Legal Trends and Issues in Russian IPOs

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Legal Trends and IssuesinRussian IPOs

• 5th Annual USRCCNE Russian Financial Markets
  Conference

3 May 2007
Mark Banovich Partner
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Overview

• The Disappearing QIB Tranche (Or, How Do I Get a
  Piece of the Action?)
• The Challenge of AIM IPOs by Russian Issuers
• Facilitating Russian Access to AIM
• Depositary Interests
• Russian Depositary Receipts
• Investing in Russian domestic IPOs
• Open subscription structures
• Listing developments
• Some things to keep in mind

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The Disappearing QIB Tranche

• How do I get a piece of the action?
• The deals are generally Regulation S Category 1,
  so
• US persons can still submit buy orders offshore
• On LSE
• On AIM
• Directly in the Russian market on RTS, MICEX or
  another Russian exchange
• Since the Russian regulator is increasingly
  restricting the total percentage of share capital
  and the total percentage of an offering that can
  be placed abroad, its time to become familiar
  with the new products that will facilitate
  Russian offerings in the near future, as well as
  with the Russian on-shore rules

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The Challenge of AIM IPOs by Russian Issuers

• AIM is a natural market for Russian mid-caps
• Small to mid-sized development stage issuers
• Receptivity by investors, particularly to
  emerging markets issuers and oil gas
  exploration and development companies
• Russian shares cannot be admitted directly to AIM
• Shares listed in the UK must be traded
  electronically through the UK electronic
  settlement system (CREST)
• Shares of companies incorporated in the UK,
  Ireland, the Isle of Man or the Channel Islands
  can be admitted to CREST
• Shares of companies in other jurisdictions, such
  as Russia, cannot be admitted to CREST directly

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The Challenge of AIM IPOs by Russian Issuers
(cont.)

• CREST settlement for companies incorporated
  outside the UK, Ireland, Isle of Man or the
  Channel Islands
• Issue Depositary Interests
• A depositary incorporated in the UK, Ireland, the
  Isle of Man or the Channel Islands can issue
  depositary interests in respect of the shares of
  an issuer
• The depositary interest mirrors the underlying
  shares for the purposes of UK trades, and passes
  through the terms and conditions of the
  underlying shares to investors
• Depositaries have not previously offered this
  product to Russian issuers due to concerns over
  the settlement cycle for the underlying shares in
  the Russian share register

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The Challenge of AIM IPOs by Russian Issuers
(cont.)

• Form an offshore holding company in the UK,
  Ireland, Isle of Man or the Channel Islands and
  gain direct admission to AIM
• Examples include a Jersey holding company
  established to hold Russian media operating
  companies, and a Guernsey holding company
  established to hold Russian property assets
• FSFM is expanding its focus from the LSE main
  market GDR deals like Pyaterochka and Integra to
  AIM deals involving structures like this
• The challenge is to structure the financial
  instruments that will permit Russian companies to
  raise capital on AIM without falling afoul of
  FSFM policy objectives

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Facilitating Russian Access to AIM Depositary
Interests

• Making Depositary Interests a Reality
• Computershare acquires control of a Russian
  registrar, National Registry Company, to manage
  settlement risk
• Computershare has standard form documentation and
  is confirming regulatory treatment with FSFM and
  CREST
• Regulatory positives
• Access to AIM by Russian issuers (no offshore
  holding company), which would facilitate
  regulatory oversight by FSFM
• Depositary interests can trade through CREST with
  the ISIN of the Russian shares, which should
  enhance transparency and the international
  recognition of Russian shares
• Issuer (not the investor) pays fees of the
  Depositary, facilitating cancellations of
  depositary interests trading on UK markets for
  shares to trade on Russian stock exchanges, which
  may enhance fungibility and support liquidity on
  Russian stock exchanges

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Facilitating Russian Access to AIM DIs (cont.)

• Structuring Consideration
• At least initially, the product is not expected
  to be set up to permit a primary offering of
  newly issued Russian shares in the form of
  depositary interests where a placement report
  relating to the shares must be registered by FSFM
  after closing
• Nevertheless, depositary interests could be used
  for a capital raising offering where a core
  shareholder offers secondary shares in the
  offering and uses the proceeds to subscribe for
  and purchase newly issued shares from the company
• Other depositaries may follow, but those
  unwilling to acquire a Russian share registrar
  may have to wait until the establishment of a
  central Russian securities depository
• Bottom Line Russian shares may soon trade on
  AIM in the form of depositary interests

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Facilitating Russian Access to AIM - RDRs

• Harmonizing the offshore holding company
  structure with FSFM regulatory objectives
• Foreign securities de facto cannot be publicly
  traded or listed in Russia
• RDRs are Russian securities issued by a
  depositary that is a Russian legal entity. By
  depositing foreign securities with the Russian
  depositary against the issuance of RDRs, a
  foreign issuer would be able to offer and list,
  and its shareholders can hold and trade, a
  Russian security representing such foreign
  securities.
• The RDRs can then be listed on Russian stock
  exchanges
• Accordingly, an offshore holding company listed
  on an international stock exchange should be able
  to use this product to return liquidity to the
  Russian market

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Facilitating Russian Access to AIM RDRs (cont.)

• Regulatory regime for RDRs is being implemented
• Enabling legislation took effect January 2007
• Forthcoming FSFM regulations will have to flesh
  out certain details in a manner that promotes
  commercial viability of the product
• In any Russian law prospectus relating to RDRs,
  the RDR issuer will have to disclose information
  about itself as well as about the foreign issuer
  and the underlying securities. Depending on the
  scope of such information, which is to be
  determined in the forthcoming regulations,
  Russian depositaries may feel the need to seek
  reimbursement and/or indemnification from the
  foreign issuer for preparing such disclosure.
• Because Russian law generally does not recognize
  a distinction between legal and beneficial
  ownership, RDR depositaries face an accounting
  issue of how to record the beneficial rights of
  RDR holders to the underlying securities
  separately from the RDR depositarys rights
  therein.
• It remains to be seen whether RDRs will
  facilitate the creation of offshore holding
  companies for future direct listings on AIM (and
  other markets), or will merely enable companies
  already listed abroad to cure their current
  lack of a Russian listing

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Investing in Russian Domestic IPOs

• Open Subscription Structures

• Pre-emptive rights 20 day exercise period, and
  offer price for both rights holders and the
  public is set after bookbuilding
• Allocation Other than shares purchased upon
  exercise of pre-emptive rights, shares may be
  allocated in the discretion of the issuer to
  members of the public offering to subscribe
• Placement report Notice filing permitted if the
  shares were placed in an open subscription,
  through a Russian broker and listed on a Russian
  stock exchange
• What does this mean in practice?

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Investing in Russian Domestic IPOs

• Example OGK-5

• Best efforts underwriting of new shares though
  open subscription under Russian law
• Timeline
• State registration of new share issuance
• 20 day pre-emptive rights exercise period
• Roadshow and bookbuilding based on submission of
  bids by investors to the Managers
• Managers recommend share price to the Company
  based on bookbuilding results
• Offer price set by the Companys board of
  directors in consultation with the Managers
• Commencement of open subscription period
• Binding bids are accepted by a Russian broker on
  a first-come-first-served basis
• Any investor may bid, but in practice the
  Managers show up first and submit binding bids
  for shares based on the bids received during
  bookbuilding
• Notification of results of the issuance signed by
  the Company and the Russian broker is filed with
  FSFM, with shares becoming transferable on the
  next succeeding business day
• Suitable for placing to portfolio investors not
  as well-suited to strategic investor participation

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Investing in Russian Domestic IPOs

• Example OGK-3

• Open auction placing of new shares though open
  subscription under Russian law
• Timeline
• State registration of new share issuance
• 20 day pre-emptive rights exercise period
• Investors submit binding bids to a Russian broker
  acting on behalf of the issuer, stating (i)
  the exact/maximum/minimum number of shares and
  (ii) the maximum price per share at which they
  are willing to buy the indicated amount of shares
• Information on the bids, including terms such as
  the proposed price per share, is disclosed on the
  Company's website on a daily basis
• Offer price set by the Companys board of
  directors after review of all bids
• Company accepts bids in its sole discretion.
• Approximately 47 stake acquired by an affiliate
  of Norilsk Nickel
• Notification of the results of the issuance filed
  with the FSFM
• Suitable for dual track strategic sale process
  and placing to portfolio investors

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Investing in Russian Domestic IPOs

• Example TGK-X

• Fixed price placement of new shares though open
  subscription under Russian law
• Timeline
• Strategic investor negotiations commence
• State registration of new share issuance
• 20 day pre-emptive rights exercise period
• Strategic investors submit non-binding
  expressions of interest
• Portfolio investor roadshow may be used to obtain
  non-binding expressions of interest
• Share price set by the Companys board of
  directors in consultation with the Managers
• Holders exercising pre-emptive rights must pay
  for their shares
• Any investors may submit bids for up to 100 of
  all remaining shares
• Company accepts one or more bids in its sole
  discretion
• Investor pays, and Company issues shares
• Placement Report approved by board and filed with
  FSFM within 30 days after closing
• Shares are not transferable until Placement
  Report is registered with FSFM
• If FSFM does not register Placement Report
  issuance is cancelled
• Portfolio investors are a stalking horse to
  discipline bidding by a preferred strategic
  investor

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Investing in Russian Domestic IPOs

• V and I Listing Eligibility Requirements

• Available for primary offerings via open
  subscription, and secondary offerings conducted
  through a Russian broker
• Available only if shares are being offered for
  the first time through a Russian stock exchange
  or broker
• Minimum corporate existence of 3 years for V
  no such requirement for I
• No losses in 2 of the last 3 years for V no
  such requirement for I
• Certain additional undertakings by the financial
  consultant in I listing
• No minimum trading volume requirement for
  admission to listing
• No unaffiliated public float requirement for
  admission to listing
• Must move up to B or A listing after six
  months of V listing, or after 5 years of I
  listing

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Investing in Russian Domestic IPOs

• Some other things to keep in mind

• Back-to-back IPO structure Some capital raising
  Russian IPOs will still be structured as a
  secondary offering by a controlling shareholder
  who agrees to use the proceeds of the offering to
  buy primary shares in a closed subscription - so
  dont just assume that an offering of secondary
  shares is a cash out without reading further into
  the offering circular
• Form of Holding Dont open an account with the
  share registrar its expensive, and in any case
  youll need a depo account at a Russian licensed
  custodian approved by the relevant exchange in
  order to be able to use its trading facilities
  (e.g., DCC for RTS, or NDC for MICEX)
• Temporary ticker symbol If you are buying
  primary shares, remember that some exchanges
  (e.g., MICEX) require newly issued shares to
  trade under a separate ticker symbol until FSFM
  consolidates the new issuance with previous
  issuances (3-5 months after closing depending on
  the open subscription structure being used)

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Legal Trends and Issues in Russian IPOs
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