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Cornerstone Investments in Ipos the New Normal for European Markets?

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Cornerstone Investments in Ipos the New Normal for European Markets? CORNERSTONE INVESTMENTS IN IPOS THE NEW NORMAL FOR EUROPEAN MARKETS? Ross McNaughton and James Cole of Paul Hastings (Europe) LLP and David Gossen of Deutsche Bank AG, London branch examine the key features and development of cornerstone investments in the European IPO markets. Cornerstone investments, where one or more characteristics with their counterparts in the use of cornerstone investments in Europe, investors agree in advance to subscribe for Hong Kong. For example, they: examines the law and regulation governing a certain number of shares in a forthcoming these investments, and highlights prevailing initial public offering (IPO), are a relatively • Typically included a lock-up period that market trends and developments regarding new feature of the European IPO markets. restricted a cornerstone investor from their typical commercial terms. They were fi rst seen in Europe around 2011, selling its shares for a particular length most notably in the Glencore IPO and have of time after the offering. MARKET DEVELOPMENT since become an increasingly common feature of European IPOs. • Were disclosed in the prospectus. Cornerstone investments have been a prominent feature of equity capital markets While cornerstone investments are relatively • Were always made at the IPO price. in Asia, and particularly Hong Kong, for new in Europe, they have been prevalent in several years. Historically, they were used Hong Kong for some time. The Hong Kong • Did not come with any board member by investors to secure their share allocations Stock Exchange (HKSE), unlike European nomination rights. in particularly “hot” deals. They were also regulators, directly regulates cornerstone and used for marketing purposes to seek to give other pre-IPO investments, and has issued The absence of specifi c regulation of European a positive perception to offerings, particularly guidance on the specifi c features for pre-IPO cornerstone investments has provided greater among retail investors. However, this practice investments, including regulation of their key fl exibility for their commercial terms. drew criticism from various commentators commercial terms, such as lock-up periods, who questioned the fairness of selected disclosure, price and board nominations. This article analyses the development of investors receiving a guaranteed allocation cornerstone investments and compares and in shares that later soared in value, while In Europe, the fi rst examples of cornerstone contrasts them to other forms of pre-IPO and other investors missed out or were subject investments shared similar features and concurrent IPO investments. It also considers to their orders being scaled back. This practicallaw.com / September 2015 / PLC Magazine 39 © 2015 Thomson Reuters (Professional) UK Limited. This article first appeared in the September 2015 issue of PLC Magazine. Cornerstone timeline • Wall Receive Submit draft crossing draft cornerstone • Sign cornerstone Moral prospectus non-disclosure investment commitment agreement language to agreement from investors regulator • Receive Confirm Receive Receive watermarked price fact pack draft draft and sign (presentation prospectus prospectus cornerstone Price and financials) extracts • Comment on cornerstone investment range investment agreement set agreement Final Management Valuation valuation meetings discussions discussions • Bookbuild Pre-IPO preparations Pre-deal investor education • Roadshow • Make intention to float • Publish Pricing announcement prospectus • Distribute draft prospectus • Books open criticism led to the HKSE Listing Committee In contrast with Asia, cornerstone fi xed monetary amount of shares in an introducing specifi c rules governing certain investments in Europe are relatively new, IPO. This agreement is usually defi nitively features of pre-IPO investments in the form of and are not subject to specifi c regulation. committed to shortly before the IPO price interim guidance in October 2010, which was During the relatively quiet new issuance range is announced and the prospectus is supplemented by further guidance in October market in the period following the fi nancial published (see box “Cornerstone timeline”). 2012 and February 2013 (the HKSE rules) crisis of 2008, market participants in The price at which a cornerstone investor (www.hkex.com.hk/eng/rulesreg/listrules/ Europe considered ways that cornerstone will invest is usually at, or determined by listguid/iporq/guidance1.htm). investments could be used to enhance reference to, the IPO price. There is typically deal certainty in the uncertain markets a lock-up period preventing the investor from The HKSE rules derive from the HKSE’s that were prevalent at the time. However, selling its shares for a set period following underlying principle of fair and equal it was not until the Glencore IPO of 2011, the IPO, and the principal commercial terms treatment of all shareholders in an IPO. which involved both a London and Hong of the cornerstone investment are generally Among other things, the HKSE rules require Kong listing, that a European IPO featured disclosed in the prospectus (see “Lock-ups” that: cornerstone investors. Since then, there and “Disclosure” below). have been several European IPOs featuring • Any placing to cornerstone investors cornerstones, including the recent examples Importantly from an investor’s perspective, must be made at the IPO price. of: NN Group NV in the Netherlands in 2014; a cornerstone investment brings with it a Rocket Internet AG in Germany in 2014; guaranteed allocation of shares; that is, the • Placings to cornerstone investors should Zalando SE in Germany in 2014; Euronext investor’s order will not be subject to scaling- be subject to a lock-up period of at least NV in the Netherlands in 2014; Lifco AB in back, as might otherwise be the case in the six months following the listing date. Sweden in 2014; Dustin Group AB in Sweden context of a successful IPO bookbuilding in 2015; Eltel AB in Sweden in 2015; and process (see box “Bookbuilding”). • Cornerstone investors should not have Integrated Diagnostics Holdings Plc in the right to nominate directors following London in 2015. From an issuer’s perspective, having one or the listing. several cornerstone investors can increase KEY FEATURES deal execution certainty by pre-selling a • Details of the cornerstone investment, portion of the shares to be sold in the IPO including the identity and background A cornerstone investment is an agreement and reducing the amount of shares required of the investors, must be disclosed in the by an investor, usually a large institutional to be sold in the bookbuilding process. It listing document. or sovereign investor, to subscribe for a also has the added benefit of driving 40 PLC Magazine / September 2015 / practicallaw.com © 2015 Thomson Reuters (Professional) UK Limited. This article first appeared in the September 2015 issue of PLC Magazine. FEATURE of documentary and management due Bookbuilding diligence. While cornerstone investors can obtain information in advance, usually in the In a bookbuilding structure, the lead bank markets the securities without naming form of a near-fi nal draft prospectus, as a the exact price and before the prospectus is fi nalised. The banks “build a book” general rule it is important that cornerstone by obtaining non-binding expressions of interest from potential investors in which investors do not receive any material they indicate the likely level and price at which they would participate. At the end information that is not ultimately included of this bookbuilding period, the price is fi xed, the prospectus is fi nalised, the shares in the prospectus, as they will not want to are allotted and dealings in the shares commence. An important feature of the run the risk of becoming an insider, and more bookbuilding structure is the ability to create price tension between investors, with importantly from the issuer’s perspective, all investors competing against each other in a single offer. the prospectus must include all material information for an investment decision in the IPO. marketing momentum by providing a level • Do not come with a lock-up. of endorsement for the IPO, particularly if For this reason, the investment decision a well-known investor publicly attaches its • Do not generally require disclosure in for the cornerstone investor is generally name to the deal. This can be of particular the prospectus. predicated on receipt of the fi nal prospectus, importance in certain geographic sectors, for and a marked version of the prospectus is example, emerging markets issuers, or for • Do not come with a guaranteed often provided to the cornerstone investor to certain industry sectors such as healthcare, allocation. highlight any changes against the draft of the and real estate investment trusts. prospectus, or sections of the prospectus, that • May be subject to scaling back in the it reviewed as part of its due diligence. This A cornerstone investment can be compared bookbuilding process. creates a timing tension, as the cornerstone to, and contrasted against, pre-IPO strategic investor must be committed in principle investments and anchor investments (see MAKING A CORNERSTONE ideally well before the launch of the IPO and, box “The IPO timeline: investment options”). INVESTMENT accordingly, the key disclosure sections of the prospectus should be substantially complete Pre-IPO strategic investments In Europe, a traditional IPO timeline typically before they are shared with the cornerstone Pre-IPO
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