Role of Nominated Adviser to be
amplified; AIM companies to publish information on
websites
Under London Stock Exchange proposals announced on
2 October, from early next year a dedicated rulebook for Nominated
Advisers (Nomads) will set out in more detail a Nomad’s
responsibilities towards its client company and the Exchange both
at the time of admission to AIM and on a continuing basis. The
responsibilities will be framed as general principles supported by
non-exhaustive lists of specific tasks that a Nomad should
“usually” perform in relation to matters such as
assessing the suitability of a company for admission to AIM; due
diligence on an applicant and its directors; preparation of the
admission document; review of announcements; monitoring of trading;
and changes to the board.
Although the new rulebook is intended to codify,
rather than change, existing good market practice, Nomads will
probably need to make various amendments to their agreements with
client companies and to their procedures and compliance
manuals.
No substantive changes will be made, however, to
the existing Nomad eligibility criteria. In particular, the number
and type of transactions that a firm must achieve in order to be
eligible to be considered for nominated adviser status will remain
the same.
New rules for AIM companies will require them to
put on their websites their admission document, all financial
results and circulars to shareholders, all announcements made to
the market over the last 12 months, and other information about the
company’s business and any restrictions on transferring
shares. Issuers will be given six months from when the new rules
become effective to establish a website (or new section of an
existing website) with appropriate precautions to secure the
content and, where necessary, to restrict access to certain
documents.
The proposed changes, which follow a strategic
review by the Exchange of the operation of AIM and its regulatory
structure, are designed to meet criticisms from investors that the
Nomad regime is insufficiently robust, and that the quality of
companies being admitted to AIM has declined over the last few
years. Consultation on the proposals closes on 1 December and the
new rules are likely to come into effect in “early
2007”.
New rulebook for Nomads
At present, any firm that wishes to act as a Nomad
must satisfy the eligibility conditions and discharge certain
ongoing responsibilities in accordance with the Exchange’s
‘Nominated Adviser Eligibility Criteria’. Rule 39
of the AIM Rules sets out various specific functions that a Nomad
must perform, including:
- confirming to the Exchange in writing that the directors of a
prospective AIM company have received sufficient guidance on their
responsibilities and that the Nomad is satisfied that the company
is “appropriate” to be admitted to AIM;
- advising the directors of an AIM company on compliance with the
AIM rules;
- submitting a nominated adviser’s declaration in respect
of any client company whenever such company is required to produce
an admission document;
- provide the Exchange with any other information, in such form
and within such time limits as the Exchange may reasonably
require;
- reviewing regularly its client company’s actual trading
performance and financial condition against any profit forecast,
estimate or projection included in the admission document or
otherwise made public on behalf of the AIM company in order to help
determine whether an announcement should be made; and
- acting with due skill and care at all
times.
Updating and clarification of existing rules
applicable to Nomads
Proposed key changes to the obligations of a Nomad
are highlighted below.
The level of skill and care expected of a
Nomad
Schedule 3 of the Nomad rulebook will set out in
more detail a Nomad’s responsibilities towards its client
company and the Exchange both at the time of admission to AIM and
on a continuing basis. These responsibilities are framed as general
principles supported in each case by a non-exhaustive list of
specific tasks that a Nomad should “usually” perform in
relation to matters such as due diligence on an applicant and its
directors; preparation of the admission document; AIM Rule
compliance; review of announcements; monitoring of trading; and
changes to the board.
In assessing whether a Nomad has discharged its
duty to act with due skill and care, the Exchange will assess the
conduct or judgement of the Nomad against the obligations set out
in the Nomad rulebook (in particular the responsibilities specified
in Schedule 3), the AIM Rules themselves, and “general market
practice and opinion”. In other words, where the Nomad
rulebook itself or the AIM Rules are not wholly clear, the Exchange
will apply an objective test set by reference to what is reasonably
expected by the market. During the course of compliance visits, the
Exchange will use the principles and specific tasks detailed in
Schedule 3 as the basis for assessing the standard of work
performed by a Nomad.
As well as those matters currently set out in Rule
39 of the AIM Rules, the following responsibilities will in
particular be specified:
- Suitability for admission to AIM: “In assessing
the appropriateness of an applicant and its securities for AIM, a
nominated adviser should achieve a sound understanding of the
applicant and its business.” To do so, it should usually:
- ensure it has, or has appropriate access to, appropriate
experience in the applicant’s sector, using in-house
specialists or external experts where necessary;
- consider the applicant’s sector, proposition, business
plan or similar, historical financial information and other
corporate information;
- consider any issues relating to its country of incorporation
and operation;
- undertake a visit of the applicant’s material site(s) of
operation and meet the directors and key managers and, if
necessary, any other material stakeholders.
- Board and individual directors: The Nomad should
investigate and consider the suitability of each director and
proposed director of the applicant, and the efficacy of the board
as a whole. In so doing, it should usually:
- issue and review directors’ questionnaires and review
directors’ CVs, and test the information revealed, for
example by conducting third party checks, press searches and
Companies House checks, and taking up references. Where
appropriate, the same procedures should be followed for key
managers and consultants who are disclosed in the admission
document;
- consider undertaking such investigations in relation to
substantial shareholders at admission, especially where there is
uncertainty as to their identity or where they are not established
institutions, in particular to ascertain the existence of shadow or
de facto directors;
- consider each director’s suitability and experience in
relation to their (proposed) company role, and whether the board of
directors as a whole will be able to provide governance appropriate
to the company’s type, size and expected profile;
- follow similar procedures where a director joins or leaves the
board.
- Due diligence: The Nomad should “oversee the due
diligence process, satisfying itself that it is appropriate to the
applicant and transaction and that any material issues arising are
dealt with or otherwise do not affect the appropriateness of the
applicant for AIM.” In so doing, it should usually:
- satisfy itself that appropriate financial and legal due
diligence is undertaken by an appropriate professional firm;
- ensure that proper reviews are carried out in relation to the
company’s working capital and financial reporting and control
systems (usually including reports and statements by accountants to
the applicant);
- consider whether commercial, specialist (e.g. intellectual
property) and/or technical due diligence is required and satisfy
itself that it is undertaken where required;
- consider all due diligence and other reports, and ensure that
all material issues identified are dealt with.
- Admission document: The Nomad should “oversee and
be actively involved in the preparation of the admission document,
satisfying itself that it has been prepared in compliance with the
AIM Rules and that the statements and information included in it
have been made after due and careful enquiry.” It should
usually:
- lead the drafting of those sections of the admission document
that relate to the business of the applicant (usually the Key
Information and Part 1 sections) and the risk factors, ensuring
that they take account of matters raised by due diligence;
- be satisfied that the financial and additional information
sections have been appropriately prepared;
- liaise with the AIM Regulation team if it needs to clarify the
interpretation of any rule or to seek a derogation.
- Nomad review of announcements: The Nomad should
“undertake a prior review of relevant [announcements] made by
an AIM company with a view to ensuring AIM Rule compliance.”
In so doing, it should usually:
- review in advance all announcements to be made by a client
company to ensure compliance with the AIM Rules. However, the
review process should not be allowed to delay the making of an
announcement that is price-sensitive. Advance review may not be
necessary where the Nomad reasonably believes that the
company’s directors are sufficiently aware of their
obligations under the AIM Rules;
- ensure that the Nomad’s name and a contact name are
included on all announcements that it reviews, other than routine
ones.
- Monitoring of trading in client company shares: The
Nomad should “monitor (or have in place procedures with third
parties for monitoring) the trading activity in securities of an
AIM company for which it acts, especially when there is unpublished
price-sensitive information in relation to the AIM company.”
In so doing, the Nomad should usually:
- use suitable alerts or other triggers to alert it to
substantial price or trading movements. This can be satisfied via
the broker;
- if there is a substantial movement, contact the client company
to ascertain whether an announcement or other action is
required;
- consider whether the press should be monitored for evidence of
a leak.
Problems with a client company
The new rulebook will make clear that it is
imperative that a Nomad contacts the Exchange immediately if it has
concerns about the appropriateness of an AIM company
post-admission.
Nomads will also have a duty to advise the Exchange
if they become aware that a client company has or may have breached
the AIM Rules. This is similar to the obligation on sponsors of
Official List companies to disclose to the FSA “any material
information relating to… a listed company of which it has
knowledge which addresses non-compliance with the listing rules or
disclosure rules” (LR 8.3.5 (1)). When that Listing Rule was
introduced on 1 July 2005, sponsors were concerned that they could
find themselves in a position where their obligations to the FSA
conflicted with those to their listed company clients, but in
practice the rule does not seem to have caused significant
difficulties.
Another new rule will give the Exchange power to
direct the actions of Nomads in exceptional circumstances in order
to preserve the orderliness or reputation of AIM. This proposed
rule mirrors that contained in the Exchange's secondary market
trading rules and is said to be “reserved only for the most
serious situations”.
Nomad annual returns
Nominated advisers will have to submit an Annual
Return to the Exchange giving details of the “relevant
transactions” they have completed in the period and the
“qualified executives” they employ. The Exchange will
review this information as part of its risk assessment of nominated
advisers both during the compliance visits it undertakes and when
it assesses whether a Nomad continues to be eligible.
The Exchange expects that the first of these
returns will be issued by early 2007 in respect of the calendar
year 2006.
Nomad record-keeping and
compliance
Existing rules requiring Nomads to retain for at
least three years sufficient records to provide an audit trail of
key advice given to client companies will be beefed up. In
particular, records will need to be kept of all key discussions
held with, and key decisions made in respect of, each client
company, including “the basis for advice given and key
decisions taken, such as internal considerations and any actions
taken prior to the advice being given.” When performing a
formal review of a Nomad, the Exchange will look for clear evidence
that at least the matters set out in Schedule Three have been
considered and appropriate actions taken or, if the Nomad has
concluded that a particular action is not required, clear evidence
of such a conclusion and the reason for it.
The Exchange states that it will be extending its
programme of Nomad compliance visits during the course of 2007. As
part of these visits the Exchange will seek to verify that Nomads
have incorporated all the new rules into their operating
procedures.
AIM companies
The following are the key changes that will affect
AIM companies.
Website disclosure
In order to ensure that investors can access a
minimum level of information about each AIM company at all times,
the Exchange proposes to require each AIM company to maintain a
website on which key company information will have to be disclosed
and kept up to date. Existing and new AIM companies will have six
months to comply with this new rule, starting from the date the new
rules come into effect.
Information to be kept on the website includes:
- a description of the company’s business;
- the names of its directors and brief biographical details on
each, as would normally be included in an admission document;
- a description of the responsibilities of the members of the
board of directors and details of any sub-committees of the board
of directors and their responsibilities;
- the issuer’s country of incorporation and main country of
operation;
- details of any other exchanges or trading platforms on which
the company has applied or agreed to have its AIM securities
admitted or traded;
- insofar as the issuer is aware, the percentage of AIM
securities that are “not in public hands” and the
identity and holdings of significant shareholders. Under a new
definition, shares will not be in public hands where (amongst other
things) they are held by directors, substantial shareholders and
their associates; trustees of an employee share scheme or pension
scheme established for the benefit of any of the company’s
directors or employees; or any party which has entered into a
lock-up agreement.
Under the draft rules, the issuer will have to
update details of the percentage not in public hands, and of
significant shareholders, at least every 6 months. It does not
appear to be the Exchange’s intention to require issuers to
send out section 212 notices at six-monthly intervals, but it would
be preferable if the draft rules were amended to make this
clear;
- where the company is not incorporated in the UK, a statement
that the rights of shareholders may be different from the rights of
shareholders in a UK incorporated company;
- details of any restrictions on the transfer of the AIM
securities. Such restrictions are most likely to be those imposed
in order to comply with the safe harbour provisions of Regulation
S, which require the company to put in place arrangements to
prevent US investors from purchasing shares during the
“distribution compliance period”, which is usually
between one and two years from closing of an issue. However, they
could also include restrictions in the company’s articles of
association that are designed to prevent more than a certain
percentage of the company’s shares being held by investors in
a particular country;
- the issuer’s most recent annual report and all
half-yearly or similar reports published since the last annual
report;
- all announcements to the market made by the company in the past
12 months;
- any prospectus, admission document, circular or similar
shareholder publication published within the past 12 months;
and
- details of the company’s Nomad and other key
advisers.
In some cases, it will be possible simply to direct
users to those sections of the issuer’s admission document
where such information can be found.
The same information will also have to be included
in a prospective AIM company’s pre-admission
announcement.
Where an admission document or prospectus is
published on the issuer’s website, it may be necessary to
include electronic mechanisms to prevent the document being
accessed by investors who are domiciled in certain overseas
jurisdictions such as the US, Canada, Australia and
Japan.
Ongoing disclosure of directors’
convictions etc
At present, an admission document must contain
details for each director of any unspent convictions in relation to
indictable offences; any bankruptcy or IVA; any companies which
have gone insolvent where that person was a director at the time or
within the previous 12 months; any public criticism of the director
made by a regulatory authority; and any disqualification order
against him.
Under the new rules, where any such information
changes after admission, details will have to be announced to the
market.
Reverse takeovers
New guidance notes to Rule 14 will make clear that
the Exchange expects an issuer that is involved in negotiations
that may lead to a reverse takeover to keep the fact of those
negotiations confidential until such time as it can announce that a
binding agreement has been concluded. Wherever possible, that
announcement should be accompanied by publication of an admission
document. If for any reason this is not possible, the
issuer’s Nomad should seek the advice of the Exchange at the
earliest opportunity.
Additional wording on the front of admission
documents
In addition to the current standard wording on the
front of an admission document that “AIM is a market designed
primarily for emerging or smaller companies to which a higher
investment risk tends to be attached than to larger or more
established companies...”, the following wording will have to
be included:
“In accordance with the AIM Rules for
Companies and AIM Rules for Nominated Advisers (together the
“AIM Rules”), [name of nominated adviser] is obliged to
use all due skill and care in performing its role as nominated
adviser to [name of applicant] pursuant to the AIM Rules for
Companies and has confirmed to the London Stock Exchange
that:
(a) it has satisfied itself that the directors
have received advice and guidance as to the nature of their
responsibilities and obligations to ensure compliance by [name of
applicant] with the AIM Rules for Companies,
and
(b) having made due and careful enquiry (i) all
relevant requirements of the AIM Rules for Companies have been
complied with (including in relation to the preparation of this
Admission Document) and (ii) [name of nominated adviser] is
satisfied that the [name of applicant] and its AIM securities are
appropriate to be admitted to AIM.”
Disciplinary procedures
The Exchange proposes to make certain changes to
the AIM Disciplinary Procedures and Appeals Handbook to
include:
- an explanation of the factors considered when assessing whether
or not to pursue disciplinary action;
- introducing the concept of a ‘warning notice’. Such
notices will be issued to an AIM company or a Nomad when the
Exchange, upon conclusion of an investigation, believes that a
breach of the AIM rules has occurred but the offence does not
justify a fine, censure or more serious sanction. A warning notice
will form part of the compliance record of the AIM company or Nomad
and will be taken into account in the event that any further AIM
Rule breaches occur; and
- an increase to the cap on fines which can be levied by the AIM
Executive Panel on an AIM company and/or its Nomad, from £25,000
per breach to £50,000 per breach.
Further information
AIM Notice 24, summarising the key changes, can be
found here.
The proposed new rulebook for Nomads can be found
here.
A marked-up version of the AIM Rules, showing the
proposed changes, can be found here.
A marked-up version of the AIM Disciplinary
Procedures and Appeals Handbook, showing the proposed changes, can
be found here.