Before the decision is made to list a company on the ASX careful consideration needs to be given to the ramifications of such a move.
Listings can allow founders to exit and entities to access fresh capital for expansion and raise their profile. These three reasons are, for many companies, the main reason why they list. However a listing brings companies a greatly increased level of exposure.
If the listing decision is not driven by founders exiting, then the founders need to assess whether they are the right temperament for controlling a listed company, which is subject to vastly different governance requirements to an unlisted company. Best practice and legal governance requirements include the need for independent directors, shareholder scrutiny of executive remuneration and an enhanced role for auditors, and founders will need to have the right personality to operate under these types of constraints.
Continuous and periodic disclosure requirements on the ASX are also detailed and are becoming increasingly onerous as the ASX responds to a number of recent disclosure related scandals. The continuous disclosure regime in place under the Corporations Act and the ASX Listing Rules requires entities to disclose any information that a reasonable person would expect to have a material effect on the price or value of an entity’s securities1. Although carve outs from the disclosure requirements exist2, they are limited, and struggling listed entities can go through an agonising disclosure process under which all their problems need to be disclosed to the market in detail.
As a result companies should also receive advice about other exit mechanisms, including trade sales, and other ways to raise money, including debt that is currently being issued by the Australian banks at historically low rates.
The sectors companies operate in can also be relevant to the decision to list. For example, profitable industrial companies can easily raise bank debt, whereas a speculative mining company usually cannot and may be forced to list to raise funds for development of resources. Companies can also attract different listing valuations depending on the sector they are in and whether that sector is the “flavour of the month” at the time. If they are flavour of the month, a listing may be a better option, although they will be required by the market to justify the valuation with performance as time effluxes.
The general state of domestic and global financial markets, and forecasts for those markets, is relevant to the decision as to whether to list. This factor affects valuations and the ability to raise capital after the company is listed. If the forecast is for turbulence ahead, a company may need to reconsider the need to list, and if it does need to list, ensure that it raises sufficient capital to see it through those turbulent times.
Finally, some exchanges are more favourable towards particular sectors and better valuations can be obtained, so sometimes the decision is not whether to list, but which exchange is the most appropriate list on. The geographical location of the company or its business is also sometimes relevant to the decision where to list. An Australian business with a large business in the United Kingdom, for example, may want to consider a primary or secondary listing on one of the UK exchanges to increase its profile in that country and to expand the pool of investors from whom it can raise funds.
An IPO is, for many companies, the biggest decision they will ever make. Companies need to receive first rate advice from trusted advisers about whether they should list, remain private or take one of the other options on hand.
A summary of the key advantages and disadvantages of a listing is set out below:
- Access to large capital markets both domestic and cross border.
- Ability to fund acquisitions via scrip
- Easier to attract institutional investors
- An exit for founders, subject to escrow restrictions
- Liquidity for shareholders
- Increased profile
- Ability to offer significant realisable employee incentives
- Impact of movements in share markets beyond the company’s control
- Requirement to continuously disclose material information, including information with negative connotations impacting on the ability to carry on business
- Subject to rigorous periodic disclosure requirements including financial reports, with information being available to competitors and paying customers
- Enhanced shareholder rights, for example the requirement to seek shareholder approval for a number of transaction types
- Increased legal, accounting and governance related costs plus listing fees
- Absorption of management time with governance related issues
- Increased exposure to claims from disgruntled shareholders, including class actions, and short sellers
1 ASX Listing Rule 3.1
2 ASX Listing Rule 3.1A lists exceptions which include where all of the following apply: the information concerns an incomplete proposal or negotiation, the information is confidential and a reasonable person would not expect the information to be disclosed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.