Access To The Capital Markets For Shipowners: Getting Your House In Order

” Any privately-held shipowner pursuing an IPO or looking to issue bonds for the first time should bear in mind that they will need to make certain preparations in order to be ready to access the capital markets.”

Any privately-held shipowner pursuing an IPO or looking to issue bonds for the first time should bear in mind that it will need to make certain preparations in order to be ready to access the capital markets. Some of these preparatory steps are mandatory, in order to meet regulatory requirements and the demands of the market, while others are advisable in order to preserve some of the flexibility which a private company may take for granted and to more easily engage with third parties. It is always preferable to anticipate problems early, instead of having them arise unexpectedly during the IPO process or after going public, and so the solutions adopted should be tailored to meet the distinctive corporate structure and future operational needs of a shipowning company.
Significant corporate renovation may be required, and advance planning to access the capital markets should take this into account. The most significant impact on the timetable for an IPO or bond issuance is often the need to engage auditors to prepare audited financials including full notes, if those have not previously been provided by a private company to its investors.

Below are listed important considerations—broken down into the categories of governance, accounting and commercial issues—which commonly arise as a privately-held shipowner prepares to access the public markets. Not all of these concerns will be relevant to every company or for every offering, and typically a bond issuance will present less onerous requirements than an equity offering.

COMMERCIAL
• Engage investment bank.
• In conjunction with advisors, evaluate market receptivity and develop equity or debt “story. ”
• ESG strategy, especially to address the energy transition, is increasingly critical.
• For an IPO:
• Approval by underwriting committee of lead underwriter is an important step in process.
• Engage IR firm.
• Select stock exchange.
• Confidential “testing the waters” marketing is possible in advance of an IPO.
• Identify executive management. Operational shipping experience is crucial and public company experience ideal for an IPO.
• Non-competition agreements may be called for if management has interests in private fleet.
• Identify members of the board of directors, considering:
• Opportunity to present additional shipping expertise to market.
• Representation of significant shareholders can signal alignment of board and shareholder interests, but independence from a controlling shareholder is important to establish.
• Majority independent board ((i.e., a majority of non-executive, “outside” directors) strongly favoredby market.
• Separation of Chairman and CEO roles favored.
• Increasing emphasis on board diversity by US regulators and ESG investors. New Nasdaq board diversity rules take effect beginning in 2022.
• Extensive business due diligence will be conducted by the investment bank.
• Certain commercial arrangements common in shipping may present marketing or legal issues:
• Acquisitions or equity investments in advance of the IPO may raise legal or accounting issues.
• Related party transactions will be scrutinized, in particular fees paid for related-party outside ship management and S&P fees, especially if there are significant termination penalties. In-house management or unaffiliated third-party management is favored by investors.
• Review existing contracts and obtain any necessary consents or waivers to change of control or other provisions such as provisions that may prohibit dividends.
• Complete documentation of all material arrangements (e.g., time charters, pool agreements, ship management agreements, loan agreements, newbuilding contracts, MoAs) will be subject to due diligence review and disclosure to investors.
• Informal intercompany or related-party arrangements, including ship management services, should be formalized and documented.
• Public company disclosure obligations can cause commercial issues or conflict with confidentiality provisions in charter agreements or loan documents, which usually are required to be filed publicly.

GOVERNANCE
• Engage legal advisors.
• Jurisdiction of organization: public markets have accepted Marshall Islands and Liberian companies. Qualified local counsel experienced in advising public companies will need to be involved from the earliest stages.
• Corporate reorganization and segregation of assets within a new holding company.
• Clean up aspects of existing corporate structure and capital structure incompatible with public markets, commonly including:
• Shareholders agreements.
• Registration rights.
• Preemptive rights.
• Rights of first refusal.
• Consider tax and economic substance implications of corporate reorganization and changes to capital structure.
• For US listings, consider whether and to what extent to take advantage of exemptions from US corporate governance requirements, in light of practices of peer shipping companies and increasing market emphasis on voluntary compliance with certain governance practices.
• ESG: Consider initiating ESG disclosures even if not legally mandated, especially carbon emissions disclosure in line with Poseidon Principles reporting. Develop KPIs and internal roles for sustainability monitoring and reporting.
• Board diversity: consider disclosure required beginning in 2022 under recently adopted Nasdaq board diversity rules.
• Prepare new or amended organizational documents, considering:
• Corporate governance best practices favored by the market.
• Anti-takeover protections tailored to a public company, which may include a staggered board, limited shareholder voting rights, removal of directors only for cause, etc. The allocation of powers between shareholders and the board must be established before an IPO, as it is difficult to change afterward. Market receptivity toward other public shipping companies with more or less shareholder-friendly features will be an important factor.
• Marshall Islands and Liberian legal considerations with particular impact on public companies.
• Consider dual-class stock structure if necessary, to preserve rights of existing equityholders.
• Related-party transaction evaluation and other procedures to ensure board independence from a significant shareholder should be established.
• Adopt Code of Ethics.
• Establish audit, compensation and nominating committees of the board of directors.
• Extensive legal due diligence will be conducted by banks’ and companies’ legal counsel.
• A prospectus or other disclosure document will be prepared with extensive disclosures of the material details of the company’s business.
• Executive compensation arrangements will be subject to disclosure, and the following should be considered:
• Regularize off-market management compensation arrangements.
• Establish equity-based incentive plan for management.
• For US-listed companies, must eliminate any personal loans to directors and officers.

ACCOUNTING
• Engage auditors.
• For a public listing, the choice of auditor has marketing implications.
• Appoint CFO and accounting team early in the process.
• Historical audited financial statements will need to be prepared, and significant effort on the part of the issuer’s accounting team will be required.
• Choice of IFRS or U.S. GAAP accounting.
• Non-GAAP measures such as TCE rate or Adjusted EBITDA require appropriate disclosure and reconciliation to GAAP measures.
• Address common accounting issues:
• Consolidation of joint ventures.
• Equity or debt treatment of certain instruments.
• Treatment of recent acquisitions as asset or business acquisitions.
• Impairment of vessels.
• Identify independent directors with relevant financial and accounting expertise to serve on an Audit Committee.
• Establish internal controls over financial reporting.
• Establish internal audit function if required.
Source: Watson Farley & Williams LLP