Will TSX adopt these strange LSE rules?

TSX/LSE Merger Part 2

I’ve been browsing the London Stock Exchange listing rules, and have come across a couple of remarkable differences with the Toronto Stock Exchange. Given that the merger negotiations have gone on for months, it may well be that our TSX professional staff have already figured out how to dovetail the local listing and regulatory framework with the LSE’s existing rules.

If the exchanges eventually merge, one has to assume the current LSE company rules will be incredibly relevant; after all, the LSE will control the merged Board of Directors according to Boyd Erman’s piece today. Here are a few bizarre examples, taken from a 2010 LSE publication called “A guide to listing on the London Stock Exchange.”

Periodic reporting

A company will be required to publish annual and semi-annual reports including consolidated financial information for the relevant period, together with an accompanying review of the company’s business for that period, within four months and two months respectively of the end of the relevant financial period. The annual financial information must be audited. The semi-annual financial information need not be audited. As well as a report on the company’s business for the period, certain other information is required, including information on the risks and uncertainties facing the business. The reports are also required to include responsibility statements from the relevant directors of the issuer, for example the Chief Financial Officer (‘CFO’). A company is also required to publish an interim management statement twice a year, between its annual and semi-annual reports. This is not required to include any financial information but should include an update on the group’s business and financial position in the period.

You read that clearly. The LSE doesn’t require quarterly financial reports. I suppose the “good news” about this is that CFOs will not be required to run around each quarter and get the auditors comfortable on internal controls or revenue recognition; that can take place just twice a year. This semi-annual reporting cycle might be more relevant to the CEO of a software company; no more quarterly pressure to drop your margins to get sales into the boat during the final week each quarter — that has to happen just twice a year now.

I checked the website of Mysis, a UK-listed software company with a US$1.3 billion market cap. Sure enough, semi-annual financials.

IPO Analyst presentation

It is common practice for senior management to meet with the research analysts employed by the bookrunner(s) before the IPO and for such analysts to publish pre-deal research on a company before the start of the roadshow. To prepare fully for the presentation, several meetings and rehearsals with senior management are usually required. Material information must be included in the prospectus, but considerable additional information will be provided to the analysts to ensure a full understanding of a company’s business and sector.

Now, I wrote about this phenomenon back in 2007 when I was observing on the regulatory differences between Canada and the LSE’s AIM exchange. But this excerpt is from the LSE’s “Big Board”, and will strike fear into the hearts of every local Compliance Officer; currently, they don’t even let their i-bankers meet with their Research Analysts without a lawyer present. And if a Research Analyst so much as has lunch with a soon-to-be public co. CEO prior to the IPO, that Analyst won’t be allowed to cover the story once the IPO is said and done.

How will this work? Bank-owned investment dealers don’t allow their Equity Research Analysts to have an opinion on the deals they take public until well after the initial listing is done and trading has settled; sometimes for 45 or 90 days. How will that Analyst now morph from being insulated from an IPO to publishing research prior to the IPO Roadshow? Complete with a brain filed with more info than is actually being published in the IPO Prospectus?

The fact is that the Research Analyst publishes a Report, prior to the IPO, and has to choose what info she/he doesn’t or does include in the pre-offering publication. Which must increase the liability of the lead investment bank, which can only make the firm’s Compliance Department more careful about which deals they allow their firms to lead. How will that increase a Canadian company’s access to capital?

More to come.

MRM