Over the past three years, there has been a greater number of foreign companies (those with the majority of their operations based overseas) seeking to list on the ASX. The country of origin of these companies has varied from Israel, USA, Germany as well as the People’s Republic of China. Some of these countries have well-established economic systems, while others are from the emerging markets.
ASIC has issued reports (Report 521 and 368) on its review of emerging market issuers (EMIs). These reports have identified that EMIs exhibit certain attributes which conflict with best practises and requirements expected of an Australian listed company.
Future aspiring EMIs, should address the following challenges as part of their planned listing:
Corporate governance processes
There is an expectation from investors, regulators and other stakeholders that any aspiring ASX listed company has proper corporate governance processes and procedures to dictate how authority is exercised and controlled within the company.
The Board of Directors (the Board) plays a fundamental role as gatekeeper to ensure transparency and accountability in the major financial and business dealings of the company. This means directors are required to remain active, informed and competent in the oversight of the company. It is therefore important that the Board is comprised of appropriately qualified and skilled Board members, with relevant Australian industry-based and ASX experience. This requirement must not be underestimated as both the ASX and ASIC have placed significant focus on corporate governance processes in recent times.
A genuine business connection in Australia
Several past EMIs have had the majority of their business operations and assets based overseas. This represents a heightened business risk, given the lower level of maturity and sophistication
of the legal and business systems of EMI jurisdictions in comparison to Australia. To ensure that investors’ interests and overall market credibility are not compromised, it is critical that the aspiring EMI demonstrate a genuine business connection in and/or to Australia.
An appropriate corporate structure
A complex corporate structure designed to achieve a favourable tax outcome is strongly discouraged, while the use of the commonly known variable interest structures is now prohibited. Aspiring
companies need to ensure that the appropriate corporate structure is put in place.
An Australian-based management and reporting team
EMIs should avoid having geographically scattered Boards and operations with limited financial resources located outside of Australia. Companies are expected to have an adequately staffed
reporting function to be able to fulfil their reporting and disclosure obligations. Failure to do so may see the company breaching critical reporting requirements.
Proper due diligence process
Professional advisers (legal, financial & underwriters) play an important role in advising issuers on appropriate conduct during an IPO. Given the increased risks associated with EMIs, it is important that the Australian-based advisors provide effective oversight and apply sufficient scepticism of the due diligence work carried out by the foreign advisers.
Australian advisers (akin to playing a gatekeeper role) are expected to understand the political and cultural environment in which the issuer operates, local business practices and laws affecting the issuer and the issuer’s local expert advisers. Without this understanding, it is difficult to effectively ensure that the due diligence process identifies all material issues and prevents misleading disclosure.