The London Stock Exchange (“LSE”) has recently consulted on proposed changes to the AIM Rules for Companies which apply to “cash shells” (i.e. new companies listing on AIM with no assets except cash, or companies already listed on AIM which become cash shells after disposing of their business).
The proposed changes to the AIM Rules for Companies and the consequential changes to the AIM Note for Investing Companies are available here.
The consultation (available here) closed on 12 November 2015 and the LSE will confirm the results of the consultation as soon as reasonably practical.
ADMISSION CRITERIA FOR INVESTING COMPANIES (RULE 8)
Under Rule 8, an applicant seeking admission as an investing company must currently raise £3m in cash via an equity fundraising on, or immediately before, admission. The LSE proposes to increase the fundraising requirement to £6m.
The LSE explains that the current level of £3m (adopted in 2005) was set in order to necessitate external, often institutional participation, ensuring an extra level of scrutiny over the investment policy, the experience of the applicant’s directors and the company’s valuation on admission. Given the passage of time, the LSE considers it appropriate to increase the fundraising threshold.
FUNDAMENTAL CHANGE OF BUSINESS (RULE 15)
Currently an AIM company which becomes a cash shell following a fundamental disposal (i.e. a disposal of all, or substantially all, of its trading business, activities or assets) is deemed to be an investing company under Rule 15. The company must obtain shareholder approval for the disposal and its proposed investing policy and will then have 12 months to either implement the investing policy or make an acquisition or acquisitions which constitute a reverse takeover under Rule 14. If the company does not do either within the 12 month period, trading in its AIM securities are suspended.
The LSE explains that the purpose of this rule is to enable AIM companies, where appropriate, to continue to access the benefits of the market following a fundamental disposal. The LSE notes, however, that following such a disposal some companies have tended to remain on AIM with limited cash balances which may not be sufficient to enable meaningful investment(s) or facilitate the functioning of a fair and orderly market in the company’s securities.
The LSE has therefore proposed the following changes to Rule 15:
An AIM company that becomes a cash shell following a fundamental disposal will no longer automatically be classified as an investing company but will instead be regarded as an “AIM Rule 15 cash shell” (a new definition of which is added to the Glossary).
Within 6 months of becoming an AIM Rule 15 cash shell, the company must make an acquisition or acquisitions which constitute a reverse takeover under Rule 14. For the purposes of this rule only, becoming an investing company pursuant to Rule 8 (including the associated raising of funds as specified in that rule) will be treated as a reverse takeover and the provisions of Rule 14 will apply including the requirement to publish an admission document.
If an AIM Rule 15 cash shell does not complete a reverse takeover as required, the LSE will suspend trading in the company’s securities.
The changes to AIM Rule 15 are not retrospective so if an AIM company became an investing company before the new rules come into force, the existing requirements of Rule 15 set out in the AIM Rules for Companies (May 2014 edition) will continue to apply (i.e. the company will have 12 months from the date it became an investing company to either implement the investing policy or complete a reverse takeover under Rule 14).
The LSE has also proposed to include some new guidance in the Guidance Notes on Rule 15 as follows:
Nomads are required to notify the LSE as soon as there is a “possibility” of the company becoming an AIM Rule 15 cash shell and to consult with the LSE where there is any question about its status as an AIM Rule 15 cash shell. Previously the guidance required Nomads to inform the LSE only where the AIM company had become an investing company.
Where an AIM Rule 15 cash shell does not intend or wish to complete a reverse takeover in accordance with AIM Rule 15, the LSE expects it to obtain shareholder approval to cancel its admission to trading on AIM in accordance with AIM Rule 15, and to consider how best to return any remaining funds to shareholders.
The LSE has also proposed consequential changes to paragraph 5.2 of the AIM Note for Investing Companies, in particular adding a confirmation that cash funds raised from a fundamental disposal under AIM Rule 15 will usually be considered independent for the purposes of satisfying the equity fundraising requirements under Rule 8.
These proposed changes are clearly intended to clamp down on cash shells listing on AIM and limit the number which remain on the market for long periods in order to reduce the speculation and volatility of some cash shells which have had the potential to damage the standing of the junior market.
By increasing the minimum fundraising requirement to £6m for new applicants, the LSE is hoping that it will prompt tighter scrutiny of strategy and governance by a broader range of market professionals and investors. For new applicants, the proposed rule changes may make the Standard segment of the Main Market an even more attractive option for listing a cash shell. In our last issue we wrote about the rising trend for Standard listed cash shells (see here). The Standard segment offers a number of advantages when compared with AIM, not least a much lower fundraising requirement and increased flexibility to appoint advisors and control costs. However, management and investors need to consider a number of factors such as the involvement of the UKLA and the longer approval process for a prospectus, free float requirements and potentially increased administration.
The shorter 6 month timescale imposed on companies which become cash shells after a fundamental disposal could be a very challenging timescale in which to complete a transaction resulting in companies being forced off the market prematurely. Furthermore, it will inevitably put pressure on boards to complete a transaction quickly which could run the risk of companies making acquisitions which may not necessarily be in the best interests of their investors.