Italy saw a strong year of growth in IPOs in 2006, with 21 new listings on Italy’s stock exchange the Borsa Italiana. The presence of a large number of private Italian companies and the bull market in European equities were the drivers of this success.
There is growing concern, however, among practitioners and bankers that the burdensome regulatory process and peculiar stock exchange requirements imposed by Italian authorities may have inhibited other Italian companies from coming to market, or will result in Italian companies looking at alternative markets on which to seek listings.
The Italian IPO
The current listing practice for IPOs in Italy is analogous to other jurisdictions. It involves submitting a prospectus to Italian securities regulator the Commissione Nazionale per le Società e la Borsa (Consob) for its review and approval. The Italian public offering in mid to large-sized offerings represents approximately 20-25 per cent of the IPO and is marketed and sold pursuant to an Italian language prospectus that has been approved by Consob. In order to receive listing approval from the Italian stock exchange, the issuer must also submit the prospectus, together with a business plan and a ‘quotation management admission test’ (QMAT) to the Borsa.
In most mid to large-sized offerings an English language offering circular is also prepared in order to market the shares to professional and institutional investors both inside and outside Italy. These buyers represent approximately 75-80 per cent of the IPO.
Italy implemented the European Prospectus Directive in March this year, well past the 1 July 2005 deadline, and it has not yet been published in its official register of laws.
Throughout 2006, in order to address the void created by the non-implementation, Consob made piecemeal application of the Prospectus Directive through amendments to existing securities laws. It took other provisional measures, such as announcing its willingness, upon request, to accept prospectuses drafted in accordance with the Prospectus Directive and to accept prospectuses of other European Econimic Area issuers approved by the competent authority, providing they received certain requisite documentation. Consob took these measures to help issuers. However, despite these steps, market participants have expressed concern about the length of the Consob review process and the nature and detail of disclosure that is being required.
A slow process
Timing is a key consideration for issuers and underwriters in an IPO. The Prospectus Directive sets a 20-day statutory maximum for regulators to review and return a first set of comments on IPO prospectuses and a 10-day period to return comments on subsequent draft submissions. However, a 2006 survey of Italian IPOs reveals that the average time period that elapsed between the first submission of the prospectus and an issuer’s admission to listing was approximately 105 days.
While there is a wide range of factors that could influence this timing, it is generally accepted by market participants that the period for Consob approval and listing is protracted and unpredictable. As a result of delays in the review process, some issuers have had to face their financials going stale, necessitating the preparation of further financial statements and updates to the prospectus, which of course require additional review by Consob.
The Italian prospectus
Practitioners have raised a number of questions about the content of the Italian prospectus based on a few key concerns that are most evident in light of the differences between the Italian prospectus and the English language offering circular (International OC). While both disclosure documents contain substantially the same information, on most recent transactions the Italian prospectus has been significantly longer than the International OC. (In one of the final transactions of 2006, the Italian prospectus was 580 pages, while the International OC was 192.)
The length of the Italian prospectus raises important issues. The first is whether retail investors, who are sought to be protected by Consob, would read a prospectus of this size? The second is whether the information being provided is synthesised and summarised so that a reader can easily distinguish material information from non-material information? The difference in size between the Italian prospectus and the International OC is partially explainable. One reason is that the overlay of the Prospectus Directive on existing Italian securities laws requires information to be repeated at various points without resorting to cross-references to relevant disclosure elsewhere. Another reason is that in the International OC information is summarised and focus is given to information that is material to the reader. An example is Consob’s recent request for issuers to disclose each and every covenant from each of its debt documents, which was dealt with in the International OC with a summary of only the material terms of the debt.
The advent of the Prospectus Directive resulted in the reformatting of prospectuses in many European jurisdictions, or in some cases the convergence of two documents, but this has not occurred in Italy. This reluctance to change the format may be driven in part by the lack of defined regulatory parameters and in part by uncertainty by market participants and their advisers due to concerns about timing and approval to do something ‘different’ than the status quo. The comparability and coherence of the Italian prospectus and the International OC would be greatly enhanced if an effort would be made in this area.
While additional disclosure requirements in Italy may be justified by high-profile securities scandals such as Cirio and Parmalat, the focus of a prospectus should be to provide investors with additional information in a format that is comprehensible and manageable. It is not clear that this is currently occurring in the drafting of Italian prospectuses.
Listing on Italy’s stock exchange
Contemporaneous with the regulatory approval process, the Borsa Italiana conducts a review and due diligence process of its own. In addition to ensuring that all requisites of listing are met (size, float, historical financials, reporting requirements, internal code of conduct) to ensure adequate investor protection, it also sets out a couple of unique requirements that have not been adopted by other European or US exchanges. These are the requirements that an issuer prepare the business plan and the QMAT, confidential documents that typically amount to a couple of hundred pages each. The business plan sets out the company strategy and steps taken to achieve it, together with an economic model, details of assumptions used in projections and forecasts and a sensitivity analysis.
The QMAT provides a complete overview of the business of the issuer and involves furnishing information in response to a comprehensive checklist provided by the Borsa. Preparation of these documents is time-consuming and requires a great deal of a company management and resources during a period that is already burdened by the rest of the IPO process. Many market participants have questioned the value of such requirements.
The Italian IPO market has grown rapidly, but may risk stalling due to regulatory issues that place a heavy burden on issuers. A number of Italian companies have begun to analyse more regulatory-friendly listing jurisdictions or alternative markets. It is in the interest of Italian regulators to review the processes in place in order to give issuers greater predictability and flexibility in the listing process.
•Michael Immordino is a partner and Sara Pinto is an associate at Latham & Watkinscontinued