On 20 February the London Stock Exchange
introduced a new Rule Book for Nominated Advisers (Nomads) setting
out their duties and responsibilities to the Exchange and to the
companies they advise that are joining, or already on,
AIM.
A Disciplinary Procedures and Appeals Handbook
accompanies these new Rules. Changes have also been made to the AIM
Rules for Companies, principally to make it easier for the public
to access key information about an AIM company and its
shares.
These changes should be considered in the
context of recent developments with AIM. It has been an outstanding
success and there are now over 1,640 companies on AIM – more
than on the UK’s official list. The Exchange rightly promotes
AIM as “the most successful growth market in the world”
marketing itself to international companies. This has coincided
with what some see as overly-stringent US regulations, such as
Sarbanes-Oxley, which has caused many US and other international
companies to choose AIM rather than a US exchange.
However, AIM is 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 surge of
such companies joining AIM has included a few that may have been
unsuitable and not enhanced the reputation of AIM.
At last month’s World Economic Forum in
Davos John Thain, Chief Executive of the New York Stock Exchange,
attacked what he saw as a lack of regulation surrounding AIM. He
has been reported as saying that he felt AIM “did not have
any standards at all and anyone could list”. The London
Stock Exchange and its Chief Executive, Clara Furse, who has been
busy seeing off unwelcome attempts to buy the Exchange, has
responded forcefully, emphasising AIM’s overriding principle:
that it is centred on providing smaller, growing companies with a
capital market that meets their distinct requirements, and that
regulation of the market has been designed to balance those needs
with those of investors who require adequate regulatory comfort.
She emphasised that the role of the Nomad is central to the
operation, regulation and success of AIM.
Although the changes to AIM rules are
evolutionary rather than revolutionary, Nomads should not
under-estimate the Exchange’s emphasis on the responsibility
of Nomads for preserving the reputation and integrity of
AIM.
Summary
On 20 February the London Stock Exchange introduced with immediate
effect a new, dedicated rulebook for Nominated Advisers (Nomads),
and various changes to the AIM Rules for Companies, broadly in the
terms proposed in the Exchange’s October consultation
paper.
The Nomad rulebook sets out in 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 are framed as general principles that
must always be followed, 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 Nomad rulebook is intended to codify,
rather than change, existing good market practice, Nomads will need
to make various amendments to their agreements with client
companies and to their procedures and compliance manuals.
Apart from a few refinements, no changes have been
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 remains the same.
In the AIM Rules for Companies, a new Rule 26
requires each AIM company to set up by 20 August this year a
website with links to various company information, including its
most recent admission document; the memorandum and articles or
other constitutional documents; financial results and circulars to
shareholders; announcements made to the market over the last 12
months; and other information about the company’s business,
its significant shareholders, and any restrictions on transferring
shares. Appropriate precautions will need to be taken to secure the
content of the site and, where necessary, to restrict access to
certain documents.
The 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
has been insufficiently robust, and that the quality of companies
being admitted to AIM has declined over the last few years.
On 5 October 2006 we published an article on LawNow describing the
key changes that were proposed (click
here to see that article). Most have now been introduced
without significant amendment. The following summary is based on
our original article and, where significant amendments have been
made to the original proposals, these are highlighted in
bold italics.
New rulebook for Nomads
Under the previous rules, any firm that wished to
act as a Nomad had to 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 set out various specific
functions that a Nomad had to 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
Rule 39 of the AIM Rules for Companies now states
simply that Nomads must comply with the Nomad Rulebook. This runs
to 23 pages and is split into three parts:
- eligibility criteria and process for obtaining approval to act
as a Nomad. The form of the new Nomad declaration is set out in
Schedule 2;
- continuing obligations to a client company and to the Exchange.
Further conditions relating to a Nomad’s independence from
its client companies is included in Schedule 1, and details of a
Nomad’s responsibilities are set out in Schedule 3 (see
below); and
- review and discipline of Nomads by the Exchange.
The level of skill and care expected of
a Nomad
The responsibilities of a Nomad described in
Schedule 3 are framed as general principles, which must always be
followed, 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. The Exchange recognises, however,
that the nature and extent of the tasks required to satisfy the
general principles will vary according to where the client company
is based and the Nomad’s local capabilities: Nomads should
record the reasons why particular actions were taken.
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 which used to be set out in Rule 39 of the
AIM Rules, the following responsibilities are now particularly
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
knowledge of the applicant’s area of business (taking into
account its country of incorporation and operation), 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 or other persons who could exert control over
the company;
- 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 (in order to be able to give
the nominated adviser’s declaration) that it has been
prepared in compliance with the AIM Rules for Companies with due
verification undertaken.” It should usually:
- oversee and be actively involved in
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.
Although the Exchange has softened its original
proposal that the Nomad should “lead” the drafting, it
stresses that it continues to regard the Nomad as the key adviser
on the admission document;
- 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 Nomad rulebook makes 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 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. During the consultation process on the
Nomad rulebook, some Nomads raised similar concerns: in response,
the Exchange emphasised that it considers a Nomad’s
obligations to the Exchange take priority over duties owed to
client companies.
Another new rule gives 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 first of these returns were sent to Nomads in
early January this year in respect of the calendar year 2006.
Nomad record-keeping and
compliance
Previous rules requiring Nomads to retain for at
least three years sufficient records to provide an audit trail of
key advice given to client companies have been strengthened. In
particular, records 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 has said that it will be extending its
programme of Nomad compliance visits during the course of 2007. As
part of these visits it 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 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,
by 20 August 2007 every AIM company must
have established a website on which key company information is made
available. Existing AIM companies should announce (whether as part
of another announcement or otherwise) the address of the relevant
website, which should either be the company’s own website or
a site hosted by a third party provider. Guidance Notes
to Rule 26 give further details of what is expected: the
information must be kept up-to-date; the last date on which it was
updated should be included; and it should be easily accessible from
one part of the website; and a statement should be included that
the information is being disclosed for the purposes of Rule 26. Any
redirection of a user to other areas of a website or to a document
included on the website should be to a specific location for that
information: users should not have to enter search criteria in
order to locate information.
Information to be kept on the website includes:
- a description of the company’s business;
- the company’s memorandum and articles, or
other constitutional documents;
- 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 (or
any other securities) admitted or traded;
- the number of AIM securities in issue (and any held in
treasury) and, insofar as the issuer is aware, the percentage 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. Issuers 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, however, to require issuers at six-monthly intervals to
send out notices under section 793 CA 2006 (formerly section 212 CA
1985);
- 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.
Where relevant, 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
As before, 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 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 entered into. 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:
“Each AIM company is required pursuant to the AIM
Rules for Companies to have a nominated adviser. The nominated
adviser is required to make a declaration to the London Stock
Exchange on admission in the form set out in Schedule Two to the
AIM Rules for Nominated Advisers.”
Originally, the Exchange proposed to
include wording referring to the fact that the Nomad is required to
use all due skill and care, and to satisfy itself that the company
is suitable to be admitted to AIM. However, this has been dropped
in response to concerns that, even if the wording did not itself
extend a Nomad’s liability, it might encourage investors to
make claims that could be frivolous and costly.
Corporate governance of AIM companies
Despite suggestions made during the consultation
process, the Exchange has declined to mandate the Combined Code or
any other particular standard of corporate governance for AIM
companies. Instead, it expects Nomads to advise client companies on
a case by case basis, taking into account the size and nature of
the company, and the rights of shareholders under the
company’s constitution and the company’s local
law.
Disciplinary procedures
Changes have been made to the AIM Disciplinary
Procedures and Appeals Handbook to include:
- an explanation of the factors considered when assessing whether
to pursue disciplinary action;
- introducing warning notices. 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 in 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 27, summarising changes made to the
original proposals, can be found here.
A clean copy of the new rulebook for Nomads can be
found here.
A clean copy of the amended version of the AIM
Rules can be found here.
A clean copy of the new version of the AIM
Disciplinary Procedures and Appeals Handbook can be found here.