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.
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.
The following are the key changes that affect AIM companies.
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.
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.
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.
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.