Earlier this year, the London Stock Exchange issued AIM Notice 46, a discussion paper in relation to proposed changes to both the AIM Rules for Companies and the AIM Rules for Nomads. This is the first discussion paper on AIM that the Exchange has ever released. The responses received from interested parties are currently being reviewed and the Exchange will in due course issue the text of any draft rule changes that it considers necessary.
1. Formalisation of the early notification process
The paper sets out proposals to formalise the early notification process that currently operates as a matter of market practice. Nomads would be obliged to enter into confidential discussions with the Exchange early in the listing process in order to highlight atypical features or potential issues that may be of concern to the Exchange. The information required to be provided would be similar to what is already provided in a Schedule One although any list set out in the new rules will be non-exhaustive. Particular issues which the early notification process would be aimed at highlighting include concerns as to the good character, skills or previous history of any director; corporate structures and business models which may not be appropriate for a public market, and specifically structures where an applicant holds a material part of its assets or business operations via contractual arrangements rather than by owning them itself or through a subsidiary. In our opinion, and we understand this is also the general view from the Nomad community, formalising the early notification process would be a good move as it should help identify red flags at an earlier stage thereby giving a better level of deal certainty. Whilst issuers may have to commence legal, financial and commercial due diligence at an earlier stage in order to allow Nomads to proceed with early notification, the risk of wasted costs from a deal aborting much later in the process would be mitigated. This proposal would apply to all admissions (so would include reverse takeovers and admissions via the designated market route) although we would question whether for certain types of reverse takeover and moves to AIM from the Main Market it would be absolutely necessary.
2. Eligibility - free float
The AIM Rules for Companies do not currently include a threshold for free float and the paper notes that the Exchange does not consider a prescribed threshold appropriate for AIM companies. The Exchange would prefer to maintain its current qualitative approach including a review of the range and spread of shareholders, in particular institutions. The general view is that maintaining this stance is preferred, although a company with a free float of below 20% may find admission difficult. One point raised in the QCA’s response in relation to the Exchange’s view on the participation of institutional shareholders is that the Exchange should not be seen to prioritise institutional shareholders ahead of retail investors although, as is noted below, having institutional shareholders on board can create an extra level of scrutiny over the business proposition.
3. Eligibility - minumum fundraise
The discussion paper notes that AIM introduced a minimum fundraising requirement for investing companies and believes it would be beneficial to introduce a minimum capital raising threshold for all new applicants, subject to limited exceptions where the purpose of the criteria can be met by other evidence (e.g., where an issuer is already admitted to another market). The suggested range is between £2m - £6m The rationale for the proposal is that a larger (typically institutional) fundraise will ensure an extra level of scrutiny over the business proposition, experience of directors and valuation on admission. Also it may possibly assist with secondary trading. Our view, and we understand the general market view, is that this would not necessarily be helpful as there may be numerous reasons why a company doesn’t need to raise a particular sum (or any) on Admission. The imposition of a fundraising requirement for investing companies has seen some investing companies elect to look at listing on other markets (in particular the Standard List) and a minimum fundraise for trading companies could have a similar effect and dissuade some potentially very good companies from listing on AIM.
4. Coporate governance
In its discussion of Corporate governance, the discussion paper asks whether it should be mandatory for AIM companies to comply and explain against a corporate governance code, rather than the current regime which requires consideration of corporate governance as part of the appropriateness review, and disclosure of an issuer’s corporate governance regime. The Exchange favours sticking with the currently flexibility on the basis that, for SMEs, no “one size fits all”. However, the market view appears to be this would lead to greater transparency for shareholders and so should be implemented. It should assist oversight of corporate governance structures and give shareholders a better insight into what issuers do in practice.
5. What the discussion paper didn't cover
We understand that respondents to the discussion paper suggested a number of further areas which were not addressed in the discussion paper but which are felt should be looked at by the Exchange. In particular, making it a mandatory requirement to have a relationship agreement in place for significant shareholders and a requirement for mandatory voting on share-based incentive plans. These suggestions are unlikely to be dealt with by any proposed rule changes arising from the discussion paper but may feature in any further discussion papers.