There has been a fair amount of talk in the news recently about the potential IPO of Arm Ltd, the Cambridge based licensor of semi-conductor technology for smart devices. Arm was previously listed on the London Stock Exchange before being acquired and taken private by Softbank, the Japanese based holding company, for a whopping $32 billion in 2016.
Investors are ready to exit Arm (the "Company") and following an aborted sale, due to regulatory issues, of Arm to US chipmaker NVIDA, the Company has since indicated an intention to float on the stock market in 2023. The question is, on which market?
Listing on the NASDAQ would be the obvious choice for a tech giant like Arm, but there is speculation that there may be scope for a dual-listing, perhaps in London, owing to Arm's British roots.
Whatever the outcome, a big new tech IPO would be a welcome vote of confidence for public markets that have seen a difficult period over the past year. Furthermore, the possibility of a dual listing raises interesting questions about what exactly a dual listing entails, the commercial rationale and potential drawbacks to consider.
What is a dual listing?
A dual listing, otherwise known as a secondary listing or cross listing, is where a company's shares trade on two or more stock exchanges, typically having a primary listing (usually the company's home exchange) and a secondary listing (a foreign exchange).
Why seek a dual listing?
There are various commercial reasons for seeking a dual listing but broadly they can be bucketed into (i) improving liquidity of the share, (ii) enhancing company profile and (iii) accessing new pools of capital.
Liquidity
A secondary trading venue means access to more traders which should translate into improved liquidity, depending of course on the popularity of the share. Improved liquidity should then translate into better pricing of the share which is good for trading and future exit opportunities. In addition, a secondary listing in a different time zone effectively allows the share to be traded after hours in the company's home country, further boosting liquidity.
Enhanced company profile
Having a presence on a foreign exchange will expand the brand and hopefully enhance the corporate status of the company. It could also go a long way into leveraging new strategic partners, contracts and, of course, investors.
Access to capital
Perhaps the most obvious advantage is gaining access to new pools of capital and growing the company’s investor base which it can do through offering new shares into the market. However, where a company seeks a direct listing or introduction, namely it seeks to list its shares on a secondary exchange without simultaneously offering new shares to the public, then of course there is no immediate access to capital albeit a share offer may be implemented at a later stage.
How does it work?
A dual listing involves a local company either listing its shares or listing depositary receipts on an overseas exchange, whilst retaining a primary listing on its home exchange.
Depositary receipts are certificates that represent ownership of a local company's shares and which certificates are traded on an overseas exchange. This provides a market for overseas investors to trade a local share without the legal or tax complexities and ancillary costs associated with an overseas investor owing and trading the share itself. In the US, depositary receipts are referred to as American depositary receipts ("ADRs") and elsewhere they are referred to as global depositary receipts ("GDRs").
In terms of how depositary receipts are set up, a foreign bank will purchase shares of a local company. The shares are registered in the banks name and held by a neutral custodian. The bank then issues depositary receipts available to overseas investors which are traded on an overseas exchange and which provide the holders of the depositary receipt with certain rights associated with the actual share. In this way a market between local companies and overseas investors is created with less administrative hassle than would be the case were they trading in the shares themselves.
Quasi-merger
The common meaning of "dual listing" discussed so far should be contrasted with the more niche concept of a Dual-Listed Company structure (a "DLC") which refers to something else. A DLC involves two companies each incorporated and listed in separate countries that decide to combine their cashflows, business operations and dividend streams by way of agreement. The effect is ultimately a quasi-merger between two companies whilst maintaining separate legal identities. These are much less common and are seen as an alternative to a conventional merger but with certain tax advantages. The most often cited example is the DLC structure of Rio Tinto PLC and Rio Tinto Limited which trades in Australia and the UK. This structure is to be distinguished from the "dual listing" referred to elsewhere in this blog.
Where: UK markets
Foreign companies interested in a secondary listing in London currently have the option of the Main Market, AIM or the Aquis Exchange, each with their own rules and admission requirements.
The Main Market's premium segment has enhanced listing requirements aimed at protecting investors as well as providing companies with the opportunity of being quoted on the FTSE indices, whereas the standard segment has less stringent rules in line with EU minimum listing standards. The standard segment also allows for listing depositary receipts (unlike the premium segment, with the exception of sovereign owned commercial companies), which may be a particular drawing card for overseas companies looking for a Main Market listing.
In terms of junior markets, a particular benefit in the UK is the streamlined fast-track process available on AIM and the Aquis Growth Market for companies already listed on foreign recognised exchanges. The fast track process allows for reduced disclosure requirements on the basis that certain information is already in the public domain.
The UK listing regime has undergone some changes recently, with some proposals still in review (for example, creating a single segment for the Main Market), ultimately with the intention of making the UK a more attractive listing venue. Already London is home to a large contingent of foreign companies and hopefully appetite for secondary listings and, even better, primary listings, will increase in the future.
Other considerations
Although there are some exciting advantages to a secondary listing, there are also some less exciting considerations to take into account. These include costs of third party advisers, such as foreign counsel, financial advisers and exchange costs, among others.
There may also be additional liability imposed on the issuer and its directors which must be considered as well more time and effort required by management to maintain good corporate governance.
Administrative considerations such as cross border company announcements and liaising between jurisdictions in order to maintain equality of treatment of shareholders is another additional factor that needs to be accounted for.
Ultimately the pro's and con's of a dual listing need to be weighed in the balance before embarking on such a project but hopefully rules on dual listings will progress in a way that encourages international fundraisings into the future.
Disclaimer: the Information contained in this publication should not to be construed as legal advice. For further information on the matters herein discussed, please contact Scott Mclean or a member of the Capital Markets team at HK.
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