Ferrovial detects internal control failures in its process to list in the US

Ferrovial has formally begun the steps to list in the United States. The company chaired by Rafael del Pino has filed prospectus 20FR12B with the Securities and Exchange Commission (the SEC), which is required of companies domiciled abroad that want to list in that country. In the document, the company indicates that its desire is to list on the Nasdaq and explains that when analyzing its internal control systems under US legislation, in accordance with what is required by the Sarbanes-Oxley law, it has detected internal control weaknesses over its financial information, which you are trying to remedy. The company, which moved its headquarters to the Netherlands last year, now warns of the additional costs that listing in the United States will entail and the risk of lower stock market liquidity as trading in different markets is fragmented.

“We have initiated a process to determine whether our current system of internal control over financial reporting complies with Section 404 of the Sarbanes-Oxley Act and to implement the necessary measures to have an effective system of internal control in accordance with applicable standards,” says the company. “To do this, we have hired an external advisor,” he adds.

“As a result of the process, we have identified material weaknesses in the design and operating effectiveness of our internal controls over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement in the annual or interim financial statements will not be prevented or detected in a timely manner. , explains Ferrovial in the document registered with the US supervisor.

During the process, the company has identified relevant deficiencies in relation to four different chapters. On the one hand, the lack of evidence of management review controls in relation to the control attributes, the level of precision applied and the documentation of resolved matters, as well as the completeness and accuracy of the reports used in the controls. Secondly, due to the lack of design, implementation and verification of the operational effectiveness of internal controls on the general controls of information technologies that affect the systems and applications used in significant processes. The third weakness is the failure to design controls to ensure that adequate segregation of duties is maintained in recording transactions. Finally, a lack of supervisory controls and a lack of sufficient resources have been identified in the internal audit department to establish an effective structure of internal controls over financial reporting and to carry out timely monitoring and evaluation of the effectiveness of the design. and operation.

“We are working to address the control deficiencies that led to these material weaknesses as quickly and effectively as possible. The corrective measures that we are adopting involve the implementation of appropriate processes with the aim of improving the effectiveness of controls over financial information,” says the company.

Ferrovial indicates that it will continue to work with its external advisor to help it design and execute its compliance program with the Sarbanes-Oxley law regarding internal control. Among the measures will be organizational changes to incorporate additional functions focused primarily on the testing function (internal audit) and appropriate responsibilities for supervision, process governance and coordination (internal control). Ferrovial also plans to hire external experts to alleviate control deficiencies related to its information technology systems.

Higher costs

All of this translates into time and money. The company has sold the benefits of its move to Holland to list in the United States, but in the now registered prospectus it also recognizes some of the drawbacks. “As a publicly traded company in the United States, we will incur significant additional accounting, legal and other expenses that we did not incur prior to the planned listing of our common stock on Nasdaq,” he notes. “We expect these rules and regulations to increase our legal and financial compliance costs and make some activities more time-consuming and costly. Implementing and testing new compliance processes and systems may require us to hire external consultants and incur other significant costs,” he adds.

Trading shares on different stock markets is also a risk that the company warns of. Until now, despite the transfer of the headquarters to the Netherlands, stock market liquidity remains concentrated in the Spanish Stock Market. Adding a new market can contribute to fragmentation. Ferrovial shares are admitted to trading on the Spanish Stock Exchange and Euronext Amsterdam. “We also anticipate that our common shares will be listed on the Nasdaq if the relevant regulatory authorities approve our registration statement and our application for admission to trading,” says the company, which emphasizes that they will be traded in different currencies (euros and dollars) and in different schedules.

“Multiple listings may adversely affect the liquidity and trading prices of shares on one or more of the exchanges due to the aforementioned factors or other circumstances, which may be beyond our control. For example, multiple listing may increase share price volatility as trading will be split between the three markets, leading to lower liquidity across the various exchanges,” he warns. The company expects that its shares will begin trading on the Nasdaq at a price similar to that in Spain and the Netherlands at the time it is released on the US market, as occurs in cases of multiple listing.

Tax risks

As it had previously done, the company recognizes that the move to the Netherlands may have negative consequences for its reputation and business: “There is a risk that our change of headquarters to the Netherlands, which was completed in June 2023, could potentially have a negative impact on the perception of our brand in Spain, which, in turn, could potentially harm our competitive position compared to other companies not affected by these or other possible reputation problems,” he says, admitting that this can hinder your quote. For now, Ferrovial shares have moved up since its transfer, to all-time highs.

The company also includes in its prospectus the risk that the Spanish tax authorities will consider that the merger through which the move to the Netherlands was implemented did not take place for a valid business reason, but with the main intention of obtaining a tax advantage, position which Ferrovial expressly rejects. In such a case, the Treasury could deny the tax exemption regime that Ferrovial wants to benefit from and “eliminate any intended tax advantage.”

The main difference in taxation between the Spanish and Dutch Corporate Tax regimes is the exemption of dividends from investees, which in the Netherlands is total and in Spain 95%. “If the Spanish Tax Authorities conclude that the avoidance of the inclusion of 5% of exempt dividends and profits in the corporate tax base is a tax advantage that the company intended to obtain, they could, as a consequence, settle the Tax. of Companies accrued by the difference between the fair market value of our assets transferred as a result of the merger not assi
gned to a branch in Spain and the tax base of the assets,” the company explains.

Ferrovial believes that even in this case the impact would be relatively small, since it would affect only 5% of the capital gains realized and a 25% corporate tax rate and, furthermore, said part of the capital gains would be reduced by the compensable losses that Ferrovial had and deductible expenses, including financial expenses and outstanding tax credits. “Although the company considers that the above would not significantly affect its business in general or its financial situation, the tax impact will depend on the valuation of the market value of the transferred assets carried out by the competent authorities, and could, however, entail a significant additional cost,” he concludes.

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