed. NZX has a wide discretion to approve or reject applications. Companies will generally not be considered for listing unless: the expected market value of the securities to be listed is at least NZ$5m; it is sufficiently ‘widely held’ – the class of securities being listed must be held by at least 500 members of the public holding at least 25 per cent of the number of securities in that class issued; and all shareholders must hold at least a ‘minimum holding’.

Who should be on the IPO team? The IPO team is likely to include representatives of the issuer (and selling shareholder, if applicable) an organising participant and financial adviser, underwriter (if an underwritten offering), lawyers and accountants.

What should the company do to get ready? Amongst other things, the company should: determine whether any IPO restructuring is necessary such as inclusion or removal of assets in the company; identify the people to be directors and senior managers of the company; determine the company’s appropriate debt and equity mix and get bank funding arrangements under way; determine its optimal capital structure, which may require restructuring to deal with other share classes or options and shareholder loans;

consider whether any issues identified during due diligence can be dealt with before the IPO; ensure that any minority shareholders are aligned with the IPO strategy; consider whether its existing corporate governance practices need amending; and determine the terms of any employee share ownership plan and incentive arrangements.

What goes in the Offer Document? In addition to detailed prescribed content requirements, the Offer Document is required to include all material information relating to the offer and the securities offered. It will typically also include information about the company’s business, the industry in which it operates and its directors and senior management.

What is due diligence? Under New Zealand’s securities law the directors of an issuer and any promoter of an offer of securities can be held liable if an Offer Document contains false or misleading statements. However, there may be a defence available if the statement was believed to be true at the time it was made and there were reasonable grounds for that belief. The due diligence process involves identifying relevant information for inclusion in the Offer Document and analysing and testing the information in the Offer Document as it develops. A due diligence committee is typically established to oversee the due diligence process.

How will the offer be priced? The IPO price will generally be agreed between the board of the company and the company’s underwriter/financial adviser. The IPO price is inherently linked to the perceived value of the company and is often one of the final points agreed before the IPO is launched.

What regulators are involved? The two key regulators that the company will interact with in preparing for its IPO are the Financial Markets Authority and NZX.

Will the company become subject to increased regulation? As a publicly listed company, after the IPO the company will be subject to a number of additional laws and regulations, including the NZSX Listing Rules, the Takeovers Code and laws relating to continuous disclosure of material information and insider trading.

INITIAL CONSIDERATIONS THE NEW ZEALAND EXCHANGE The principal New Zealand securities exchange is the NZSX equities market operated by NZX Limited, a New Zealand listed company. NZX Limited also operates a debt market (NZDX) and a ‘junior’ market, generally for companies with a smaller market capitalisation (the NZAX). There are other securities markets that operate in New Zealand but none are currently registered under the Securities Markets Act 1988. NZX has useful information on its website that may assist with an understanding of the IPO process. This information is available at http://www.nzx.com/markets/nzsx/listing-on-the-sx.

WHY LIST ON THE NZX? Companies choose to list in New Zealand for reasons that are common to many jurisdictions. These include: a need to raise capital or make capital raising easier in the future; a full or partial exit option for founders or substantial shareholders; broadening the shareholder base; providing liquidity for existing shareholders; and a desire to raise the company’s public profile and its standing among key stakeholders such as customers, lenders and investors.

OFFER CONSIDERATIONS Consideration should be given to matters relating to the structure of the public offer accompanying the listing, such as: capital needs (ie, how much new equity capital is needed by the company); the pricing of the offer; whether shares will be offered to the public and/or institutional investors in countries other than New Zealand; whether preferential offers will be made to targeted groups such as employees or customers of the company; the current shareholders’ preferred ownership percentage after listing; whether to list on the NZSX or the NZAX; whether warrants or options will be issued as part of the offer; and whether the offer will be underwritten.

TIMING Another key consideration will be the optimal timing of the offer. This is likely to be driven by the timing of:

how recent the company’s audited accounts are; a desire to avoid traditionally quiet market periods (from Christmas to late January in New Zealand and particularly the Christmas/New Year holidays); a desire to make the offering when the company is performing well and its prospects are favourable; and an absence of competing offers. A straightforward offer and listing should take approximately four to five months from the date a decision is made to proceed. The principal reasons an IPO may take longer are: determining the optimal structure and pricing of the offer; difficulties in preparing the historical or prospective financial statements or information to the extent required; and significant changes or uncertainties in the business during the period in which the offer is being planned.

COSTS As a guide, the total costs (including brokerage, lead management, underwriting, legal and accounting fees, share registry, printing, advertising and marketing costs) for an IPO range between three and ten per cent of the total offer size, with the larger offers likely to be more cost effective.

MANAGEMENT TIME One factor often neglected in assessing the cost of an IPO is the management time taken up in the IPO process and the distractions caused by it. It is useful at an early stage for the company to form a small internal management team to manage the offer and listing. The management team is likely to be involved in strategic issues, preliminary structuring matters and the due diligence process associated with the preparation of the offer document. Care should be taken to ensure that the company’s resources are suitably divided between the IPO process and the ongoing management of the business.

PREREQUISITES TO AN IPO GENERAL REQUIREMENTS Before a company can complete an IPO it must be accepted for listing by NZX.

MINIMUM MARKET VALUE OF SECURITIES An applicant company generally will not be considered for listing on the NZX unless the anticipated market value of the securities to be quoted is at least NZD$5m. NZX will make this determination in its sole discretion.

Spread NZX requires a company seeking listing to have a satisfactory spread of shareholders as a result of the offer. This requirement will be satisfied if the class of securities issued under the offer is held by at least 500 members of the public holding at least 25 per cent of the number of securities of that class issued.

Minimum holdings NZX also requires each shareholder to hold a certain minimum number of shares. A minimum holding ranges in various bands from 25 where the market price equals NZD$10 per share to 2,000 where the market price is 25 cents per share or less. A company must ensure the spread and minimum holding requirements are maintained, or NZX must otherwise be satisfied that the company will maintain a spread of security holders which is sufficient to ensure that there is a sufficient liquid market in the securities.

NZX DISCRETION NZX retains a wide discretion to approve or reject an application for listing, whether or not the applicant company complies with all provisions of the NZSX listing rules. NZX may refuse listing of a company or quotation of a class of securities for any reason. For example, NZX may refuse an application for listing based on a belief that the applicant’s directors are not of suitable character notwithstanding the fact that the NZSX listing rules do not include minimum character standards for directors of NZX listed companies. NZX may also impose conditions, which may be additional to the NZSX listing rules, which must be fulfilled to obtain or maintain listing.

DETERMINE THE TYPE OF LISTING It is important for companies considering an IPO to determine the type of listing that will be sought in New Zealand. The type of listing determines the extent to which, among other things, the company will be bound by the NZSX listing rules.

Primary listing Primary listed companies have New Zealand as their home exchange. All of the NZSX listing rules apply to companies with a primary listing.

Dual listing Dual listed companies are companies incorporated in Australia and which have home exchanges in both Australia and New Zealand. They are admitted to the official list of the ASX and are party to a

listing agreement with NZX. A number of the NZSX listing rules do not apply to dual listed companies so long as those companies comply with the ASX listing rules and the Australian Corporations Act 2001.

Overseas companies An overseas listed company has a ‘recognised stock exchange’ as its home exchange. Overseas listed companies are not generally required to comply with most of the NZSX listing rules so long as they comply with the listing rules of their home exchange.

DIRECTORS The quality and experience of the board of directors of a company undertaking an IPO is important. Early attention should be given to ensuring that the board, and particularly the Chair of the board, is right for the company. There must be at least three directors, two of whom must be ordinarily resident in New Zealand. In addition, the company must have ‘Independent Directors’. The minimum number of Independent Directors is two, or if there are eight or more directors, the minimum number is three or one third of the total number of directors (rounded down to the nearest whole number), whichever is the greater.

AUDIT COMMITTEE Before its IPO the company will be required to have established an Audit Committee to monitor and review the independent and internal auditing practices (amongst other things). The Audit Committee must comprise at least three directors, the majority of whom must be Independent Directors. At least one member of the Audit Committee must have an adequate accounting or financial background. A director will have an adequate accounting or financial background if he or she is a member of the Institute of Chartered Accountants of New Zealand, has held a position as chief financial officer of an NZX listed company for more than 24 months, has completed a course approved by NZX for Audit Committee membership, or the board deems the director’s experience and/or qualifications to be satisfactory. Aside from the requirement to have an Audit Committee, as part of its IPO planning, the company will need to ensure that it has good corporate governance practices, as discussed in section 5.2.

CONSTITUTION A company’s constitution will need to comply with the requirements of the NZSX listing rules.

THE LISTING APPLICATION An application to list on the NZX must be made through the company’s ‘organising participant’, which is usually the company’s financial adviser/broker. Among other things, it will involve submitting the draft offer document and other documents to NZX to review, along with a listing application. The key items to be delivered to the NZX for listing are: a listing agreement in which the company agrees to comply with the NZSX listing rules; a copy of the company’s constitution (which must comply with the NZSX listing rules); acknowledgements from each company director that: he or she is aware that company is contractually bound to observe the listing agreement and to comply with the NZSX listing rules; and

he or she will use best endeavours to procure compliance by the company with the NZSX listing rules; payment of the listing fees; provision of a bond (usually provided by the company’s bank); the draft offer document and any proposed advertisements for the offer; confirmation from the ‘organising participant’ that it will act as the NZX sponsor for the offer; and a share registrar. Listed companies need to appoint a share registrar which will be responsible for, among other things, maintaining the register of shareholders and recording the transfer of shares. The company bears the share registrar’s costs.

IPO TEAM A company should appoint a team with the knowledge and experience to implement the IPO effectively and successfully. The IPO team may include representatives of the company (and selling shareholder, if applicable), an organising participant, financial adviser, underwriter (if an underwritten offering), lawyers, accountants and others (which may include public relations consultants and other consultants). It is important that the company’s internal team and external advisers can work autonomously, given that the company needs to continue running its day-to-day business throughout the IPO process. Furthermore it is important to define the role of each external IPO team member at the outset and to establish what sign-offs will be required from each team member to avoid last minute issues. A company’s external IPO team may include: an organising participant/financial adviser; an underwriter; lawyers; accountants; auditors; communications consultants; and other experts. These are outlined below in more detail.

ORGANISING PARTICIPANT/FINANCIAL ADVISER The organisation participant’s role is to manage the entire process and to work closely alongside the other members of the company’s team to help the IPO meet the company’s business and financial objectives. NZX requires that an organising participant be engaged by a company seeking listing to assist it in the process. The organising participant is usually the financial adviser to the company for the offer.

UNDERWRITER Whether or not the IPO will be underwritten, and the nature of the underwriting, are important considerations. There are many different types of underwriting and sub-underwriting arrangements that can be considered for an IPO. If an underwriter is appointed, the company will need to agree the terms of the underwriting with the underwriter, particularly fees and termination events. This is best done early in the IPO process. Generally, the underwriter legally commits to underwrite the IPO before the start of the offer period when the offer document is registered with the Financial Markets Authority (FMA).

LAWYERS Lawyers will ensure the company and its directors are aware of all legal obligations including under legislation such as the Securities Act 1978, the Securities Regulations 2009 and under the NZSX listing rules. They will assist with preparing the company’s offering documentation in conjunction with other advisers and management. The lawyers may also be involved in negotiating the underwriting agreement with the underwriter and drafting other documents required for the IPO, including a new constitution for the company, any employee share ownership plan and any new employment contracts required with senior management. Typically, the lawyers will play a substantial role in the due diligence process and will also document and assist with any pre-offer restructuring.

ACCOUNTANTS An external accountant is likely to be engaged to assist the company, particularly regarding prospective financial information and other accounting and taxation issues. The external accountant role is often performed by the company’s auditor (since the auditor is usually familiar with the company’s business) but may also be a separate additional adviser.

AUDITORS The company’s auditor will need to report on the financial statements. Generally, full audited financial statements for the most recently completed financial year with prior period comparisons will be required. These financial statements become ‘stale’ once they are more than nine months old, although interim financial statements (which need not be audited) can be included in this event. In addition if the company has an operating history, summary financial information for the five years preceding the date on which the prospectus is registered are required (or summary financial statements for such lesser period as the company has been in existence). If the company is going to acquire a substantial business or subsidiary, historical financial statements for that business or subsidiary may be required.

COMMUNICATIONS CONSULTANTS The company should consider putting a communications plan in place for the public offering. This may include a skilled communication adviser on its IPO team or in-house. The role of the communications consultant is to prepare a marketing plan and ensure the company gets appropriate press coverage and to liaise with members of the media.

OTHER EXPERTS Depending on the circumstances, it may be appropriate for other experts to be commissioned to advise the company or to produce special reports for the Offer Document.

GETTING THE COMPANY READY PRELIMINARY RESTRUCTURING There will usually need to be restructuring work undertaken by the company and its advisers to prepare for listing. This work might include:

Dealing with businesses and assets It may be necessary to get the appropriate businesses or assets into the company or any assets that are not required out of the company. If the company is part of a group it may be necessary to put transitional arrangements in place to deal with the separation of the company from the larger group.

Dealing with existing options or similar rights plans The company may have options or other instruments on issue that could affect its capital structure postlisting. For example, options may have been issued as part of earlier capital raising initiatives or under an employee incentive scheme. The company will need to decide whether to deal with the options prior to the listing or have them remain in place and factor the potential effect of exercise into the capital structure.

Other share classes Similarly, if the company has more than one class of shares on issue, it will need to decide whether or not to rationalise the capital structure or seek quotation on NZX of all or less than all of the share classes. The effect of any convertible instruments on the listing will need to be considered.

Formalising or renegotiating material contracts etc As part of getting the company ready for an IPO, key arrangements may need to be formalised. The due diligence process is likely to highlight some issues that need to be resolved before the offer can take place. The company will need to work with its advisers to determine how best to address these issues as they arise.

Identifying suitable directors and senior management It will be necessary to ensure that the IPO has a suitable board and senior management team with the appropriate mix of skills and experience.

Determine the IPO’s debt and equity mix The company is likely to need ongoing debt funding from its bank. It will be necessary to put in place an appropriate debt and equity mix and organise suitable long term bank funding. There may also be a need to replace any existing debt funding that is not suitable for the company’s capital structure.

Dealing with minority shareholders Where a company is not wholly-owned, the shareholders will need to agree on and commit to the IPO strategy. If there are minority shareholders, it will be important to ensure that their rights do not put the IPO strategy at risk.

CORPORATE GOVERNANCE The company should try to recruit independent directors with relevant expertise, experience and contacts. If possible, independent directors should be appointed as soon as possible in the IPO process

so they can understand and be involved in the IPO and due diligence processes fully, and so the management gets used to working with those directors. As each director will have potential liability under the public offer, it is important that they fully understand the company and have the ability to contribute to the offer process and documentation. Early consideration should also be given to matters, such as: whether the offer and listing require changes to be made to the governance or management structures; and financial or operation systems and the method of internal and external reporting and disclosure. It may be necessary to spend considerable effort on corporate governance and company structuring prior to the change from private to public ownership. Most boards will need to adopt new charters as part of the listing process. For example, these are likely to include a board charter, a code of ethics, an Audit Committee charter, a Nominations Committee charter, securities trading policies and a market disclosure policy. The Securities Commission, now the FMA, has published a guide to corporate governance – Corporate Governance in New Zealand: Principles and Guidelines. This guide is not binding however the FMA encourages entities to adopt and report against the principles in order to ensure high standards of corporate governance. The FMA’s principles of corporate governance are: Directors should observe and foster high ethical standards. There should be a balance of independence, skills, knowledge, experience, and perspectives among directors so that the board works effectively. The board should use committees where this would enhance its effectiveness in key areas while retaining board responsibility. The board should demand integrity both in financial reporting and in the timeliness and balance of disclosures on entity affairs. The remuneration of directors and executives should be transparent, fair and reasonable. The board should regularly verify that the entity has appropriate processes that identify and manage potential and relevant risks. The board should ensure the quality and independence of the external audit process. The board should foster constructive relationships with shareholders that encourage them to engage with the entity. The board should respect the interests of stakeholders within the context of the entity's ownership type and its fundamental purpose. In addition, the NZSX listing rules have certain minimum requirements regarding corporate governance (such as relating to the audit committee) and certain ‘best practice’ standards. There are also good commercial reasons for adopting strong corporate governance standards as the market can apply a discount to the share prices of companies that it considers have inadequate corporate governance practices.

OFFER STRUCTURE The company will need to work with its advisers to determine the right structure for the offer. Matters to be considered include:

the offer size and type of securities to be offered; pricing strategies; any underwriting; any expert reports that may be required; the need for a cornerstone shareholder; any retail v institutional focus; and jurisdictions in which the offer will be made and/or securities listed.

SECURITIES ACT EXEMPTIONS/NZX WAIVERS In some cases it may be necessary to seek an exemption from aspects of the Securities Act or the Securities Regulations or waivers from the NZSX listing rules in connection with the offer. This will require an application to be made to the FMA or the NZX with the assistance of the company’s lawyers. It is important that any such exemptions or waivers are identified early in the process so that there is adequate time for them to be obtained.

EMBARGO AGREEMENTS As part of structuring an offer, it may be necessary for some shareholders, such as founders or those with material holdings, to agree to not dispose of company shares for a specified period following the offer. NZX may impose such restrictions as a condition to listing or the company’s brokers may require these restrictions as part of the marketing of the offer.

EMPLOYEE INCENTIVE PLANS Some companies conducting an IPO establish an employee share ownership plan (ESOP) for their employees. An ESOP gives employees the opportunity to become part owners of the company and have a financial interest in its success. An ESOP can help incentivise management but ought to be structured so that the incentive is aligned with the interests of shareholders. There are a number of ways that ESOPs can be structured, with each having various advantages and disadvantages associated with them. Shares or other securities offered to employees or directors under such plans will be subject to the restrictions under the NZSX listing rules (in particular, limitations on the number of shares that can be issued over a certain period without shareholder approval) so careful structuring will be needed to ensure the plan is effective after the listing. An offer of shares to employees will usually also be an offer of securities to the public requiring compliance with the Securities Act.

DIVIDEND POLICY NZX requires that every offering document for equity securities must specify the directors’ intentions and expectations as to the company’s future dividend policy. If, after listing, directors recommend or pay dividends other than in accordance with this policy (or any other public forecast made for the relevant period) they are required to explain in an NZX announcement the reasons for any difference.

PRE-REGISTRATION MARKETING Restrictions are imposed on what marketing activities a company can undertake relating to its IPO before the company registers its Offer Document. Prior to registration a company cannot make a statement which: does not fall within an exception (discussed below); and could encourage the public to participate in the IPO.

Exceptions Prior to registration of its Offer Document a company may make a general, limited statement to the effect that: it is considering making an offer of securities to the public; and no money is currently being sought and no applications for securities will be accepted or money received unless the relevant investor has received an Offer Document. A company can also announce that it is seeking preliminary indications of interest in the offer and how indications of interest may be made, provided that it makes it clear that no indication of interest will involve an obligation or commitment of any kind. Announcements associated with a meeting of shareholders of the company are also permitted. A company can continue to undertake ‘ordinary course’ business advertising so long as it is not encouraging the public to subscribe for the IPO. As a result of these relatively tight restrictions, a company would usually ensure that any ‘awareness’ advertising undertaken prior to registration of the Offer Document only contains information which relates to the company and its business activities and does not refer to the IPO (including by implication).

Pre-offer disclosure to analysts and institutional investors The company can make more extensive disclosures before registration of the Offer Document to institutional investors and other analysts on the basis that they are not members of the public. However, there are a number of precautions that should be taken in respect of such disclosures, including entering into confidentiality agreements and only using information which is materially consistent with information to be included in the Offer Document. Such information must also not be misleading, deceptive or otherwise untrue.

OFFER DOCUMENTS PROSPECTUS AND INVESTMENT STATEMENT Introduction The prospectus and investment statement are the key documents for communicating with potential investors. The preparation of these documents is a major exercise that will involve significant input from the company, financial advisers, lawyers, accountants and other experts. Prospectuses and investment statements are contemplated as being two distinct documents under the Securities Act and each has its own anticipated purpose and content requirements. The investment statement must be provided to all investors while the prospectus must be registered and available to investors. Where a company prepares a separate prospectus and an investment statement, there may be significant duplication of content between the two documents. In practice, companies often chose to prepare one joint ‘prospectus and investment statement’. For the purposes of this Guide, we refer to the prospectus and investment statement together as the Offer Document.

Prescribed Content The Securities Act and Regulations set out detailed requirements for the contents of the Offer Document. The general purpose is to ensure the disclosure of relevant information to prospective investors. Amongst other things, the Offer Document will be required to include information relating to: the terms of the offer; corporate information about the company, including incorporation details, significant shareholders, details of directors and senior management; a description of the company’s business, principal assets and the directors’ plans for the company; risk factors; historical financial information; prospective financial information (discussed further below); and details of material contracts.

Materiality In addition to the above, the Offer Document must contain all material information in relation to the securities offered. The term ‘material’ is not defined in the Securities Act but case law indicates that material information is information that a reasonable investor would take into account in deciding whether or not to invest in an offer. This is a wide test and, as a result, the directors of the company cannot simply focus on ensuring that the prescribed content is disclosed but should ensure that a ‘due diligence’ exercise is undertaken to satisfy themselves that all material information relating to the securities being offered is disclosed. It is often difficult to identify where the dividing line is between information that is material and information that is not material. Practical guidelines for determining materiality are often agreed at the outset to avoid different people within the IPO team applying different criteria. Such guidelines would typically involve quantitative factors (eg, a dollar amount based on a percentage of a relevant financial

metric) and qualitative factors. Where, notwithstanding the materiality guidelines, it is unclear whether a matter should be disclosed, that matter should be referred back to the due diligence committee (discussed below). Materiality guidelines are usually considered and set by the due diligence committee.

Responsibility for the Offer Document Under the Securities Act the directors of the company are ultimately responsible for the Offer Document. The directors will typically delegate the preparation of the Offer Document to a due diligence committee. Normally one organisation within the IPO team will be tasked with managing the production of the Offer Document; typically that person is either the company’s lawyer or the organising participant. That process will involve the preparation of drafts of the Offer Document, coordination of drafting sessions, receiving and inputting comments from relevant individuals and advisers and re-circulating drafts of the Offer Document as it develops.

Prospective financial information Usually an Offer Document is required to include a prospective balance sheet, profit and loss statement and statement of cash flows for the company’s consolidated group in respect of the then current financial year and the next financial year or interim period. However, such prospective financial information is not required if, in the opinion of the directors of the company after due enquiry by them, including it would be likely to deceive or mislead, in which case the Offer Document is required to include the directors’ reasons for that opinion. The prospective financial information is a key area of potential risk for the company and its directors. Great care should be taken when preparing the prospective financial information for an Offer Document as it is likely to be a significant factor in the investment decision of potential investors. After the IPO the company’s performance will be monitored against the prospective financial information included in the Offer Document. The assumptions that were used in preparing the prospective financial information need to be clearly set out in the Offer Document. The prospective financial information should be the subject of significant and thorough review during the due diligence process.

Commercially sensitive information New Zealand’s securities laws prioritise a potential investor’s right to receive all material information about a company before deciding whether or not to invest ahead of the company’s desire to keep commercially sensitive information confidential and not disrupt its relationships with contractual counterparties. As a result, information that must be disclosed in the Offer Document cannot be excluded on the basis that that it is confidential or commercially sensitive, nor can it be excluded on the basis that the company is contractually bound to a third party not to disclose it (for example, the terms of material contracts might include confidentiality restrictions yet all material contracts entered into by any member of the issuing group in the two years prior to the date of the prospectus (other than contracts entered into in the ordinary course of business) must be disclosed and the contracts publicly filed).

Experts Companies in particular industries may consider including an expert report in the Offer Document. Expert’s reports are often useful in industries where the underlying assets are difficult to value without specialist knowledge, such as natural resources or real estate.

Verification The process of verification involves checking the accuracy of every material statement in the Offer Document, preferably by reference to underlying source documents or information. Verification is undertaken prior to the Offer Document being finalised, but does not typically start until after an Offer Document is reasonably close to being finalised so that the contents being verified are in as final form as possible. The verification process is typically led by the company’s lawyers, with input from management. The lawyers will report back to the due diligence committee who will ultimately have to be comfortable that the verification has been completed to an acceptable standard. The process will include the preparation of a set of ‘verification notes’ that will comprise folders of all of the supporting papers for each verified material statement.

Typical contents of an Offer Document A typical Offer Document might include: investment highlights; letter from the Chairperson; investment overview/summary; details of the offer; industry overview; company overview; board, management and corporate governance; financial information; auditor’s and/or accountant’s report; risk factors; statutory information; and glossary

MARKETING MATERIALS Once the Offer Document has been registered more widespread and detailed marketing is permitted. As a result, the marketing campaign commences in full after registration. In smaller IPOs, this might be limited to investor road-shows, brokers contacting clients directly and other limited marketing. In large IPOs it can also extend to television and radio commercials, newspaper advertisements and brochures. There are some specific content requirements and restrictions for advertisements. The form and content of advertisements should be subject to scrutiny by the due diligence committee and the company’s lawyers.

DUE DILIGENCE WHY IS DUE DILIGENCE NECESSARY? Under New Zealand’s securities laws there can be severe consequences if an Offer Document or advertisement contains false or misleading statements or otherwise fails to comply with the applicable laws. The company, promoters, their directors and the principal officers of the company may be liable. Criminal charges are possible in serious cases. It is important that each of the potentially liable parties is involved in the process of making enquiries – that is, conducting due diligence.

Defences A director will not be liable under the civil and criminal liability provisions of the Securities Act for an untrue statement if he or she had reasonable grounds to believe, and did believe, that the statement was true at the relevant time. A strong due diligence process should assist the directors of the company to show that they had reasonable grounds to believe, and did believe, that all statements in the Offer Document were true up to the time of registration or distribution of the Offer Document.

THE DUE DILIGENCE SYSTEM Due diligence committee The company would typically establish a due diligence committee to oversee the due diligence process. This committee would meet regularly to discuss the proposed investment information, business risks and financial statements in the Offer Document and ultimately report to the board on its findings. An example of the composition of a typical due diligence committee might be: two or more directors; and members of senior management; with participation of the following (either as members of the committee or as observers): the company’s lawyers; the company’s financial adviser and/or underwriter; the company’s auditor; and other experts or external advisers.

Directors’ participation The directors should participate in the due diligence process in two ways. Firstly, they should review all key documents and receive reports from, and have meetings with, the due diligence committee. Secondly, they should take steps individually to satisfy themselves that: the due diligence process is adequate; the Offer Document does not contain any untrue statements;

all material issues that they have raised during their interactions with the due diligence committee have been appropriately disclosed in the Offer Document or otherwise resolved; and the experts, external advisers and management specialists relied on for the preparation of the Offer Document are appropriately qualified, experienced and competent.

Planning Memorandum The company’s lawyers will generally prepare a ‘Due Diligence Planning Memorandum’ which will set out, among other things: the content requirements for the Offer Document; materiality guidelines; the composition of the due diligence committee; procedures for meetings of the due diligence committee; the work programme; a summary of the approach to verification; and a description of the relevant securities laws and areas of potential liability.

Preparation of Offer Document The Offer Document will be prepared in tandem with the due diligence process. There will be a process of preparing revised drafts to incorporate amendments to reflect the findings of investigations of the due diligence committee and directors.

Due Diligence Committee Report The culmination of the due diligence committee’s work is usually a report to the company’s board that is issued immediately before the Offer Document is finalised and registered. That report usually confirms that the members of the due diligence committee are not aware of any matter which causes them to believe that: the Offer Document contains a statement that is false, misleading or deceptive; there is a material omission from the Offer Document; or the Offer Document is misleading or deceptive, or likely to mislead or deceive. Appended to the report from the due diligence committee will be a series of expert and external adviser reports and sign offs, as well as copies of the verification notes and minutes of due diligence committee meetings.

Approving the Offer Document Having received the report from the due diligence committee, the board should formally approve the making of the offer, the publication and registration of the Offer Document and all ancillary steps.

Continued due diligence The Offer Document must be accurate and not false or misleading up to the time the offer closes and shares are allotted. As such, the due diligence process continues until the IPO closes. If the process

uncovers material new information after the Offer Document has been published, but before the IPO closes, the company may need to amend the Offer Document.

PRICING The price of the company’s securities offered in an IPO is inherently linked to the perceived value of its business. Valuing an otherwise privately held company is often a complicated and, at times, subjective exercise. As a result, the pricing of an IPO is one of the last steps in the process. The IPO price is generally agreed between the board of the company and the company’s underwriter/financial adviser. Early in the IPO planning process the company and its financial advisers will discuss valuation methodology and potential price ranges for the IPO. There are many different ways to value a company and ultimately it is the approach adopted by or acceptable to the market that will be determinative.

Pricing methods There are a range of different methods of pricing an IPO, the most common being a fixed price, a price set through a book build process or a combination of the two. Fixed price This is the most common approach adopted in New Zealand, particularly for offers to retail investors. In a fixed price offer the price for subscribing for shares in the IPO is specified in the Offer Document. In setting that price the financial advisers/organising participant may have undertaken confidential soundings with institutional investors. Book-building during offer A book-build involves institutional investors providing bids at the opening of the offer setting out the number of shares they are willing to subscribe for and the price they are willing to pay. At the end of the offer period the company and financial adviser will discuss the levels of demand at different price levels and set the price at a level which will see successful take up of the available shares.

Incentives for retail investors New Zealand does not have as large an institutional investor base as a number of offshore markets. As a result it is often important to the success of an IPO that there is strong demand from retail investors. On occasion, incentives may be provided to encourage retail participation such as: a discount to the issue price for retail investors; a loyalty discount scheme – where retail investors receive a discount on products and services of the company so long as they are a shareholder; and payment by instalments – where retail investors pay a portion of the issue price up front (eg, 50 per cent) with the balance payable after a fixed period (eg, a year).

DEALING WITH REGULATORS There are two key regulators that a company and its advisers will interact with in preparing for its IPO, the Financial Markets Authority and NZX. Also, the consent of the Overseas Investment Office may be required.

FINANCIAL MARKETS AUTHORITY (FMA) The FMA is the principal securities regulator in New Zealand. The FMA has been established recently (May 2011) and has taken over from its predecessor, the Securities Commission (see section 13 for further discussion). In the lead up to launching an IPO, the company (usually through its lawyers) may have to apply to the FMA for waivers from specific requirements of New Zealand’s securities laws which the company may be unable to comply with.

NZX The company will need to communicate regularly with NZX during the IPO process to make sure that NZX is aware of the progress of the IPO and to ensure that NZX is able to work within the company’s transaction timetable. The company will need to provide the NZX with drafts of a range of documents, including: the Offer Document; any proposed advertisements in relation to the IPO; and the company’s proposed constitution. Where the company will be unable to comply with any of the listing rules, NZX may be prepared to grant a waiver. Once all documentation relevant to the IPO is complete, the company submits its listing application to NZX.

Overseas Investment Office (OIO) In some cases approvals may need to be obtained under the Overseas Investment Act and Regulations. For example, if the company will be more than 25 per cent overseas owned at the conclusion of the offer and will use the offer proceeds to acquire assets, overseas investment approvals may be necessary. If the assets being acquired include sensitive land, the application will need to contain comprehensive information about the land and will take time to prepare and be considered by the OIO. Sensitive land applications require Ministerial approvals. It is therefore important to identify early in the process whether any overseas investment approvals are required and then prepare and lodge the application promptly.

Overseas approvals If the company owns (or will acquire) assets or businesses in overseas companies it is important to determine early in the process whether any overseas regulatory approvals or filings are required (for example FIRB in Australia).

OFFER PERIOD New Zealand has recently adopted an Offer Document consideration period process, which is based on the Australian ‘exposure period’ model.

Registration and consideration period Once the Offer Document is finalised, it is registered with the New Zealand Companies Office (in its capacity as the Registrar of Financial Service Providers). After registration, the Offer Document is subject to a ‘consideration period’ of five working days. During this time the FMA may review the Offer Document for compliance with the relevant securities laws. The company cannot accept any applications or subscriptions or allot any of the securities offered under the Offer Document during that period (which may be extended to up to ten working days by the FMA). The company is not prevented from conducting an investor road-show or other marketing activities during the consideration period.

Post-consideration period The company does not need to receive any positive confirmation from the FMA that the FMA has completed its review. Once the consideration period has expired the company may receive subscriptions and allot securities. Even if the consideration period has expired, the FMA can raise issues relating to a company’s Offer Document if the FMA becomes aware of any non-compliance or material inadequacy. If these issues are not resolved, the FMA may prohibit the allotment of securities under the Offer Document for up to 18 months and/or cancel the registration of the Offer Document.

Publication of registration Within five working days of registering the Offer Document, the company must ensure that an internet site maintained by or on behalf of the company contains a statement, or a link to a statement, that the Offer Document has been registered and describing where a copy of the Offer Document can be obtained.

Offer period The length of the offer period will generally depend on the size of the offer and how it has been structured (eg, an institutional offer followed by a retail offer). Often the offer period will be around three or four weeks if the offer is focused on retail investor demand. As the consideration period procedure has been adopted very recently in New Zealand, it is unclear how it will impact the length of offer periods. Practice in New Zealand is likely to align with the Australian approach which involves the offer period starting when the consideration period ends.

AFTER THE IPO There are a number of advantages to being a publicly listed company, including improved ability to raise capital and a greater ability to offer shares to employees as part of their remuneration. However, a consequence of being a public listed company is that a number of additional laws and regulations will apply, including those set out below.

CONTINUOUS DISCLOSURE Once listed, the company is subject to the continuous disclosure rules set out in the NZSX listing rules. The company must immediately disclose all information likely to have a material effect on the price or value of its shares. A company will need to have in place appropriate reporting procedures and compliance systems to ensure that material developments are monitored, reported and disclosed promptly.

OTHER NZSX LISTING RULES After an IPO a company will be subject to other ongoing obligations and requirements set out in the NZSX listing rules including rules relating to share issues, major transactions, transactions with related parties, corporate governance principles and the appointment and remuneration of directors.

INSIDER TRADING After an IPO the company and investors will be subject to New Zealand’s laws relating to insider trading. The insider trading laws prohibit trading in shares or advising about trading or holding shares by persons who hold material information relating to the company that is not generally available to the market.

TAKEOVERS CODE After an IPO the company and investors will be subject to the rules relating to takeovers set out in the Takeovers Code. Under the Takeovers Code, a person must not acquire more than 20 per cent of the voting rights, or increase an existing holding of 20 per cent or more of the voting rights, in a listed New Zealand company except through one of the permitted exceptions (eg, by making a partial or full takeover offer or making a permitted creeping acquisition).

INCREASED FINANCIAL REPORTING Listed companies are subject to heightened financial reporting obligations. A listed company must deliver to NZX and make available to its shareholders half yearly reports and annual reports as well as make preliminary announcements about financial results. The listing rules prescribe certain information to be included, and matters to be addressed in those reports. The financial statements in the annual report must also be filed with the Registrar of Companies in accordance with the Financial Reporting Act.

ANALYSTS After a company’s IPO, financial analysts may monitor the company. Analysts may prepare reports on the company, which often include the analyst’s view on the company’s share price. Companies will often set up procedures for monitoring analyst’s reports and liaising with analysts.

INVESTOR ENQUIRIES The company will need to establish procedures to deal with enquiries from investors. These are often handled through the share registrar. Any such procedures will need to take into account the restrictions on disclosure of inside information (referred to above).

The company will also need to bear the cost of maintaining the share register and reporting to and dealing with shareholders.

SECURITIES LAW REFORM At the date of this publication (June 2011) New Zealand is part-way through a series of significant reforms to its securities laws. The FMA was established in May 2011 as the new regulator of financial markets and has taken over from the Securities Commission with new and enhanced powers. New procedures have been adopted recently such as the consideration period referred to in section 11. Further change is scheduled over the next few years. The laws governing securities offerings (including IPOs) are likely to be replaced, as will laws governing secondary trading (for example insider trading). Amongst other things, the prospectus and investment statement is likely to be replaced with a single document called a ‘Product Disclosure Statement ’.

TRANS-TASMAN MUTUAL RECOGNITION PURPOSE OF MUTUAL RECOGNITION Australia and New Zealand have established a mutual recognition scheme which allows companies to offer securities in Australia and New Zealand using a single disclosure document prepared under the laws of the company’s home country. The aim of the scheme is to remove unnecessary regulatory barriers to trans-Tasman securities offerings and reduce the costs associated with capital raisings in both Australia and New Zealand.

REQUIREMENTS A New Zealand company doing an IPO should be able to extend the offering into Australia relatively simply, assuming that it is complying with all relevant New Zealand laws. Importantly, the company must, no later than 14 days before the offer is first made: lodge a written notice with New Zealand Companies Office of its intention to make an offer into Australia; and lodge a written notice with the Australian Securities & Investments Commission together with a range of documents including the Offer Document and the details of any exemptions from New Zealand’s securities laws that apply to the IPO. The Offer Document must be accompanied by a prescribed warning statement that the offer is regulated under New Zealand’s securities laws and that Australian law does not apply to the offer, along with prescribed warnings about tax differences and currency risks. While the offer is open, the New Zealand company will need to comply with certain limited restrictions, including ensuring that the offer remains open in New Zealand for so long as it is also open in Australia.

INDICATIVE IPO TIMETABLE Set out below is an indicative timetable of key milestones for an IPO. These actions and dates are indicative only and may vary depending on the circumstances applicable to the IPO.

Weeks 1-2 Appoint Organising Participant and IPO team Prepare IPO and listing timetable Finalise offer structure Appoint due diligence committee Prepare initial draft due diligence planning memorandum Identify whether OIO approval (or any overseas regulatory approvals or filings) are required Identify any necessary Securities Act and NZX waivers Commence preparation of prospective financial information Commence due diligence process Commence drafting of Offer Document Provide advice to the board of the company on securities law regime and liabilities Weeks 3-5 Circulate first draft of Offer Document Prepare final draft due diligence planning memorandum Prepare drafts of other transaction documents (such as the proposed constitution) Continue due diligence process Submit any necessary applications for Securities Act exemptions and NZX waivers Finalise and submit OIO application if required (and any overseas regulatory approval applications or filings)

Weeks 6-10 Complete drafting of final Offer Document Complete initial due diligence process and the due diligence report Review and adjust the company’s corporate structure and processes to ensure compliance with NZSX Listing Rules and relevant legislation Obtain any necessary Securities Act exemptions and NZX waivers Conduct any necessary corporate restructuring of the company or its contracts Week 11 Submit Offer Document to NZX for review Weeks 12-13 Respond to NZX review of Offer Document Weeks 14-16 Obtain OIO consent (if applicable) Submit Listing application to NZX Due diligence committee approves final Offer Document Company's board approves and signs Offer Document Register Offer Document with Registrar of Financial Service Providers Printing of Offer Document Week 17

Offer opens

Week 20

Offer closes ‘Bring-down’ due diligence sign-off Allotment of shares Trading on NZSX commences