In new guidance published on 1 June 2015 the AIM Regulation team has clarified its approach to the free float requirement for AIM companies and reminded nominated advisers of the steps they are expected to take to ensure that a company seeking to join AIM has proper policies and procedures in place to enable it to comply with its financial reporting and other obligations under the AIM Rules.
Instead of being included in an edition of the AIM’s team newsletter, Inside AIM, the new guidance has been published on a dedicated page of the AIM website1 . The AIM team says that this approach will be followed in future. To help companies and nomads find guidance previously given in editions of Inside AIM, the AIM team has published on the same page an index of AIM Rules that have been the subject of comment in the newsletter, with details of the relevant edition. All the newsletters can also be found on the page.
The AIM Rules do not prescribe a minimum level of free float that must be met in order for shares to be admitted to trading on AIM. This is in contrast to the position under the Listing Rules, where companies seeking a premium listing of shares on the Main Market must, as a condition of admission, demonstrate that not less than 25% of the shares for which admission is being sought will be in ‘public hands’. Broadly speaking, shares will not be treated as being in public hands where they are held by (i) the issuer’s directors or their connected persons; (ii) the trustees of any employees’ share scheme or pension fund established for the benefit of the issuer’s directors and employees; (iii) any person with a contractual right to appoint a director to the board of the issuer; or (iv) a person (together with their affiliates) who holds more than 5% of the shares of the issuer. In its guidance the AIM team reiterates that whilst the AIM Rules do not prescribe any particular level of free float, the AIM team considers it an important part of the work of a nominated adviser to ensure that there will be a large enough free float on admission.
Having a large enough free float is considered by the AIM team to be fundamental to the orderly trading and liquidity of the shares once admitted to trading, and inextricably linked to a company’s appropriateness for admission to AIM. Riewe emphasised that the close coordination between the AMU and OCIE is “not cause for alarm” and “nothing new,” but undoubtedly the coordination has greatly energised the exam program. Indeed, Riewe noted that over the past five years, the “three-legged stool of collaboration — AMU, OCIE, and the Division of Investment Management — has yielded tremendous results.”
Specifically, the AIM team has clarified some of the factors which it will discuss with a nominated adviser in relation to the free float of a company’s shares:
- In light of discussion with the company’s broker(s) and potential market makers, nomads should consider how the shares are likely to trade when admitted to AIM, taking into account the likely spread and nature of the shareholders comprising the free float.
- Failure to raise initial target funds (which might also give rise to concerns about the free float) may indicate that the company is not appropriate for admission to AIM. This is something that should be properly explored by the nominated adviser.
- If the company expects to have only a limited free float, the nomad should scrutinise carefully the rationale for the company seeking admission to AIM.
- Where there are concentrated shareholdings (e.g. where shares will be held by persons who are connected through family, business or other interests), the nomad should pay particular attention to the company’s corporate governance arrangements and other safeguards that are in place to reduce the risk of major shareholders exercising improper influence or control. While not mentioned in the guidance, in some circumstances it may be appropriate for the nomad to require major shareholders to enter into a relationship agreement with the company to regulate dealings between them and the company.
Systems, procedures and controls – financial policies and procedures
AIM Rule 31 requires a company to have in place, prior to admission, systems, procedures and controls that are sufficient to enable it to comply with the AIM Rules. In particular, such systems must enable the company to comply with the obligation to announce price-sensitive developments as soon as possible; to publish annual and half-yearly financial results by the relevant deadlines; to put in place arrangements that restrict when directors and certain employees can deal in the company’s shares; and to announce details of any dealings by directors and any changes in significant shareholdings. This is an important area that has been the subject of focus recently among Main Market companies in light of enforcement action taken by the FCA against Lamprell and certain other companies that have failed to comply with similar requirements under the Listing Rules and/or Disclosure and Transparency Rules.
A related part of the nomad’s role is to ensure that an applicant has established appropriate working capital and financial reporting systems and controls. This is similar to the requirement for Main Market companies to establish procedures that provide a reasonable systems and controls. This is similar to the requirement for Main Market companies to establish procedures that provide a reasonable basis for the directors to make proper judgements on an ongoing basis as to the financial position and prospects (FPP) of the company and its group. For this purpose nomads may find it helpful to refer to the technical guidance on FPP procedures published by the ICAEW2 last year , which is applicable to companies seeking admission to AIM as well as the Main Market (or High Growth Segment).
Companies should also bear in mind that they will usually be expected to give warranties to the nominated adviser in the placing agreement to the effect that the company’s systems, procedures and controls are adequate.
It is therefore in the interests of both companies and their nomads to ensure that any shortcomings in the company’s systems, procedures and controls are identified and addressed at an early stage in the preparations for IPO, usually with the help of a report by the company’s reporting accountants; that at a later stage both the company and/or its reporting accountants test how robust the systems are; and that the nomad is given sufficient access to the relevant documents and to the reviewing and testing arrangements to satisfy itself that the systems will enable the company to comply with the AIM Rules. Tech 14/14CFF says, for example:
"Examples of involvement by the [nomad] include:
- attendance at meetings between the reporting accountant and the applicant;
- contribution to the setting of the scope of the reporting accountant’s assurance work;
- involvement and participation in discussions with the applicant about its risk assessment and objectives for FPP procedures; and
- involvement and participation in discussions over potential weaknesses and exceptions relating to weaknesses in design or implementation of FPP procedures.
To fulfil its regulatory obligations, the [nomad] determines what enquiries it needs to make and what assistance and information it requires to support its judgements and, where applicable, declarations in relation to the applicant’s […] appropriateness […] for admission. This exercise will involve identifying where there are gaps in the information the [nomad] has or can obtain and which it will need to bridge in other ways, for example by engaging a third party such as a reporting accountant. The [nomad] will consider all the information it obtains in the context of its knowledge of the company.”
The AIM team guidance reminds nominated advisers that the Rule 31 requirement is one of the areas they must consider in connection with a company’s application for admission to AIM. Nomads should certainly review the financial policies and procedures documents prepared by the company in conjunction with its reporting accountants, including the accountants’ report, but (as Tech 14/14CFF suggests) the AIM team expects nomads to go beyond this: they should assess whether those policies are capable of working in practice, taking into account the nomad’s knowledge of the company and its management.
James Parkes is a Corporate Partner at CMS. James advises clients on a wide range of corporate transactions, including domestic and international mergers and acquisitions (public and private), corporate finance, joint ventures and corporate restructurings. James specialises in advising issuers and investment banks on acquisitions, disposals, fundraisings and other transactions undertaken by companies admitted to the London Stock Exchange (both Main Market and AIM).
Peter Bateman is a senior solicitor and professional support lawyer in the CMS Corporate team.
CMS Cameron McKenna is a member of CMS, which provides clients with specialist, business-focused advice in law and tax matters. Our 3,000 legal professionals across the world, working in sector-based teams and trained in project management, are focused on our clients and fulfilling their objectives. CMS lawyers operate in 59 offices worldwide, offering real-world advice to clients operating in a challenging business climate and a fast-changing regulatory environment. For more information on CMS Cameron McKenna, please visit www.cms-cmck.com