Stock exchange listing: considerations for small and medium-sized companies - International Law Office

International Law Office

Capital Markets - Malta

Stock exchange listing: considerations for small and medium-sized companies

October 12 2010

Introduction
Going public
Advantages and disadvantages
Comment


Introduction

At the end of 2009 some 48,520 companies and partnerships were registered with the Registry of Companies. The number of registered companies has been rising steadily over the past few years, by an average of 2,800 each year since 2005.

The fact that there are only 19 equities listed on the stock exchange means that there is a great disparity between the number of 'targets' and actual 'hits'. The number of companies which can be legally defined as 'public' account for only a fraction of total registrations; therefore, the main reason for the lack of listed equity is not the exchange - with its rules and disciplines - but rather the reluctance of family companies to go public. Once a company actually takes the plunge and goes public, the decision to list is almost regarded as a natural consequence.

Any discussion related to the paucity of companies listing their shares on the market must inevitably first consider the reasons why family companies show such a strong reluctance to go public.

Going public

Why would a private company want to go public? What are the advantages, as well as the disadvantages, that come with going down this path? Can it be beneficial for smaller companies to go public, or is this only territory for large, well-established firms? Small, family-run companies are such a common feature in Malta that they are considered as one of the pillars of the economy. This is not a phenomenon unique to Malta; small and medium-sized enterprises are an important feature in the gross domestic product of all EU countries. What is considered as small or medium-sized in Italy, Portugal or Spain is not necessarily the same size as a small or medium-sized company in Malta. However, the general profile is still that of a small, family-run company producing essentially for domestic consumption.

Examining the relatively small number of companies that have come to the exchange's Alternative Company List, which has been available since 2001, it is evident that such companies have been generally reluctant to consider listing as a viable solution. And yet going to the market may be the ideal vehicle for a lot of these companies, enabling them to invest, grow and compete. By going public, companies can gain enough strength to reach the size required to enable them to keep up with today's dynamic and fiercely competitive business environment.

One of the reasons for listing is the need for fresh, relatively low-cost capital. A stock exchange is essentially a marketplace where people buy and sell financial instruments such as shares and bonds. It is a regulated marketplace and all parties involved - be they the investing public, brokers or the listed companies themselves - know that they can deal with both the Listing Authority (the Malta Financial Services Authority), as well as with the stock exchange, with a high degree of confidence. This is vital for a healthy and vibrant market.

By listing on the exchange, a company acquires a much wider public exposure of its brand and operations. This could be considered as extra advertising that comes with listing and being associated with the stock exchange. Furthermore, a listed company may find it easier to obtain funding from more traditional sources due to its superior profile. This type of funding could even be obtained at a cheaper cost because of the company's higher profile as a listed company.

To be listed on the exchange, a company must meet a certain set of standards as laid out by the competent authorities, which in Malta's case is the Listing Authority at the Malta Financial Services Authority. The disciplines involved can only be perceived as positive by the company, as listing adds credibility to its business, both in the eyes of its clients and in those of possible investors. Essentially, listing creates a general feeling of confidence around the company itself and a more positive customer awareness.

Advantages and disadvantages

The high level of service provided by the stock exchange can play a critical role in providing alternative solutions for companies. The fiscal advantages enjoyed by holders of shares listed on the exchange (ie, exemptions from stamp duty and capital gains tax) can certainly lend a hand in mitigating any possible tax liabilities arising on the disposal of shares.

Another advantage tied to listing is the valuation of shares, which is constantly provided by the open market. Again, the marketability provided by listing gives shareholders which would prefer to cash in on their holdings rather than stay on in the business an easy exit route. This benefit applies especially to family-owned companies, many of which are in their third and fourth generation, with shareholders suffering a constant dilution in their holdings. Furthermore, the marketability of the shares in the secondary market makes it easier for a listed company to issue new shares in the primary market.

One of the biggest concerns for companies when considering whether to go public is the potential loss of control resulting from bringing in outside shareholders. However, this is not necessarily the case because the company can choose to sell only a percentage of the company, which, as a rule, is set at a minimum of 25%.

Other concerns which are often mentioned by companies thinking of coming to the market are the actual costs of listing and ongoing compliance. Listing costs mainly consist of:

  • sponsor and professional fees;
  • advertising and marketing expenses in connection with an offer for sale;
  • initial fees payable to the authority; and
  • annual fees payable to the exchange.

Comment

Capital markets play a vital economic role since they provide an important channel for companies to raise capital. Exchanges offer companies a possible avenue to access funds through a public listing, which is one choice among other traditional channels of financing (eg, bank loans or seeking venture capital).

The individual companies must assess the advantages and disadvantages of the different channels according to a number of different criteria. There are difficulties - not least the size and structure of the vast majority of business firms in Malta and their traditionally inward-looking culture. However, this mentality is slowly changing and during the past year an increasing number of companies have come to the market. This is good news for the companies, the exchange, the financial services industry and Malta as a whole.

For further information on this topic please contact Alain Guillaumier at Fenech & Fenech Advocates by telephone (+356 2124 1232), fax (+356 2599 0645) or email (alain.guillaumier@fenlex.com).


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