On 16 March the London Stock Exchange (LSE) published guidance for companies involved in exploration, development or production of mining, oil and gas resources. The guidance imposes additional requirements in terms of the due diligence required of such companies and their advisers, the information that must be publicly disclosed when seeking admission to AIM, and their continuing obligations to announce price-sensitive developments. The guidance took effect immediately and effectively supplements the AIM Rules.
The guidance has been drafted after consultation with industry experts and members of the AIM community and is intended to codify existing best practice.
A significant proportion of the companies on AIM are natural resource companies - companies involved in exploration, development or production of mining, oil and gas resources. The large numbers of resource companies that have joined AIM reflect the prolonged upturn in the commodity sector driven, perhaps, by the emergence of China and India as economic powers.
Typically such companies, particularly exploration and developments ones, involve a much higher degree of risk than companies in most other sectors of the economy. A number of companies, such as Regal Petroleum, have run into difficulties and the LSE is concerned to protect investors and the reputation of AIM.
Despite the increased risks associated with resource companies, the AIM Rules have not to date imposed any special requirements on such companies. By contrast, for many years the UKLA’s Listing Rules (and now the Prospectus Rules as expanded by the Recommendations of the Committee of European Securities Regulators (CESR)) have imposed additional requirements on ‘mineral’ companies. Best practice, however, has always been for AIM companies to include in their admission documents substantially all the information that would be required for a prospectus of a company joining the Official List.
Following consultation, the LSE has published the new 16-page guidance which, although not formally part of the AIM Rules, effectively supplements the Rules and will need to be followed by resource companies themselves, their advisers and nominated advisers (Nomads).
The guidance deals principally with the specific requirements that will apply to a resource company that is seeking admission to AIM, and with its continuing obligations to announce price-sensitive developments. In particular:
- The admission document must contain a report by a Competent Person on the company’s material assets and liabilities. This reflects current market practice and is similar to the requirements applicable to ‘mineral companies’ seeking admission to the Official List. Assets include all plant and equipment, licences, joint ventures and other arrangements to exploit resources, and liabilities include all royalty payments, contractual agreements and minimum funding requirements relating to the company’s assets or work programme.
- The Competent Person (CP) must be independent of the company, and must not receive fees that are linked to the admission or value of the company. This would appear to prohibit the company granting the CP options or shares, or paying the CP an ‘IPO success fee’ or admission bonus.
- The report must be addressed to both the company and its Nomad and contain certain information specified in the Appendices to the guidance.
- The CP must review the rest of the admission document and confirm in writing that nothing in it is inconsistent with the CP’s report.
- The admission document must include summaries of all material subsisting contracts which relate to the company’s assets or liabilities, even if the contract was entered into in the ordinary course of business or more than two years before admission. This requirement modifies for resource companies paragraph 22 in Annex I of Appendix 3 to the Prospectus Rules.
- The Nomad is expected to conduct “full due diligence” on the company and its assets prior to admission, including where practical a site visit and physical inspection of the company’s physical assets. Where assets are located outside the UK, a formal opinion should be obtained from local lawyers on matters such as (i) the proper incorporation and good standing of any incorporated subsidiary or interest and (ii) the title to or validity and enforceability of any assets (including licences and agreements).
- The admission document should disclose any payments of more than £10,000 in aggregate made by or on behalf of the company to any government or regulatory authority or similar body in relation to the acquisition of, or maintenance of, its assets - e.g. fees paid to a government for a concession or licence, or money payable under royalty or tax agreements.
- All announcements by a resources company must be vetted by an appropriate person from the company’s Nomad before release.
- Where an announcement contains a statement about the company’s resources or reserves, details should be given of the internationally recognised standard (“Standard”) that has been used (such as a standard published by the Institute of Materials, Minerals and Mining, or the Society of Petroleum Engineers). If a change occurs in relation to the company’s resources or reserves that is likely to be price-sensitive, so that under Rule 11 an announcement must be made without delay, the company may not be able to verify all the information in the announcement in accordance with the appropriate Standard. In such a case, an estimate may be included, but it must be “accurate and not false or misleading”, and as soon as possible thereafter duly verified information must be announced.
- Exploration drilling updates must be announced under Rule 11.
- A qualified professional from the company or an appointed adviser (who may be the CP), must sign off on every announcement containing a drilling update or a statement about the company’s resources or reserves.
- Every Nomad acting for a resource company must ensure that it has appropriate access to suitably experienced and qualified individuals in the sectors in which its AIM clients operate. These individuals need not necessarily be full-time employees of the Nomad: they can be engaged on a consultancy basis.
The guidance does not apply to companies which purely invest in or provide consultancy, advice or other such services to resource companies.
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