UK: ‘Inside AIM’ Issue 5 Provides Guidance On Directors’ Participation In A Fundraise, The Close Periods For Accounts And The Duty Of Nomads Regarding Due Diligence And The Education Of Directors

Last Updated: 26 November 2012
Article by David Hirschman and Mark Howard

Issue 5 of 'Inside AIM' was produced by AIM Regulation in October 2012 and addresses a number of matters including Rule 41 on the cancellation of an AIM company and an update on investigations and enforcement. In this update we focus on the clarification provided regarding the requirement for a derogation where directors intend to participate in a fundraise, further guidance (following on from Issue 4) on the close period for accounts, and important guidance on the standards required of nomads in carrying out due diligence on directors and in educating directors on their AIM Rules obligations, pursuant to the AIM Rules for nominated advisers (Nomad Rules). The latest edition of Inside AIM can be found on the LSE website.

Directors' Participation in a Fundraise

Issue 5 of Inside AIM makes it clear that, where directors or applicable employees of AIM-listed companies intend to participate in a placing or other fundraising, entry into the commitment to deal made prior to any announcement will amount to a 'deal' for the purposes of the AIM Rules. A derogation must be obtained in advance in order to enable the intended participation.

The applicable rule here is Rule 21 of the AIM Rules for Companies (Rules), which prevents directors and applicable employees from dealing in any of a company's AIM securities during a close period. The company will be in a close period where a forthcoming fundraise constitutes unpublished price-sensitive information.

Applications to AIM Regulation for a derogation allowing directors and applicable employees to participate in a fundraise must be made by the nomad and are considered on a case by case basis. The application should specify:

  • if the directors or applicable employees are to participate on the same terms as other investors;
  • if the company is in a close period for any other reason apart from the fundraise (along with the relevant details); and
  • whether the directors are required to participate by the investors.

AIM Regulation will normally grant a derogation from Rule 21:

  • where the company is in a close period only due to the fundraise; or
  • where the company is in a close period in respect of its accounts, provided that those accounts do not contain unpublished price-sensitive information; or
  • where the company is in a close period in connection with a transaction that is inextricably linked to the fundraise (such as an acquisition for which the fundraise is being carried out), provided that the announcement of all related matters take place concurrently.

Other considerations for nomads where directors are to participate in a fundraise are: Rule 13 (related party transactions); Rule 16 (aggregation of transactions); and Rules 18 and 19 (interim and annual accounts).

Close Periods for Accounts

As reported in our November 2011 update, the period from the end of an AIM company's financial year until publication of its annual audited accounts (as required by Rule 19) is a close period. Dealings by directors or applicable employees during this period are therefore prohibited by Rule 21, and the publication of a preliminary results announcement does not (in contrast to the UKLA Listing Rules) automatically constitute full compliance with Rule 19.

Agreement from AIM Regulation can be requested, and is routinely granted, for the company's close period to end upon publication of preliminary results. However, there must have been no dealing by directors or applicable employees in the two months prior to such publication. Nomads should also consider whether the company may remain in a close period due to it possessing any other price-sensitive information.

Failure by the company to fully comply with its obligations under Rule 19 and publish audited annual accounts within six months of the end of the financial year will result in the suspension by the LSE of trading in the company's AIM securities.

Due Diligence on AIM Directors

Following disciplinary action by AIM Regulation in 2011, details of which are set out in AIM Notice AD11 ( the latest issue of Inside AIM includes important guidance on carrying out meaningful due diligence on directors. Nomads have responsibility for assessing the appropriateness both of applicants for AIM and where appointed as nomad to an existing AIM company. Rule 1 and AR2 in Schedule 3 to the Nomad Rules are relevant here, providing that a nomad should investigate and consider the suitability of each director and proposed director of the applicant, and should also consider the efficacy of the board as a whole.

The guidance is stated to be general, and AIM Regulation specifically refers nomads to Notice AD11 (above) in performing their duties. The general guidance covers points that highlight the importance of:

  • a consistent application of due diligence procedures that constitute a substantive, rather than a formulaic, approach;
  • the application of the nomad's reasonable judgement as to the information required to make an informed decision about each director and the use of a number of sources of information; and
  • the evaluation of information and consideration of whether further due diligence is required (and undertaking third party due diligence for overseas directors as a matter of course).

Having gathered the results of the due diligence, nomads should then:

  • consider all the issues arising from the information gathered and convene an appropriate forum to assess any risks (comprised of independent and experienced members of the firm); and
  • make further reasonable enquiries where concerns are raised and, if unable to reconcile any concerns, consider the impact on appropriateness.

Where concerns are material and cannot be resolved, it is of key importance that the nomad may be unable to conclude that the individual is suitable to be a director. This can include situations where a concern is not proven.

It is also worth noting that these principles will apply to any due diligence carried out on substantial shareholders or individuals able to exert significant influence or control over the company.

Education of Directors on their AIM Obligations

In addition to the obligations contained in AR2 (as noted above), a nomad must satisfy itself that an AIM applicant understands its obligations under the Rules and that it has sufficient systems, procedures and controls in place to comply with the Rules. This is set out in AR5 in Schedule 3 to the Nomad Rules.

To ensure that it has complied with these requirements, a nomad must provide an appropriate level of education to the directors. The published guidance (which is stated to be non-exhaustive) states that:

  • the same standard to directors' education should be applied - whether relating to a new admission, the taking on of an existing AIM company or the appointment of a new director.
  • the education should be led by the nomad, and should include an assessment of the most effective way of ensuring that the directors understand their responsibilities, which would normally mean the education taking place in person and involving discussion;
  • a nomad should not assume that any outgoing nomad of an existing AIM company has provided sufficient education, and should also not assume that directors with previous AIM company experience have sufficient knowledge and understanding of the Rules;
  • in the limited cases where a nomad reasonably decides that the education of directors can be sufficiently carried out by way of email written presentation, the nomad must be able to demonstrate to the LSE that their approach was reasonable and appropriate;
  • a tailored approach to education is most effective, taking into consideration the size of the board and the roles, experience and requirements of individual directors; and
  • where relevant, the AIM Notes for Mining and Oil & Gas Companies and Investing Companies should be considered along with, for dual-listed companies, the differences between AIM and any other exchanges.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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David Hirschman
Mark Howard
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