UK: Inside AIM - Fifth Edition Focussing On Nomad's Consideration Of Directors

Last Updated: 18 January 2013
Article by Edward Westhead

The fifth edition of Inside AIM was published in October 2012 focussing on issues relating to a nomad's consideration of directors. A short summary of the main points arising from the publication is set out below. Inside AIM can be downloaded from the London Stock Exchange's website here.

1. Education of directors on their AIM Rules obligations

Given the diversity of experience within AIM companies, nomads are encouraged to approach directors' education in a practical and meaningful way. In general, Inside AIM notes that:

  • the education as to a director's obligations and responsibilities should be the same whether in the context of IPOs, secondary fundraisings or where a new director is joining the board of a company which is an existing client of the nomad;
  • the nomad should undertake an education exercise when taking on a new company and should not assume that the outgoing nomad has already undertaken one previously;
  • the education should be led by the nomad, ordinarily in person; and
  • it would not normally be acceptable merely to email a presentation or memoranda to the directors. This may be appropriate in certain limited circumstances but the nomad should always be able to demonstrate to the Exchange how its approach is appropriate and reasonable.

2. Due diligence on AIM company directors

The nomad's judgement regarding the appropriateness of a company for AIM has a crucial role to play in maintaining the quality of the market. Accordingly, the quality of the nomad's due diligence on the directors is vital. Due diligence on directors should be a substantive tool in assessing appropriateness, rather than merely a box ticking exercise for a regulatory process. It should generally be noted that:

  • due diligence on directors should be applied consistently, whether in connection with a new admission, the take-on of an existing AIM company from another nomad or the appointment of a new director;
  • nomads should use a range of sources when undertaking due diligence and should also consider whether it is appropriate to contract with third party due diligence companies to carry out further due diligence – AIM Regulation would expect that third party due diligence is undertaken for overseas directors, in particular;
  • there should be an appropriate forum within each nomad firm where risks are identified and the issues considered and challenged by members of the firm who, where possible, are independent of the transaction team;
  • where issues of concern are raised, a nomad must "reconcile" those concerns by way of further enquiries. If concerns arise which cannot be reconciled and those concerns are material, a nomad may be unable to conclude that the individual is suitable to be a director. This may extend to concerns that remain unproven; and
  • interestingly the principles regarding due diligence on directors apply equally to due diligence to be carried out on substantial shareholders or, more predictably, an individual exerting control over the company.

3. Directors' participation in a fundraising

Where a forthcoming fundraising itself constitutes unpublished price sensitive information, the company will be in a close period and Rule 21 will apply. This would prevent directors and applicable employees from dealing in the company's securities during such close period and thereby participating in the fundraising. In such instances, the company's nomad may seek a derogation from Rule 21 in advance in order to enable directors and applicable employees to participate in the fundraising should they wish to do so.

Inside AIM states that AIM Regulation routinely grants derogations from Rule 21 in the following circumstances:

  • where the close period only exists due to the fundraising itself;
  • where the company is in a close period for accounts, provided that those accounts do not contain any unpublished price sensitive information; or
  • where the company is in a close period in connection with a transaction which is inextricably linked to the fundraising (such as an acquisition for which the fundraising is being undertaken) provided that the announcement of all matters (such as the fundraising, the acquisition and any dealings by directors or applicable employees) takes place at the same time. 

Notwithstanding the above routine derogations, AIM Regulation will consider each submission on a case by case basis. When making any such submission, nomads should supply some brief background to the fundraising including:

  • whether the directors or applicable employees will be participating in the fundraising on exactly the same terms as the other investors;
  • whether the company is in a close period for any other reason apart from the fundraising itself; and
  • whether the investors in a fundraising require the directors of the company to participate.

A nomad will also need to consider the implications of Rule 13 (related party transactions), Rule 16 (aggregation of transactions) and Rules 18 & 19 (interim and annual accounts) in respect of any director's participation in a fundraising.

4. Close period for accounts

A number of nomads have requested from AIM Regulation that the close period for accounts ends upon the publication of preliminary results. Inside AIM states that AIM Regulation has routinely been able to agree to this. Inside AIM sets out further answers to some common questions in relation to close periods for accounts received from nomads:

  •  if the company ends its close period for accounts at the point of notification of preliminary results (with the prior approval of AIM Regulation), the directors will still need to consider whether the company remains in the close period by reason of it being in possession of any other unpublished price sensitive information;
  • regardless of whether a company has published preliminary results, if the company fails to publish its annual audited accounts within six months from the end of the financial period to which they relate, the Exchange will suspend trading in that company's securities in accordance with Rule 40. AIM Regulation should be contacted as soon as possible by the nomad if this is a possibility; and
  • if a company is intending that its preliminary results end the close period for accounts (having sought prior approval from AIM Regulation), the directors and applicable employees should not have dealt in the company's own securities in the two months prior to the intended notification of the preliminary results. This does not override the prohibition on dealing for any extended period where the company is in the close period due to the possession of any other unpublished price sensitive information. Accordingly, it is important that an AIM company determines its financial reporting timetable at an early stage so that directors and applicable employees are clear about the timing of the close period for accounts.

5. AIM Rule 41: cancellation of admission

Rule 41 outlines the circumstances in which a company can cancel its admission from AIM. It stipulates, amongst other things, that cancellation is conditional upon the consent of not less than 75 per cent. of the votes cast by the holders of AIM securities in general meeting. Inside AIM sets out some further points to note in connection with Rule 41:

  • if the AIM company's securities will continue to be traded on a comparable dealing facility, there is a likelihood that AIM Regulation may grant a discretionary waiver of the 75 per cent. shareholder consent requirement;
  • where local laws require a lower threshold than 75 per cent., the AIM Rules will override this, and the 75 percent. consent requirement should therefore be enshrined in the company's constitutional documents, such as the articles of association or other comparable documents;
  • where the AIM company is subject to a takeover offer which requires less than 75 per cent. approval for it to become wholly unconditional, a separate resolution of 75 per cent. of the members to cancel the securities is still required;
  • where the AIM company is going through a members' voluntary liquidation which would also result in a cancellation of the AIM securities, AIM Regulation may grant a discretionary waiver of the 75 per cent. shareholder consent requirement; and
  • AIM Regulation will not grant any derogations from the requirement to notify the Exchange 20 business days prior to the intended cancellation date.

6. Nomad notification requirements

Inside AIM reminds nomads of the requirements of Rule 13 of the AIM Rules for Nominated Advisers - in particular, the requirement that a nomad must inform AIM Regulation as soon as possible of any matters that may affect it being a nomad, including, for example, any material adverse change in its financial or operating position, any new controlling shareholder or partner, or whether the nomad is in receipt of any written warning or disciplinary communication from another regulator.

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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