In a bold initiative affecting UAE capital markets, the Securities and Commodities Authority of the UAE (SCA) recently issued a new Regulation to give private joint stock companies with two full financial years’ performance history a “fast track” to listing on the DFM and ADX, without the need to convert to a public joint stock company and undertake the IPO process.
The new Regulation opens the UAE equity market to a new range of issuers. Any UAE private joint stock company which meets the following criteria is eligible to apply for listing on DFM or ADX.
- published audited financial statements for two complete financial years;
- at least 30 shareholders; and
- shareholder equity not less than paid up capital.
A significant advantage for issuers and shareholders is that existing owners are not restricted from selling down their interest to buyers in the market. In contrast, where there is an IPO the founders cannot sell their shares for two years after listing. The new pathway may offer a faster exit for private equity firms and other shareholders choosing to sell down.
After the private joint stock company’s Board decides to list, the company must prepare a listing application to the SCA. The listing application is effectively a “short-form” prospectus, which will become a public document on listing. The application will contain details of corporate structure, equity and capital structure, a list of the board of directors and senior management, and the names of shareholders with 5% or more equity. The application must set out a summary of the significant events in the life of the company from incorporation. It must also include the company’s last two full-year financial statements together with the briefing on the businesses, investment projects, assets, subsidiaries, material contracts and current business operations. It must outline details of any litigation or claims against the company which might affect its prospects.
The new Regulation makes the issuer’s Directors liable personally for the accuracy and integrity of the information in the listing application. It is thus vital that the issuer’s Directors take proper and careful steps to verify the listing information submitted, both through financial audit and legal review.
The Regulation envisages a “fast track” process, with the SCA issuing its decision on any listing application within 30 days from a completed application being submitted.
Once the SCA approves the issuer, the listing application must be submitted to the financial market (either DFM or ADX) which will determine the pricing mechanism for listing the shares. The Regulation infers that a book building process based on market pricing might be an option, if approved by the financial market. Once the shares are listed, the Regulation imposes insider trading restrictions and, importantly, continuous disclosure requirements to notify the market of any development which might affect the company’s financial position.
The proposed new Regulation is an intriguing option for prospective issuers under current buoyant market conditions and offers an avenue for shareholder liquidity. This is particularly true of existing proprietors, who would otherwise be restricted from any sell-down in an IPO scenario for two years after listing.
From the company’s standpoint there will be access to equity capital markets and opportunity to attract a wider range of shareholders and raise further capital through rights issues. This will come at a cost, in the form of additional compliance requirements, particularly the need for continuous disclosure of developments affecting the company.
At present, most onshore companies are subject to a share requirement of 51% UAE ownership or 100% GCC ownership. However, public joint stock companies have the benefit of an exception which is permits 51% GCC ownership. It is not yet clear whether this concession will be available to private joint stock companies when they list under the new Regulation.
Issuers contemplating this path need to consider a range of questions including:
- Will there be sufficient liquidity in the issuer’s shares to maintain an attractive level of pricing in the market?
- How can issuers protect themselves against opportunistic acquisitions by hostile buyers?
These questions can be addressed effectively in the process leading up to listing with the right specialist advice.
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Insider Trading: the PrJSC members of the Board and executive management will be bound by certain insider trading rules.