AIM Consultation

The London Stock Exchange (“Exchange”) has published AIM Notice 46 in which it announced the launch of a discussion paper on proposed changes to the AIM Rules for Companies and the AIM Rules for Nominated Advisers.

Many of the proposals concern the pre-admission process, principally to avoid delays. However, there are a number of proposals which would affect companies already admitted to trading on AIM.

Pre-Admission Proposals

  • Early notification: whether nominated advisers should enter into discussions with the Exchange at an earlier stage setting out key information regarding the company and its proposed admission to AIM.
  • AIM Rule 9 powers: whether the Exchange should publish a list of non-exhaustive examples of factors that a  nominated adviser should take into account when assessing a company’s appropriateness for AIM.
  • Free float: whether the Exchange should introduce a minimum “shares in public hands” requirement and if so, what the minimum free float should be.
  • Minimum fundraising: whether the Exchange should introduce a minimum fundraising threshold for all new applicants (subject to limited exceptions) and if so, whether it should apply to both revenue and non-revenue generating companies. What should the minimum threshold be?

Post-Admission Proposals

Corporate Governance

The Exchange takes a principle-based approach to corporate governance and is of the view that each company, together with their nominated adviser, should focus on what is meaningful and appropriate for that company in its particular circumstances. AIM Rule 26 sets out the current corporate governance arrangements and the discussion paper is canvessing views on whether those requirements are effective.

The question is also raised as to whether it should be mandatory for AIM companies to comply and explain against one of the industry codes of their choosing, such as the UK Corporate Governance Code or the Quoted Companies Alliance Corporate Governance for Small and Mid-Size Quoted Companies.

Standards of Conduct and Approach to Non-Compliance

The Exchange’s remit to enforce standards of conduct in AIM companies is strictly limited to its rulebooks. It cannot get involved with other examples of inappropriate or fraudulent conduct such as market abuse, fraud, breach of directors’ duties and so on. The Exchange is concerned that market participants, particularly individuals, do not fully appreciate its limited remit. To that end, it raises the question as to what more it could do to educate market participants, beyond the information already available on its website.

Breaches of the AIM Rulebooks

The discussion paper sets out what factors the Exchange considers when investigating alleged breaches of its rulebooks and the sanctions available to it. The Exchange intends to undertake a further review of the AIM Disciplinary Procedures and Appeals Handbook with a view to considering proposals to increase understanding about the outcome of the Exchange’s work.

The Exchange also intends to review its supervisory powers and sanctions policy and to issue a consultation paper on proposed changes to the AIM Disciplinary Handbook. In the meanwhile, the discussion paper raises the question as to whether to introduce automatic fines for explicit breaches of the AIM Rules, which breaches and the level of the fine.

The Exchange invites responses to the discussion paper on or before 8 September 2017.

Takeover Code Consultation

The Code Committee of the Takeover Panel has published PCP2017/1 consulting on a number of proposed amendments to the Takeover Code in relation to asset sales in competition with an offer and other matters.

The background to one of the consultation issues is that in late 2016, there were two cases in which the board of an offeree company subject to a unilateral offer decided that shareholders would receive better value by the company selling all of its assets to a third party, returning the proceeds to shareholders and winding up the company, rather than accepting the offer. These cases raised a number of issues under the Takeover Code and in part led to this PCP.

In the Code Committee’s view it is undesirable that certain provisions of the Takeover Code might be capable of being circumvented through an offeror or potential offeror purchasing the assets of an offeree company. Accordingly, the Code Committee proposes to introduce an additional restriction into Rules 2.8, 12.2(b)(i) and 35.1 prohibiting persons subject to these Rules from purchasing, agreeing to purchase, or making any statement which raises or confirms the possibility that it is interested in purchasing, the assets of an offeree company. Furthermore, in order to cast the net wider, the Code Committee proposes that the prohibition should apply not only in relation to the purchase of all or substantially all of the assets of the offeree company but rather in relation to the purchase of assets which are significant in relation to the offeree company. In determining whether assets are “significant”, the Panel will look at the consideration, assets and profits tests similar to those set out in Note 2 on Rule 21.1 and relative values of more than 50% will generally be regarded as significant.

Responses to the consultation are requested by 22 September 2017.


Changes to the PSC Regime: AIM Companies Take Note

In our Down the Wire post of 22 May, we warned that the Fourth Money Laundering Directive (which the UK had to implement by 26 June 2017) could bring AIM companies within the scope of the “PSC regime”, so as to require the identification and registration of people with significant control. At the time we said that clarification on this question was required.

Guidance issued by the Department for Business, Energy & Industrial Strategy (BEIS) on Friday, 23 June, confirmed that AIM companies are, from today, now required to create and maintain a PSC register, and must file PSC information with the central public register at Companies House, as a result of the coming into force of  The Information about People with Significant Control (Amendment) Regulations 2017.

Until now AIM companies have been exempt from the need to create and maintain a PSC register.   This new compliance requirement for AIM companies applies in addition to the existing disclosure obligations in Rule 17 of the Aim Rules and DTR 5.

iStock_000020654006_SmallCompanies whose voting shares are admitted to trading on the London Stock Exchange’s main market, or any other regulated market in the UK or EEA (and certain other specified markets) are not affected by the changes and continue to be exempt from the PSC regime (but subject to other transparency rules).

For AIM companies and other companies affected by the PSC regime BEIS has issued updated Summary Guidance and Detailed Guidance.

If you require any further assistance please contact your usual Squire Patton Boggs representative.

Changes to the Persons with Significant Control Regime

The Fourth Money Laundering Directive ((EU) 2015/849) (“MLD4″) must be transposed into national law by 26 June 2017. MLD4 requires (amongst other things)  corporate and other legal entities to disclose their beneficial owners. In many respects this is currently being done under the PSC regime. However, MLD4 goes further than the PSC regime in two important regards and, as a consequence, changes will need to be made to the PSC regime.

Money Laundering SeriesMLD4 requires the beneficial ownership information to be “current”. However, at present, any changes to the PSC register are notified on the annual confirmation statement, meaning the information open to public scrutiny could potentially be close on a year out of date. For that reason, Companies House has announced that as from 26 June the PSC register will no longer be updated on the confirmation statement (form CS01). Instead, companies will need to update their register within 14 days of the change and file a form PSC01 to PSC09 within another 14 days. This is a significant change and is strictly event-driven.

The second difference is that MLD4 has a wider scope of application, meaning that the PSC regime will need to be extended to include more entities. Affected entities are Scottish Limited Partnerships and General Scottish Partnerships, in both cases from 24 July 2017 (although strangely it appears from Companies House announcement that they can continue to update their PSC information yearly on a confirmation statement).

Other possible affected entities are so called DTR5 companies i.e those listed on AIM and NEX (formerly ISDX). Such companies are currently not caught by the PSC regime, but that could change. Clarification is required but, as a result of the snap general election being called, government has gone into purdah. No regulations have yet been published and parliamentary time will be in short supply after the result is called, meaning that the timetable could be delayed. However, Companies House has said that until it hears otherwise, it is currently working to the original timetable.

New Long-Term Reporting Guidance

The Investment Association (“IA”) has published new guidance on long-term reporting which it is encouraging companies to adopt as soon as possible. This follows on from the IA’s call some 6 months ago to cease quarterly reporting in favour of more meaningful long-term reporting. The guidance applies to  companies whose shares are admitted to the Premium Segment of the Official List. All other listed companies (including AIM companies) are encouraged to follow the guidance as a matter of best practice.

Business people discussing strategy in boardroomThe guidance comprises recommendations in the following areas:

  • Business models and long-term reporting. This section reiterates the importance of longer-term performance reporting. The IA endorses the FRC Reporting Lab’s Business Model Reporting recommendations and suggests reporting should aim to clarify a company’s significant strategic issues and risks, at least over the next 3 to 5 years, although longer time frames would be preferable where possible.
  • Productivity. This section sets out how companies should assess and report on the drivers of productivity within their business. The IA would like to see companies develop a set of Key Performance Indicators by which improvements in productivity can be reliably measured over time.
  • Capital management. This section outlines investors’ expectations on capital management disclosures and how companies can improve reporting on the connection between capital management and its long-term strategy, promoting sustainable, long-term value creation.
  • Disclosure of material environmental and social risks. This section covers disclosures relating to the board’s responsibilities and policies, procedures and verification systems to manage environmental, social and governance risks. The IA encourages companies to demonstrate how they create, sustain and protect value through the management of material environmental and social risks.
  • Human capital and culture. This section sets out expectations as to how companies should report on human capital and culture. The guidance sets out minimum metrics which a company should disclose.  As regards culture, the guidance notes that a healthy corporate culture is a valuable asset, a source of competitive advantage and a vital component in the creation and protection of long term value.

Andrew Ninian, Director of Stewardship and Corporate Governance at the IA, said:

“The best way to boost productivity and long-term returns in the UK is to shift the way many big companies operate away from a short-term focus, to more long-term decision-making. This will ultimately benefit the economy as a whole by creating more jobs, higher levels of growth and stronger returns for savers.

All businesses need access to long-term funding to grow, but many who take a long-term view are not currently maximising their appeal to investors. This guidance will help responsible companies get noticed by investors, by providing them with the information they need to make informed, long-term investment decisions.”

The IA’s corporate research service, the Institutional Voting Information Service, will be monitoring the implementation of the guidance analysing annual reports for year-ends on or after 30 September 2017.


PIRC Shareowner Voting Guidelines 2017

PIRC has published the 2017 edition of its UK Shareowner Voting Guidelines, replacing last year’s version.  Additions to the guidelines include the following:

  • PIRC will oppose the re-election of an executive chairman except in exceptional circumstances.
  • PIRC supports the Hampton-Alexander Review and the Davies Review recommendation that 33% of board positions in FTSE 350 companies be held by women by 2020.
  • PIRC will not support the re-election of a nomination committee of a FTSE 350 company where current female representation on its board falls below the expectation above and the company has no clear and credible proposals to achieve that objective.
  • Boards and shareholders should consider a director’s track record, qualifications, sector based experience, transactional experience and overall competency when considering their suitability for election (previously, this was a requirement on re-election only).
  • It should be normal practice to advertise formally vacant executive director posts.
  • Where a company receives a significant proportion of votes cast against a management proposed resolution it should (in addition to a statement within its RNS announcement) disclose in its subsequent annual report the steps taken to engage with shareowners on their substantive concerns.
  • PIRC views the BEIS Green Paper on corporate governance reform as consistent with its interpretation of the law regarding directors’ duties and strategic reporting (i.e greater emphasis on directors explaining how they have fulfilled their duties under the Companies Act 2006, including the non-exhaustive items specified in section 172).
  • Companies should, on an annual basis, disclose the remuneration consultants used and the amount of their fees.

Business people discussing strategy in boardroomThe following items have not been included in the new guidelines:

  • The secretary should not also be a director.
  • The role and responsibilities of the secretary should be set out formally in a contract and outlined in the annual report.
  • PIRC’s view that the appointment of alternate directors is not acceptable due to the lack of accountability to shareholders.

The guidelines are available to purchase through the PIRC website.

Corporate Governance Changes Ahead?

If the Business, Energy and Industrial Strategy Committee’s recent report on its inquiry into corporate governance is anything to go by, we may be seeing significant changes ahead. Whilst the report does not believe that a fundamental overhaul of the current framework is necessary it makes a number of noteworthy recommendations, including:

  • The UK Corporate Governance Code requiring informative narrative reporting on the fulfilment of directors’ duties under section 172 (duty to promote the success of the company) of the Companies Act 2006. This would require boards to explain precisely how they have considered the different stakeholder interests and how this has been reflected in financial decisions.
  • The FRC holding to account company directors in respect of the full range of their duties and reporting publicly to shareholders any failings of the board and initiating legal action for breach of section 172 duties.
  • A rating system publicising examples of good and bad corporate governance practice by companies, with a company’s rating being published in its annual report.
  • Simplifying the structure of executive pay. Long-term incentive plans should be phased out as soon as possible with deferred stock becoming best practice in incentivising long-term decision making.Business people discussing strategy in boardroom
  • From May 2020, establishing a new target of at least half of all new appointments to senior and executive management level positions in the FTSE 350 and all listed companies being women. Companies would be required to explain in their annual report any failure to meet this target and what remedial steps are being taken.
  • Employees being appointed to boards not as representatives of the workforce but as directors in their own right, with the necessary skills and aptitudes to play a part as a full board member.

The report concludes: “These reforms are not intended to create onerous new requirements, but to establish arrangements to ensure that [sic] the better enforcement of the Companies Act 2006, to improve the voice of other stakeholders, including employees, and to require companies to engage in a more open and transparent manner with the public. Their aim is to ingrain permanently the values and behaviours of excellent corporate governance into the culture of British business.”

Race in the Workplace

Last month Baroness McGregor-Smith published her review on race in the workplace, focusing on the issues affecting black and minority ethnic (BME) groups in the workplace. In all, the review made some 26 recommendations and estimated that the UK economy could benefit from a £24bn a year boost if BME talent was fully utilised.

iStock_000046212782_SmallThe government has now responded and the Business Minister has written to the chief executives of all FTSE 350 companies calling on them to take up key recommendations from the review including:

  • Publishing a breakdown of their workforce by race and pay.
  • Setting aspirational targets.
  • Nominating a board member to deliver on those targets.

For now, the government has indicated that it does not favour legislation requiring employers to publish the suggested data and has instead opted for a business-led, voluntary approach. However, it has also said that it will monitor progress and stand ready to act if sufficient progress is not delivered. And indeed, that’s what happened with the gender pay reporting obligations which are now mandatory.

Companies should take this opportunity to review their policies on diversity and inclusion and critically assess what steps they are taking to embed those policies within their culture and to address unconscious bias and other barriers to BME participation and progress within their workplace.

Reporting on Payment Practices and Performance

The government has published the Reporting on Payment Practices and Performance Regulations 2017. The regulations come into force on 6 April 2017 and, subject to certain exceptions, the duty to report will apply in relation to financial years beginning on or after 6 April 2017.

The regulations only apply to “qualifying” companies incorporated within the UK. Whether a company is a qualifying company depends on whether it is a parent company or not.

As regards a non-parent company, if it exceeds any two (or all three) of the thresholds set out below, it will be a qualifying company. As regards a parent company, it faces a two stage test before it is considered a qualifying company:

  • first, the parent company must, as an individual company, exceed any two (or all three) of the thresholds below; and
  • secondly, the group of which the parent company is the head must exceed any two (or all three) of the specified thresholds.

The balance sheet thresholds are:

  • Annual turnover: £36 million net (£43.2 million gross).
  • Balance sheet total: £18 million (£21.6 million gross).
  • Average number of employees: 250.

The Regulations require qualifying companies to report on relevant contracts, broadly:

  • contracts for goods, services, or intangible assets (including intellectual property) entered into in connection with the carrying on of a business;

  • are not a contract for financial services; and

  • have a significant connection with the UK, such as contracts to be performed in the UK or where one or both of the  parties is either established in the UK or carries on a relevant part of their business in the UK.

 466766337The report must be published on a web-based service to be provided by the government (available from April 2017) and suppliers, and other interested parties, will be able to view the information as soon as it has been published.

Qualifying companies will need to report on their standard payment terms, including:

  • the period in which the company is contractually required to pay a sum, expressed in days;
  • details of any variations to the standard payment terms made by the company in the reporting period;
  • details of any notification or consultation by the company with suppliers prior to the variation;
  • a description of the maximum payment period specified in a qualifying contract;
  • an explanation of the company’s process for resolving a payment-related dispute with a supplier;
  • various details about the company’s payment practices and policies;
  • a statement of the average number of days taken to pay suppliers; and
  • a statement as to whether the company has deducted a charge levied on a supplier for remaining on the company’s list of suppliers or potential suppliers.

 Breach of the reporting requirements is a criminal offence.

Can More Information Boost the Flagging UK IPO Market?

The Financial Conduct Authority has published a consultation paper on reforming the availability of information in the UK equity IPO process.

In the FCA’s view, for too long information on companies about to float has been restricted to corporate finance advisory firms and investment bankers. By the time the prospectus is published, trading in the company’s shares has already commenced with the result that independent assessment of the pricing and size of the offer cannot take place.

The current process for an institutional-only IPO in the UK may be summarised as follows:

  • Prior to the announcement of an intention to float (ITF), an analyst presentation is arranged at which the issuer’s management presents information on the company to “connected” analysts within the syndicate banks to support the preparation of their connected research (typically around 4 weeks before the ITF announcement).
  • At the time of the ITF announcement, connected analysts publish connected research and the syndicate then imposes a 14 day “blackout” period. During this period, connected analysts use their research to provide their views on the issuer to selected institutional investors and determine the initial offer price range. A “pathfinder” prospectus is sent to potential institutional investors to assess demand before then actively marketing the offer at management roadshows (book-building) during a 14 day period. At the end of that period, the final prospectus is published with the agreed offer price and size, followed by the securities being admitted to trading.

iStock_000046478238_SmallThe cause for concern with the typical process outlined above is that the pathfinder prospectus is made available late in the process and only to a select group of potential investors, with the final prospectus only becoming available after the offer has effectively closed. Of further concern is the fact that analysts within the prospective syndicate banks tend to meet management and the corporate finance advisers before a placing/underwriting decision is made. The paper notes that advisers typically consider a positive research message by analysts as being one of the main factors when advising the issuer on which banks to appoint to the syndicate. This potential bias further compromises the objectivity of connected research. Unconnected analysts are effectively excluded from the process of determining the price and size of the offer.

The paper sets out two core components to the FCA’s policy proposals.

The first is a series of new Handbook rules designed to ensure that an approved prospectus is published, and unconnected analysts have access to management, before any connected research is released. This should restore the primacy of an approved prospectus, improve the range and quality of information available to investors and make information available sufficiently early to enable investors to form a more balanced view on the issuer and the price of the offer.

The second is new Handbook guidance clarifying the FCA’s expectations on analysts’ interactions with management and their corporate finance advisers when an underwriting/placing mandate and subsequent syndicate position is under consideration. Existing guidance states that an analyst should not become involved in activities which would ordinarily be considered inconsistent with an analyst’s objectivity, for example, participating in pitches for new business. The FCA regards “participating in pitches for new business” to include analysts’ interaction with an issuer until:

  • the firm has accepted an instruction to carry out underwriting/placing services for an issuer; and
  • the firm’s position in the syndicate has been contractually agreed.

Comments are due by 1 June 2017.