On 27 January 2014, the London Stock Exchange (LSE) published AIM Notice 38, which announced its consultation on proposed changes to the AIM Rules for Companies (AIM Rules) and the AIM Rules for Nominated Advisers (Nomad Rules). Many of the changes deal with minor administrative matters or clarify existing drafting, but there are some substantive points to note.
Read on for a summary of the key proposals.
Proposed key changes to the Nomad Rules
Change of control – does the nomad remain eligible?
All applicants for the status of nominated adviser must meet eligibility requirements as part of the approval process by the LSE. In the draft Nomad Rules, the LSE emphasises the importance of the approval process by proposing that, where there is a change of control in a firm, its status of nominated adviser will not automatically continue. The firm must submit a new application in respect of its status and consequently, the LSE will consider the new controller and whether the new controller is able to satisfy the relevant requirements in its own right when determining the eligibility of the firm.
To reinforce this point, further changes to the Nomad Rules are proposed which provide that the LSE may impose a moratorium on the nominated adviser from acting as such, where there is a change in its control. The moratorium will be lifted once the situation is resolved to the LSE's satisfaction, that is, presumably once the new application for the nominated adviser is approved. In addition, the draft Nomad Rules provide that a moratorium will be placed on a nominated adviser where there has been a change it its financial position or operating position that may affect its ability to provide the relevant services.
The proposals also provide that any potential change of control of the nominated adviser should be informed by it to AIM Regulation as soon as possible. This emphasises the importance of keeping an open dialogue with the regulator, particularly where there are potential strategic transactions which may impact its status as nominated adviser.
Qualified Executives (QEs)
A nominated adviser must have a minimum of four QEs, all of whom must meet certain eligibility requirements, so that their employing firm can meet its own requirements to obtain and retain its nominated adviser status. The proposed changes seek to ensure that the requirements do not unfairly restrict what the LSE considers to be relevant experience as part of the eligibility test, and consequently, eliminate quality candidates from the QE team. The proposed new Nomad Rules provide that:
- existing QEs will remain eligible if they have acted in a lead corporate finance capacity on three relevant transactions in the last five years, rather than the current three year period; and
- individuals with over five years continuous experience as a QE and who are actively involved in a corporate finance advisory role (particularly, in relation to AIM), remain eligible if they have acted in a lead corporate finance role on one relevant transaction in the last five years.
Since the publication of AIM Notice 38, on 30 January 2014, the FCA published a consultation paper on proposals to amend the Listing Rules in relation to sponsor competence. Interestingly, one of the proposals is that sponsors must have carried out sponsor services within the previous three years, whereas in contrast, the LSE proposes to look at relevant experience over a longer period, now being five years.
Furthermore, when considering an application for nominated adviser status, the Nomad Rules clarify that the LSE will consider the overall experience of the QEs, both on an individual basis and as a team. In support of this, the draft rules further clarify that an existing QE or a QE applicant can cite the same Relevant Transaction if they have each been involved in the transaction to an appropriate extent.
It is also proposed that, if an individual ceases to be a QE, or the firm ceases to be a nominated adviser, that person shall cease to be a QE and will need to re-apply for their status in respect of the current or proposed nominated adviser.
A nominated adviser is also required to inform AIM Regulation as soon as possible of any potential changes to the structuring or organisation of the directors, partners or employees which impacts its services in such a capacity. So, an internal reorganisation of a firm which results in the re-allocation of several Qualified Executives from the nominated adviser function to a different function would need to be notified to AIM Regulation as soon as possible.
Proposed key changes to the AIM Rules
One of the more notable proposals in the consultation is perhaps the new AIM Rule 43, which clarifies that the LSE retains jurisdiction over companies which no longer have their shares admitted to AIM. The clarification confirms that AIM Regulation can investigate and take disciplinary action in relation to breaches (and suspected breaches) of the AIM Rules which occurred whilst the company had its securities admitted to trading or whilst it was an applicant to become admitted to AIM.
Content in the admission document
AIM Rule 3 has been amended to provide that an applicant must take 'reasonable care to ensure that the information in the admission document is to the best of its knowledge and in accordance with the facts and contains no omission likely to affect the import of such information'.
Currently, Schedule Two of the AIM Rules requires companies to make this statement in the admission document, by incorporating certain of the disclosure requirements in Annex I in the Prospectus Regulation. As a result of the proposed amendment, issuers would not only be liable to investors for false or misleading information or omissions in the admission document, but also to the LSE as a result of a direct breach of this new obligation under the AIM Rules.
Price sensitive information
AIM Rule 11, which relates to the disclosure of price sensitive information, is amended to replace the reference to a 'substantial' movement in price, to a 'significant' movement in price. In its AIM Notice, the LSE notes that it does not expect this amendment to change the current standard of disclosure but that the change is intended to align the terminology with that used in the Financial Services and Markets Act 2000, which provides the legal framework for dealing with market abuse offences. The proposed changes to this AIM Rule also clarify that the current bullet point list of matters which may affect the price of AIM securities is a list of examples only which is simply a clarification of market practice.
Half yearly reports
AIM Rule 18 has been amended to note that whilst there is a requirement that the half yearly report contain comparative figures for the corresponding period in the preceding financial year, the balance sheet may instead include comparative figures from the last balance sheet notified.
More website disclosures
Additional items have been added to the list of information that must be available on an AIM company's website under AIM Rule 26. These are:
- the date on which information was updated in relation to the number of AIM securities in issue and details of significant shareholders
- the annual accounts published for the period which is the lesser of the last three years or since admission
- details of the corporate governance code that the AIM company has decided to apply, how it complies with it, or a statement that no code has been adopted; and
- AIM companies are required to state whether they are subject to the UK Takeover Code or any other similar legislation or code in its country of incorporation or any other similar provisions that it has adopted voluntarily.
The latter point, together with the recent amendments to the Takeover Code bringing more AIM companies within the jurisdiction of the Takeover Code (click here to read a summary of the changes) brings some welcome clarification as to which regimes companies are subject.
Profits test calculation
An additional paragraph to deal with the treatment of losses has been inserted in the profits test calculation in Schedule Three of the AIM Rules.
Updated guidance notes
The guidance notes to the AIM Rules have been updated generally, so that they reflect technical guidance by AIM Regulation which has been previously published in editions of its newsletter, Inside AIM.
A response to market conditions?
Most of the changes proposed in the consultation reflect the LSE's continued oversight of the AIM Rules and Nomad Rules to ensure that they correctly reflect market practice and are aligned to other regulatory changes (such as the amendments to the Takeover Code).
The proposed changes to the Nomad Rules may also reveal a considered response to recent market conditions. Increasing the time period during which relevant experience of potential QEs is to be considered, may be to recognise the recent difficult market conditions over the last few years, which has resulted in lower deal activity on AIM and other markets. The change indicates an awareness by the LSE that whilst deal activity has been relatively slow, quality candidates with good deal experience should not be denied access to participate in a dynamic growth market which is gradually showing signs of recovery.
Responses to the consultation are requested by 3 March 2014. The new AIM Rules and Nomad Rules are expected to come into effect during 2014.