Comply or explain … but with which code?
From 28 September 2018, an AIM company will need to disclose on its website how it complies with or departs from a recognised corporate governance code. This obligation has been introduced through AIM Notice 50 and amended AIM Rule 26.
There is no definitive list of governance codes which can be adopted for this purpose, although the LSE has referred to the UK Corporate Governance Code and the Quoted Companies Alliance Code as established benchmarks. For companies incorporated overseas and/or with dual listings it may be that a more "local" governance code will be appropriate. Directors will need to carefully compare governance codes to assess which works best within their structure and operations.
The nature of the disclosure being introduced goes beyond what AIM companies have, until now, been used to. It will no longer be possible to state that the company intends to comply with a particular code "so far as is practicable and appropriate for a company of its size, stage of development and nature". From September the board will need to publicise which code it will be adopting, how the company complies with that code and its reasons for not complying if it departs from the code in any way. So each affected company is going to have to ensure it can justify any assertion it makes that it complies with the chosen code – an additional layer of compliance.
AIM Rule 26 will require an annual review of corporate governance information and the date of each review must be publicised on the company's website. It makes sense for each review to take place at the same time as the company's preparation of its annual reports and accounts.
Note that all new applicants to AIM since 30 March 2018 have already been required to state which corporate governance code they intend to follow, but they then also have until 28 September 2018 to comply fully with the new requirements.
The revised QCA code
According to the Quoted Companies Alliance, more than half of AIM companies currently refer to the QCA corporate governance code.
A revised version of the QCA Code was published on 25 April 2018 and it sets out ten corporate governance principles, together with step by step guidance on how they can be applied effectively. These principles focus on three main themes reflecting the QCA’s view on the effective function of corporate governance:
- Delivering growth;
- Maintaining a dynamic management framework; and
- Building trust.
The principles cover various matters, including requirements for companies to ensure that their directors are suitably experienced and skilled and to describe and explain external advice sought on any significant matter.
The revised code is described by the QCA as a practical, outcome-oriented approach to corporate governance that is tailored for small and mid-size quoted companies, providing a valuable reference for growing companies wishing to follow good governance examples.
Don't forget …..
Running in parallel with the above reforms are additional corporate governance initiatives aimed at large companies. If your company is incorporated in England Wales and meets prescribed thresholds, these new rules will apply to you - whether or not you are listed or are a private or public company. Even if your listed entity is not incorporated in England and Wales, these reforms will apply to operational subsidiaries incorporated in England and Wales in your group. Read our insight for more of the detail.
AIM as an SME Growth Market
AIM became an SME Growth Market on 3 January 2018 with the objective, in part, of reducing the administrative burden on AIM issuers. In practice, and as noted in our earlier insight, the burden hasn't significantly reduced. For example, although AIM companies no longer need to maintain insider lists, they still need to collate the information in case the FCA should ask for this.
The European Commission has therefore proposed replacing the existing regime for SME Growth Market companies with a requirement for companies to maintain a list of "permanent insiders" (i.e. those with regular access to inside information), which again the company would only need to produce to the FCA if requested. We will have to wait and see if this, and other proposals, amending the Market Abuse Regulation are adopted.
Running alongside this, we have the New Prospectus Regulation (Regulation) which has been introduced to facilitate access to capital for smaller companies whilst maintaining protection for investors.
From 21 July 2019, the Regulation will:
- allow certain SME Growth Market companies to benefit from a simplified regime (details of content not yet confirmed) for secondary issues when they are offering securities to the public; and
- give certain SME Growth Market companies the option of drawing up an EU Growth prospectus (details of content not yet confirmed) instead of a full prospectus when they are offering securities to the public.
Note that changes to the size of public offers for which there is an exemption to the prospectus regime came into force on 21 July 2018 as follows:
- Exempt offers to the public – the threshold below which offers to the public are exempt from the prospectus regime and therefore do not require the issue of a prospectus has increased from €100,000 to €8 million; and
- Transferrable securities – the threshold for securities exempt from the prospectus regime has been reduced from a total consideration value of €5 million to €1 million (calculated over a period of 12 months).
These changes are expected to encourage smaller businesses to raise funds through public rather than institutional offers (although businesses should note that the financial promotions regime remains unchanged). The Impact Assessment published by the Treasury estimates that these changes may provide a net annual benefit to businesses of approximately £10 million.
Before 28 September 2018, directors will need to carefully compare governance codes to assess which works best within their structure and operations. They will need to analyse how they can comply with their company's chosen code and the circumstances in which it will be appropriate for them to deviate from such code.
Additionally, ahead of 1 January 2019, AIM companies incorporated in England and Wales (or whose operational business is held through subsidiaries incorporated in England and Wales) will need to assess whether the new corporate governance initiatives set out in our insight will apply and need to be observed.