UK: Capital Markets Update - February 2009


  • Rights issue process to be streamlined following a report by the Rights Issue Review Group
  • New Shareholder Rights Directive: Clarification from BERR re notice for General Meetings
  • Proposed new AIM Rules for Investing Companies
  • The FSA amends the Disclosure and Transparency Rules to permit delay in disclosing liquidity support
  • FSA clarifies disclosure obligations when granting security over shares
  • Public censure of Minmet plc for repeated breaches of the AIM Rules for Companies and private investor fined for market abuse

Rights issue process to be streamlined following a report by the Rights Issue Review Group

In November 2008, the Treasury published 'A Report to the Chancellor of the Exchequer: by the Rights Issue Review Group' which proposed a series of far-reaching reforms to the rights issue process. Rights issues in the UK currently take at least 39 days, but if the proposals in the report are implemented this would fall almost immediately to 32 days, and for many issues to 16 days. This would reduce the period when a company's share price is open to potential abuse, for example, through short selling. The length of time currently taken to complete rights issues only serves to compound the potential risk.

The report suggested a number of short-term measures to improve the efficiency of the rights issue process as follows:

  • the Association of British Insurers (ABI) should review their guidance on the ceiling on allotments. The Review Group recommended that this should be increased from one-third to two-thirds of an issuer's issued share capital
  • the Financial Services Authority (FSA) should consult on reducing the rights issue subscription period from 21 to 14 days;
  • working with BERR on the practical transposition of the Shareholder Rights Directive to maintain the notice period for companies' general meetings at 14 days (please click here for a commentary on the recent BERR guidance on notice periods under the Shareholder Rights Directive);
  • the FSA should continue to maintain oversight of the conflict of interest regimes with a view to reinforcing transparency between issuers and underwriters;
  • the FSA is to produce non-prescriptive guidance on what issues should be usefully considered when embarking on a rights issue; and
  • the FSA shall consider the development of a new form of compensatory open offer which may be run over a 14 day period in conjunction with a general meeting notice period.

Longer term proposals were also put forward with the aim of reducing the rights issue period to below 16 days. These recommendations include the following:

  • the FSA and the Treasury should work at the EU level for the adoption of a short form prospectus for rights issues;
  • issuers to consider the possible increased use of shelf registration for equity issuance; and
  • the FSA to consider the development of more accelerated rights issue models, including consideration of the Australian RAPIDS model. The Australian market has gradually adopted a structure that has two tiers - a faster wholesale offering and then a slower retail offering.

It is also recommended that the FSA will issue a market consultation on a more permanent position on the matter of short selling in rights issues.

Responses to the report


In response to the recommendations of the report, the ABI has reviewed its guidance in order to facilitate quicker rights-issues. Companies following the ABI guidelines will now be able issue new shares worth up to two-thirds of their existing capital without the need for further shareholder approval. The change will help speed up the rights issue process and make it easier for companies to launch issues at a discount. The new guidance also requires all board members of a company that takes advantage of the new rule to stand for re-election at the next AGM, unless, of course, the additional "headroom" involves the issuance being lower in amount than one-third of the company's issued share capital.

The ABI guidelines are not legally binding but are considered best practice and form the basis of shareholder voting decisions. The ABI has confirmed that this guidance will be reviewed after three years and until then they will continue to monitor the use by companies of the additional "headroom". A copy of the ABI's statement can be accessed by clicking here.


The FSA recently published Consultation Paper 09/4: Rights issue subscription periods (CP09/4) relating to the reduction of the rights issue subscription period from 21 to either 14 calendar days or ten business days. The FSA is in favour of the reduction but has sought opinions on whether it should follow the Review Group's proposal to reduce this to 14 calendar days or if it should be reduced to 10 business days.

In its report, the Review Group recommended that the current open offer subscription period of 15 business days be reduced along similar lines to the rights issue subscription period. While reducing the open offer period to ten business days would roughly match the reduction to a 14 calendar day rights issue period, a harmonised approach would arguably be less confusing for issuers but would also make a significant difference where transactions are run over extended bank holiday periods.

The consultation period ended on 26 January 2009 and the FSA has now announced that it has decided to reduce the Listing Rules' minimum rights issue subscription period to ten business days with the rule change becoming effective on 10 February 2009 (Policy Statement 09/2: Rights issue subscription periods).

The FSA has also confirmed that it will consult at a later date on 'open offers with compensation' and on document vetting fees in relation to equity shelf registration.

New Shareholder Rights Directive: Clarification from BERR re notice for General Meetings

The Department for Business Enterprise & Regulatory Reform ("BERR") recently published a consultation document setting out draft regulations (the "Regulations") to amend the Companies Act 2006 in order to implement the directive (adopted by the EU Commission on 11 July 2007) on the exercise of certain rights of shareholders in listed companies (the "Directive"). Please visit our website for a full explanation of this consultation process, which ended on 30 January 2009.

Under the Directive and proposed Regulations, the minimum notice period for general meetings of traded companies is generally 21 days, however, this minimum notice period may be reduced to 14 days, if the following two conditions are met:

(i) The traded company must offer "the facility for shareholders to vote by electronic means accessible to all shareholders";

(ii) A resolution to reduce the notice period to not less than 14 days must have been passed either unanimously on a show of hands or on a poll by a two-thirds majority of those voting.

The Government asked for views on whether resolutions to permit traded companies to hold a general meeting on 14 days' notice should be passed on the basis of a two-thirds majority or whether it should be 75 percent as for special resolutions.

As a large number of listed companies will have already held their 2009 AGMs by the date of implementation of the Regulations on 3 August 2009, BERR has responded to concerns that these companies would not be able to pass the necessary resolution at their AGMs this year by clarifying that listed companies wishing to be able to call a General Meeting (other than an AGM) on 14 clear days' notice after 3 August 2009 should consider passing a special resolution with a 75 percent majority prior to that date.

In response to this, the City of London Law Society has developed a pro forma circular which includes a suggested enabling resolution.

The Government also asked for views on whether and, if so, how it should define "electronic means accessible to all shareholders", however, BERR has confirmed that this issue does not need to be resolved for an enabling resolution to be passed prior to 3 August 2009.

A full copy of BERR's advice can be found here.

Proposed New AIM Rules for Investing Companies

In 2005, following widespread concern that too many cash shells were admitted to AIM, the London Stock Exchange (the "LSE") published new AIM Rules applicable to investing companies. The new AIM Rules required investment companies seeking admission to AIM to raise at least £3m in cash on admission and, until an acquisition was made, to obtain annual shareholder approval for the continuation of the company's business.

On 18 December 2008, following further concerns regarding the range of companies (in particular, closed-end funds) that have been admitted to AIM since the AIM Rules were amended, the LSE published AIM Notice 30/08 (the "Notice") setting out proposed changes to the AIM Rules for Companies (the "New Rules") and a new AIM Note for investing companies (the "Note") with the intention of specifically tailoring the AIM Rules and the regulatory framework applicable to investing companies.

Pursuant to the proposed New Rules, it will be necessary for an investing company to have a precise and detailed investing policy (as opposed to the existing requirement for an investment strategy) so that the company's parameters for investment are clear to investors, unless shareholders approve otherwise.

The new proposals also aim to regulate investment managers for externally managed investing companies by introducing specific disclosure requirements thus both reflecting the key role that managers perform but also recognising that the managers are currently not directly covered by the AIM Rules.

In particular, the Notice includes the following proposals:

(i) Investing Policy

The existing AIM Rules require an investing company to have an investing strategy at all times. The LSE proposes to change this to a requirement on an investing company to have an "investing policy" that it will follow in relation to asset allocation and risk diversification.

The policy will have to be sufficiently precise and detailed in order to be clear, specific and definitive. It will need to include details on the following, as a minimum:

(a) the business sector(s), geographical area(s) and type of assets or companies in which it can invest;

(b) the means or strategy by which the investing policy will be achieved;

(c) whether such investments will be active or passive and, if applicable, the length of time that investments are likely to be held for;

(d) how widely it will spread its investments and its maximum exposure limits, if applicable;

(e) its policy in relation to gearing and cross-holdings, if applicable;

(f) details of any investing restrictions; and

(g) the type of returns it will make to shareholders and, if applicable, how long it can exist before making an investment and/or before having to return funds to shareholders.

Any proposed material changes to the published investing policy will need to be approved by shareholders in a general meeting. The LSE has suggested that in determining what constitutes a "material change", consideration must be given to the cumulative effect of all the changes made since the last shareholder approval of the investing policy or, if no such approval has been granted, since the date of admission.

In addition, in the event that an investing company has not substantially implemented its investing policy within eighteen months of admission, it will need to seek the consent of shareholders of its investing policy on an annual basis. The LSE has suggested that it would consider "substantial" implementation to equate to an investment of substantial portion (usually at least 75%) of all funds available to the investing company in accordance with its investing policy.

If shareholder approval is not obtained in relation to either a material change or non-implementation of an investing policy, the existing policy will continue to be effective and the investing company will be expected to propose further amendments to its policy and to seek approval for those further changes as soon as possible. If consent is again not obtained then the investing company should consider either returning funds to shareholders or another resolving action in conjunction with the company's nominated adviser and the LSE.

Investing companies already admitted to AIM will be expected to update their existing strategy in order to bring it into line with the new investing policy requirements as soon as possible, obtaining approval from shareholders if required at the next available opportunity.

(ii) Types of Investing Company

The LSE has clarified the types of investing companies that it expects to be appropriate for admission to AIM and, in addition, requires nominated advisers to take into account an investing company's ability to exist within AIM's regulatory framework when assessing the appropriateness of such a company for AIM.

Typically, the LSE would expect an investing company to be a closed-ended entity of a similar nature to a UK public limited company, thus, not requiring a restricted investor base. An investing company should be straightforward and not complex in terms of its structure, securities and/or investing policy and should issue primarily ordinary shares (or the equivalent). Partly paid or non-voting securities or securities that are not redeemable on an open basis or which form part of a stapled unit are not likely to be considered appropriate for admission.

(iii) Investment Managers

The LSE has proposed the introduction of specific disclosure requirements in relation to investment managers for externally managed investing companies. In addition, an investment manager and any of its key employees that are responsible for making investment decisions in relation an investing company will be treated as a "director" for the purposes of AIM Rules 7 (lock-ins), 13 (related party transactions), 17 (deals by directors) and 21 (restrictions on dealing).

(iv) Independence and experience

The LSE has introduced provisions aimed at ensuring that:

(a) the board of directors and the nominated adviser to the investing company are independent of both the investment manager and any substantial shareholders or investments (and any associated investment manager) comprising over 20% of the gross assets of the company; and

(b) the investment manager and the board of directors have sufficient and appropriate levels of experience for the investing company and its investing policy.

In addition, the New Rules require that an investing company have in place adequate safeguards and procedures to ensure that the board of directors retains sufficient control over the company's business.

Any issues in relation to the independence requirement will need to be disclosed in the investing company's admission document or notified in accordance with the AIM Rules as appropriate.

(v) Admission Document Requirements

An investing company will be subject to stricter requirements than standard issuers in relation to the information it must disclose in any admission document it publishes, including the following additional disclosures:

(a) the information required by Annex XV of the Prospectus Rules;

(b) the expertise the investment manager and the investing company's directors have, as a board, in respect of the investing policy; and

(c) a summary of the key terms of the agreement(s) with the investment manager including fees, length of agreement and its termination provisions.

(vi) Corporate Transactions

The LSE has not proposed any formal changes to the AIM Rules governing corporate transactions (Rules 12 to 16), however, guidance on the application of the class tests to investing companies is included in the New Rules and the Note, in particular:

(a) Rule 12 (substantial transactions) - an investment made by an investing company that is in accordance with its investment policy and only breaches the profits and turnover tests contained in the class tests will be considered as being on of a "revenue nature in the ordinary course of business" and would, therefore, not require disclosure as a "substantial transaction";

(b) Rule 14 (reverse take-overs) - an acquisition (which includes an investment in a company or the acquisition of assets) by an investing company which exceeds 100% in any of the class tests may be considered a "reverse take-over" pursuant to AIM Rule 14 notwithstanding that such acquisition was made in accordance with the company's investing policy. However, such an acquisition will not be considered to be a "reverse take-over" if it:

(i) is made in accordance with the company's investing policy;

(ii) only breaches the profits and turnover tests; and

(iii) does not result in a fundamental change in the investing company's business, board or voting control.

(c) Rule 15 (fundamental change of business) - the Note suggests that a disposal by an investing company which is within its investing policy will not be subject to the requirement under Rule 15 to obtain shareholders' consent on the basis of a circular. However, where an investing company disposes of all, or substantially all, of its assets, the investing company will be required to obtain renewed shareholders' consent for its investing policy and will have twelve months in which to implement the new policy.

(vii) Fundraising

The LSE has provided guidance to clarify that the condition of admission to raise a minimum of £3 million via an equity fundraising on or immediately before admission should be satisfied from independent investors and not "related parties" unless the related party is a "substantial shareholder" only and also an "authorised person".

The formal consultation period in relation to the new AIM Rules will end on 13 February 2009.

A full copy of AIM Notice 30/08 can be found on the LSE website.

The FSA amends the Disclosure and Transparency Rules to permit delay in disclosing liquidity support

In its July consultation paper Disclosure of Liquidity Support (CP08/13), the Financial Services Authority (the "FSA") proposed certain amendments to the Disclosure and Transparency Rules (the "DTRs"). The proposals were to clarify that a company with securities admitted to trading on the Main Market of the London Stock Exchange may have a legitimate interest in delaying public disclosure of liquidity support received from the Bank of England (or another central bank).

Following feedback from the consultation, the FSA has amended the DTRs to include a new rule, DTR 2.5.5A with effect from 6 December 2008. This new rule states that:

"An issuer may have a legitimate interest to delay disclosing inside information concerning the provision of liquidity support by the Bank of England or by another central bank to it or to a member of the same group as the issuer."

The FSA is of the view that a issuer receiving liquidity support from a central bank may have a legitimate interest to delay the disclosure of such support on the grounds that immediate disclosure could further exacerbate the company's existing problems and threaten its solvency. Moreover, the FSA considers that the amendments are consistent with the exemptions from immediate disclosure provided for by the EU Market Abuse Directive. As such, the FSA has clarified that the receipt of liquidity support is one of the "non-exhaustive circumstances" justifying delay in disclosure.

Click here for further detail

FSA clarifies disclosure obligations when granting security over shares

The Financial Services Authority ("FSA") has released a statement clarifying its position on the disclosure obligations of persons discharging managerial obligations ("PDMRs"). PDMRs include directors and their connected persons.

The FSA has confirmed that:

  • the grant of security over shares (by the creation of a security interest such as a pledge, mortgage or charge) is covered by the disclosure requirements found in Chapter 3 of the Disclosure and Transparency Rules ("DTR 3");
  • PDMRs must disclose all transactions which grant security over shares to their companies. The companies must then notify the market through a regulatory announcement;
  • any security that has already been granted should be disclosed to the market as soon as possible; and
  • enforcement action is not planned in respect of previous failures to notify.

The FSA made the statement in response to a large number of queries regarding the definition of a 'transaction in shares' for the purposes of DTR 3.There has recently been uncertainty in the market as to whether this definition would include grants of security over shareholdings. This uncertainty is reflected in the decision not to pursue enforcement actions at the present time. The FSA noted that DTR 3 is designed to implement the EU Market Abuse Directive, and that different approaches have been taken other member states. It hopes to reach a common understanding on the detail of the directive with the European Commission and the Committee of European Securities Regulators.

Although the FSA statement does not apply to them, directors of AIM companies should be reminded that granting of security will constitute a "deal" for the purposes of the AIM Rules and, pursuant to Rule 17 of the AIM Rules, AIM companies are required to disclose all "deals" by directors.

Issuers were also reminded that the grant of security is a 'dealing' in shares for the purposes of the Model Code (Annex 1 to Chapter 9 of the Listing Rules). PDMRs must therefore obtain clearance from their companies before using their shares as security.

Please click on this link for the FSA's statement.

Public censure of Minmet plc for repeated breaches of the AIM Rules for Companies and private investor fined for market abuse.

Public censure of Minmet plc

The London Stock Exchange ("LSE") actively monitors compliance with the AIM Rules for Companies ("AIM Rules") and the AIM Rules for Nominated Advisers ("Nomad Rules") and can take action, either privately or publicly, where AIM companies or their nominated advisers breach those rules.

Since the introduction of the new AIM Rules and Nomad Rules in February 2007, seventeen companies have received censures from the LSE for violations of the rules. However, despite criticism only 3 companies have received public censures from the LSE, as the regulator has shown a preference for privately reprimanding companies which they believe allows them to deal with violators in a more "timely and effective manner". As such, public censure has been reserved for the most serious breaches of the AIM Rules and Nomad Rules and until the beginning of December 2008 only SubSea Resources plc and Meridian Petroleum plc had publicly been on the receiving end of the LSE's wrath.

On 4 December 2008, Minmet plc became the latest company to be publicly censured for its breaches of the AIM Rules between October 2006 and January 2008. The LSE held that Minmet had breached AIM Rules 10, 11, 12, 13, 14 and 31 in relation to various transactions in which Minmet had specifically failed to:

  • release announcements without delay regarding a reverse takeover, substantial transactions and related party transaction;
  • include material information in announcements that it made;
  • comply with the requirements for reverse takeovers under the AIM Rules; and
  • liaise with its nominated adviser in respect of these matters.

In determining the public sanction, the LSE took into account the number of breaches over a prolonged period of time and the seriousness of those breaches. In the disciplinary notice, the LSE also stressed that the number, nature and duration of the breaches evidenced a clear disregard by the company of the AIM Rules which was reckless. However, the LSE stopped short of imposing a fine on Minmet due to its poor financial situation. This censure may well be the thin end of the wedge as the LSE tries to ensure better disclosure practices by companies and improve their consultation with nominated advisers in the context of the current unpredictable market conditions.

A copy of the Minmet plc disciplinary notice can be found here.

Belgian private investor fined for market abuse

The FSA has fined a Belgian private investor, Mr Erik Boyen, for dealing in the shares of Monterrico Metals Plc, an AIM-quoted company, on the basis of inside information. He was fined a total of £176,254 , which includes a disgorgement of profit of £127,254 and an additional penalty of £49,000.

This fine concludes an FSA investigation into timely dealing in Monterrico shares, during which similar fines were imposed on Erik Boyen's brother, Filip Boyen, and Montericco's former chairman, Richard Ralph.

In January 2007, Richard Ralph asked Filip Boyen to buy shares in Monterrico on his behalf. At the time, it was publicly known that the company was in takeover discussions and that an offer had been made in principal at a premium to the share price. It was also known that Richard Ralph was actively involved in confidential discussions about the takeover. In asking Filip Boyen to buy shares for him he therefore passed on inside information.

Filip Boyen later asked his brother Erik to buy shares on his behalf, and in doing so he too passed on inside information. Erik Boyen knew that the company was in takeover discussions and that Richard Ralph had asked his brother to buy the shares. He was therefore dealing in shares on the basis of inside information when he later bought the shares and sold them on for a personal profit of £127,254. Erik Boyen was also found to have encouraged another person to deal in Monterrico shares.

The FSA Director of Enforcement, Margaret Cole said the fine illustrated the FSA's determination to take action against everyone involved when inside information is used to gain an unfair advantage over other market participants.

A copy of the Boyen disciplinary notice can be found here.

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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