The beginning of 2014 has seen a real return to growth for the AIM Market
(AIM), with more money being raised in March 2014 than during any
month since December 2010 and more funds having been raised by new
Tips for enhancing corporate governance disclosure
03 joiners in the year to date than by new joiners in the whole of 2013. This
edition of our Corporate Briefing therefore concentrates solely on
What are relationship agreements? 05
developments relevant to companies trading on, or considering an
ABI’s best‑practice recommendations regarding lock‑ up agreements
06 application to, AIM and their advisers.
the key changes to the AIM Rules for Companies (AIM Rules) and the
AIM Rules for Nominated Advisers (Nomad Rules) announced in
mid‑May – which will require all companies currently trading on
AIM to review what they disclose on their websites;
the review of corporate governance disclosure, published in March
by the Quoted Companies Alliance (QCA), which indicates that there
is scope for improvement by most companies;
relationship agreements in the context of AIM (in light of changes
being made to the Listing Rules in this area); and
the new Association of British Insurers (ABI) guidelines on lock‑up
agreements published in April, which may lead to some changes in
It is also worth mentioning the abolition of stamp duty and stamp duty reserve tax on certain qualifying AIM shares with effect from 28 April 2014, which it is hoped will help boost liquidity on AIM. Finally, a number of minor amendments were made to the City Code on Takeovers and Mergers (UK Takeover Code) with effect from 1 April 2014. These Code amendments have either been made as a consequence of changes to legislation or do not materially alter the effect of the relevant provisions and so are not covered in further detail here.
We would be pleased to provide more detailed or bespoke advice on any of these changes.
What’s new under the AIM Rules?
Companies trading on AIM should take note of newly published changes to the AIM
Rules. The changes will have some practical consequences for companies as a result of
the inclusion of new information that must be made available on a company’s website.
Significantly, companies will be required to disclose, for the first time, and on an
ongoing basis, information in relation to corporate governance compliance and
applicability of takeover legislation.
“Significantly, companies will be required to disclose, for the first time, and on an ongoing basis, information in relation to corporate governance compliance and applicability of takeover legislation.”
On 13 May 2014, the London Stock Exchange (LSE) published changes to the AIM Rules and the Nomad Rules following a consultation announced in January 2014. Many of the changes are administrative or clarificatory in nature, but some are more substantive and will require steps to be taken by AIM companies to implement them. The majority of changes were implemented with immediate effect with the exception of the changes to the
website disclosure requirements under Rule 26 which must be implemented by 11 August 2014. Key changes include:
> Clarification that an applicant must take reasonable care to ensure that the information contained in an AIM admission document is, to the best of its knowledge, in accordance with the facts and contains no omission likely to affect the import of the information;
> Amendment of Rule 11 (disclosure of price sensitive information) to replace the reference to a “substantial” movement in the price of the AIM securities with “significant” – the LSE does not consider this to be a change in the standard of disclosure (merely a consistency change to reflect terminology used in other legislation). The guidance now also clarifies that the reasonable investor test will apply to this rule;
> Clarification of Rule 18 (half‑yearly reports) to state that the balance sheet may contain comparative figures from the last balance sheet notified (rather than comparative figures for the corresponding period in the preceding financial year);
> The addition of the following to the list of information that must be made available on an AIM company’s website from admission under Rule 26:
The date on which details relating to the AIM securities in issue and significant shareholders were last updated;
The annual accounts for the last 3 years (or since admission if less) – the previous requirement was only to make available the most recent annual accounts;
Details of the corporate governance code that the AIM company has decided to apply and how it complies with the code, or if no code has been adopted, this should be stated together with its current corporate governance arrangements;
Whether the AIM company is subject to the UK Takeover Code, or any other such legislation or code in its country of incorporation or operation, or any other similar provisions it has voluntarily adopted;
> Clarification that the LSE will have jurisdiction over AIM companies no longer admitted to the market for the purpose of investigating and taking disciplinary action in relation to rule breaches that occurred whilst admitted (or applying for admission). The Exchange will be able to require a company to provide it with information in such circumstances; and
> Various changes to the Guidance Notes, to include, for example, technical guidance that has previously been discussed or clarified in the LSE’s newsletter “Inside AIM” and reference to AIM’s recognised growth market status and the abolition of stamp duty and stamp duty reserve tax for certain AIM companies.
> Clarification of the eligibility criteria for becoming a nominated adviser (Nomad) and that on a change of control a new Nomad application is required; and
> An easing of the rules in relation to the maintaining of Qualified Executive (QE) status in order to retain the experience and knowledge of those who have practised as a QE for a number of years and are actively involved in providing corporate finance
advice to AIM companies.
Steps to take
AIM companies will have until 11 August 2014 to check that their websites comply with
the updated rules. Companies should:
> Familiarise themselves with the new requirements;
> Review what they currently disclose on their websites; and
> Update the disclosed information as necessary – some companies will already
disclose some of this information in their annual accounts.
The guidance to Rule 26 states that information 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 should be kept up‑to‑date and the last date on which it was updated should be included.
Tips for enhancing corporate governance disclosure
A review of corporate governance disclosure by the QCA published in March 2014
indicates that there is scope for improvement by most companies. The review offers
practical tips to quoted companies to improve their reporting and to help directors
communicate with investors better. The QCA already recommends that companies
publish a corporate governance statement in their annual report and accounts or on their
website. In light of the new website disclosure requirements in relation to corporate
governance under the AIM Rules (see above), AIM companies will need to better
evidence their corporate governance behaviour and compliance. Taking note of the
comments and recommendations in the review will assist this process.
The QCA, in partnership with accountancy firm UHY Hacker Young, has undertaken a review of corporate governance disclosures made by small and mid‑size quoted companies. Disclosures made in the annual reports and accounts and on company websites of 100 small and mid‑size companies across all sectors with equity securities admitted to trading on the Main Market of the LSE (Main Market), AIM and the ISDX Growth Market were compared to the minimum disclosures set out in the QCA’s Corporate Governance Code for Small and Mid‑Size Quoted Companies 2013.
“AIM companies will have until
11 August 2014 to check that their websites comply with the updated rules.”
“Companies should move beyond the comfort of boilerplate and cut‑and‑paste disclosures.”
The results of the review have highlighted some obvious areas of improvement for the
majority of companies. Key messages from the review are that boards need to improve on
telling shareholders why the decisions they make are in the best interests of the company
as a whole and companies need to make it easier for investors to come to their
The top five governance reporting tips emanating from the review and selected investor feedback are:
> Focus on what is important – companies should think about what messages they want to convey in the annual report and accounts and use it as an opportunity to sell their company’s story. Companies should move beyond the comfort of boilerplate and cut‑and‑paste disclosures;
> Explain what you do – investors do not necessarily want blind compliance and box‑ ticking – they want to understand what governance structures and processes you have and why;
> Link your company’s strategy, governance and risk – everyone accepts that this is difficult to do, but it is important to investors that companies try to articulate this clearly;
> Use the reporting cycle to tell a story – write in your company’s voice and tone; don’t hide the bad news; and deliver your company’s messages in a clear and confident manner. Companies should view the annual report and accounts as the “shop window”; and
> Board evaluation can help your company improve its governance – board evaluation and disclosures on this can help demonstrate to investors a process of continuous improvement.
Areas to improve
The weakest areas of disclosure were those relating to board evaluation, how the
application of a company’s corporate governance structures and behaviour support the
company’s long‑term success and its strategy for growth, information received by the
board and by individual committees, and explanations of the role of any external advisors
to the board or its committees and any internal advisory responsibilities, all of which
investors say provide a valuable insight into the company. Other areas significant to
investors, where improvement can be made, include an explanation of how audit
objectivity and independence is safeguarded (particularly if the auditor provides
significant non‑audit services) and an explanation of how risks align with the strategy of
the company and how the strategy links to the key performance indicators, the
remuneration policies and corporate responsibility activities.
The report highlights that investors want to see companies improving their corporate behaviour as they grow and that good corporate governance can bring a great deal of value to a company by helping it raise finance and preserve capital.
What are relationship agreements?
Relationship agreements are a common feature on AIM. Here we take a closer look at
when and why a relationship agreement may be required and what terms it might
With effect from 16 May 2014, the Listing Rules have re‑introduced an express requirement for a premium listed issuer on the Main Market to have a written and legally binding agreement (usually called a relationship agreement) in place with its controlling shareholder(s), one of a number of measures designed to strengthen minority shareholder rights and protections.
The Listing Rules now specify certain minimum mandatory independence undertakings which an issuer must put in place to ensure that the business remains independent of the controlling shareholder’s influence. As many premium listed companies already behave in line with such provisions or have relationship agreements in place, it will largely be a matter of codifying existing practice by putting in place agreements or amending existing agreements to include the required terms (and there is a transitional period of six months to comply).
By comparison, for companies trading on AIM, there is no specific legal or regulatory requirement to enter into a relationship agreement. However, in practice, as with premium listed companies, such agreements are common and are often expected by an applicant’s Nomad and investors. As there is currently no guidance for AIM as to when a relationship agreement may be appropriate, this will be for the company to consider in conjunction with its Nomad. Going forward, the new Listing Rules requirements may be an extra factor that will be taken into account in assessing when an agreement is required for an AIM company and what terms it should include. We summarise below current practice on AIM as to why and when relationship agreements are commonly used and what provisions are commonly sought.
What are relationship agreements and why are they used?
A relationship agreement is an agreement governing the relationship between a company
and its major shareholder (Significant Shareholder). The relationship agreement will
generally aim to ensure that all arrangements between the company and Significant
Shareholder are entered into on an arm’s length basis, and that the company can operate
independently of such Significant Shareholder.
The company and Significant Shareholder will have competing interests: the company’s aim will be to provide protections for minority shareholders of the company and to impose restrictions on the Significant Shareholder. The Significant Shareholder’s objective will generally be to cement certain rights which are not enjoyed by other shareholders, such as the right to board representation, in order to protect its investment in the company.
When are they used?
Practice varies for AIM relationship agreements, but these will usually be put in place
where a Significant Shareholder holds around 15% to 20% or more of the company’s
voting rights. A company or Significant Shareholder may, however, wish to enter into a
relationship agreement as a condition to such Significant Shareholder taking a smaller
stake in order to protect their respective positions (particularly considering that AIM is
traditionally the market more suitable for companies with higher risk profiles and also
that the AIM Rules regard any 10% shareholder as a “Substantial Shareholder”).
“[There are] certain minimum mandatory independence undertakings which an issuer must put in place to ensure that the business remains independent of the controlling shareholder’s influence.”
“A relationship agreement
can help to
A company’s Nomad will be required to sign off on the suitability of the terms of the relationship agreement as part of the requirement for the Nomad continually to assess the appropriateness of such company’s admission to AIM. A relationship agreement can help to demonstrate that a company has good corporate governance and will be run for the benefit of shareholders as a whole following admission and so satisfies the criteria that it is appropriate for AIM.
Common provisions found in a relationship agreement
An AIM company may seek to include (amongst other things) the following provisions:
that a company
has good corporate >
will be run for the >
shareholders as a
restrictions on a Significant Shareholder voting on any conflict matters (at director and shareholder level);
an obligation on the Significant Shareholder to remove any of its nominated directors when its shareholding falls below a relevant percentage and to indemnify the company for any claims relating to any such removal; and
various voting and other obligations designed to ensure that the company is run for the benefit of members as a whole and can continue to operate independently.
A Significant Shareholder may seek to include (amongst other things) the following
> director appointment rights, which may increase or reduce according to the Significant Shareholder’s percentage shareholding;
> the right (but not obligation) for the Significant Shareholder to maintain its percentage shareholding by participating in future share issues carried out by the company (often excluding issues relating to employee share option schemes or share‑ for‑share acquisitions);
> the right to be consulted in relation to, or the right to veto, certain transactions proposed by the company (e.g. significant acquisitions or disposals); and
> sometimes, the right to maintain a board observer when the Significant Shareholder’s percentage shareholding falls below the required holding to enjoy director appointment rights.
Inevitably, each relationship will need to be tailored to a very specific scenario so it is best to consider this early in any discussions with potentially significant new investors.
ABI’s best‑practice recommendations regarding lock‑up agreements
On 14 April 2014, the ABI published best‑practice recommendations regarding lock‑up
agreements. It recommends clearer disclosure of the terms and periods, an initial ‘hard’
lock‑up period for longer lock‑up agreements, and reminds investment banks to
carefully consider overall merits before granting a waiver of a lock‑up agreement.
Lock‑up agreements are often entered into in the context of a company undergoing an initial public offering or secondary fundraising. Significant shareholders, directors and other officers of the company undertake to the investment bank or Nomad/broker leading the capital raising process that they will not sell shares in the company for a specified period of time, subject to certain exceptions and circumstances. Lock‑up agreements operate to regulate the supply to the market of shares in the company and so help formulation of share price. Lock‑up agreements usually continue for a period to allow share price fluctuations to stabilise and for the real value of the company to be determined. Consequently, investors can, and do, place significant reliance on lock‑up agreements.
The need for a change of practice regarding lock‑up agreements?
The ABI comments that investment banks have progressively waived lock‑up restrictions
prior to their expiry, and often a long period prior to the expiry date. ABI members
consider this development unwelcome, and damaging to market integrity, because it has
led to uncertainty regarding how lock‑up agreements will actually be enforced.
The ABI recommends clear disclosure of the period of a lock‑up agreement, together with
any circumstances in which a sale may be permitted prior to expiry of the lock‑up
agreement. Whilst noting that the appropriate period and terms for a lock‑up agreement
will depend on the circumstances, the vendor and investment bank involved, the ABI
> ‘soft’ lock‑ups (where the lock‑up may be broken at any time at the sole discretion of the investment bank) are appropriate only for periods of short duration;
> where a lock‑up is for a longer duration, an initial ‘hard’ lock‑up period (where sales are not permitted, or permitted only in very limited, definable circumstances) will be appropriate; and
> if an investment bank has sole discretion to waive the lock‑up restriction, any such waiver should only be given after careful consideration, taking full account of the overall merits from an investor’s perspective and the need to maintain market integrity, and should only be given close to the stated expiry of the lock‑up agreement.
Implications for companies
These recommendations focus on clearer disclosure of the terms and periods of lock‑up
agreements. They do not prohibit early sales by a party to a lock‑up agreement, and so
banks retain a degree of flexibility through the ability to waive lock‑up restrictions prior
to their expiry. However, investors do not generally expect banks to waive a lock‑up
agreement other than where that agreement is close to expiry.
Whilst the ABI’s best practice recommendations are not legally binding, they do influence market practice and it will be interesting to see how future practice regarding lock‑up agreements develops, including lock‑ups entered into in respect of AIM companies.
“... the ABI recommends that
ʹsoftʹ lock‑ups... are appropriate only for periods of short duration.”