Briefings
CORPORATE: RECENT CHANGES TO THE AIM RULES
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16 June 2009
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- Shareholder disclosure rules have been amended to catch contracts for differences. These apply to UK AIM companies and their investors who need to be aware of their extended disclosure obligations. The changes also affect non-UK AIM companies who may need to change their constitution. Investors in non-UK AIM companies should check the company's constitution to assess the scope of their disclosure obligations.
- Investing companies (including cash shells) and their advisers also need to take note of new requirements for investing companies. Investing companies already admitted to AIM should note in particular that they may need to amend their "investment strategy"; and review their arrangements with (and make additional disclosure in relation to) investment managers.
Disclosure of contracts for differences
AIM companies and their shareholders will already be aware of the FSA requirements for notification of holdings of voting rights crossing 3% (and every 1% increase or decrease after that). These "major shareholding" rules, found in FSA Disclosure and Transparency Rule 5, have now been extended to catch holdings of long contracts for differences (CfDs) and other derivatives. Consequential changes have been made to the AIM Rules on significant shareholders.
What does this mean for UK incorporated AIM companies?
The rule changes should mean there is greater transparency in who has an interest in the company. Previously, outside a takeover offer period, interests that were purely economic in nature and did not confer entitlement to voting rights (or to acquire such voting rights) need not be disclosed. The new principles-based rules now extend to interests that have a "similar economic effect" and so will include CfDs (whether or not the CfD provider hedges its position by dealing in the underlying shares). Convertible bonds, cash-settled call options, warrants and other instruments may also be caught; there is not an exhaustive list. Issuers should be prepared for greater disclosure from stakeholders and remind themselves of the rules.
Points to note are that:
- The FSA's Disclosure and Transparency Rule 5, as amended, will now catch any direct or indirect holding of an instrument which is referenced in whole or in part to an issuer's shares where generally the holder has, in effect, a long position on the economic performance. This is the case whether the instrument is settled physically in shares or in cash;
- Such holdings should be aggregated with other holdings (both direct and indirect) which were required to be disclosed previously (such as in shares) when calculating whether the thresholds for disclosure are reached;
- Disclosure is required of the gross long position, it is not possible to offset short positions;
- A notification threshold may be crossed not only when the holder acquires or disposes of holdings or instruments, but also following a buy back or share issue by a company which changes the percentage holding;
- As with the current rules, the obligation is on the holder of the instrument or shares to notify the company, which must then in turn announce this by delivery to a Regulatory Information Service without delay. While there is no prescribed form for making notifications for AIM companies, it is useful to use the form TR1 provided by the FSA, which has been updated for the disclosure of CfDs;
- There are various exemptions including a new exemption for CfD writers;
- In an offer period, the disclosure rules in the Takeover Code (which also applies to CfDs) will need to be complied with in addition to the FSA major shareholding rules;
- The FSA's short selling provisions, which relate to net short positions, are unaffected and continue to apply in respect of financial stocks and during rights issues.
What does this mean for non-UK incorporated AIM companies?
The FSA's major shareholding rules do not directly apply to non-UK AIM companies. However, perhaps unsurprisingly, the AIM "significant shareholder" rules require AIM companies to notify any equivalent holdings to those which would be notifiable under the FSA rules, without delay. This presents a difficulty as investors in the non-UK AIM company are not strictly bound by either the FSA or AIM Rules in question. The Exchange therefore requires companies to use all reasonable endeavours to obtain such disclosure from their investors. It is recommending such companies to review their constitutional documents to ensure investors are required to make notification of holdings (as now more widely defined to catch CfDs). The amendments should either be made at the company's next AGM (or the following AGM if the next AGM is before 28 November 2009).
What does this mean for the holder of an interest in shares of an AIM company?
If the holder as at 1 June 2009 has an aggregated holding of shares, CfDs and other instruments referable to shares in the AIM company equal to 3% or more of the issued share capital of the company then they may well already be under an obligation to notify the company of this. Going forward any changes in this aggregate percentage through a whole percentage point, up or down, may also require notification.
If the AIM company is a non-UK company then they should check the constitution to see to what extent they are required to make disclosures.
New rules for investing companies
New rules for investing companies (including cash shells) have been published by AIM this month to reflect the wider range of companies qualifying for admission as investing companies. The changes are comprised in amendments to the AIM Rules and a new Note for Investing Companies, which forms part of the AIM Rules. As explained more fully below, existing investing companies should in particular be aware that:
- they may need to amend their "investing strategy" to comply with amended and renamed "investing policy" rules; and
- they should review their arrangements with and make additional disclosure in relation to investment managers; for example, if the investment manager is not considered independent then an announcement may be required.
A number of other changes (which are not covered in detail here) have also been made, including clarification of the application of the class tests and fundamental change of business rules for investing companies. Also, the requirement to raise £3 million equity upon initial flotation is now expected to be satisfied by an independent fundraising and not be funds raised from related parties, unless the related party is a substantial shareholder only and an FSA authorised person.
Investing policy
New rules relating to an investing company's investing policy mean that existing investing companies are likely to need to review and may need to update their existing investing policies. They have until 1 December 2009 to do so. The new requirements are to set a precise and clear policy in relation to asset allocation and risk diversification complying with certain minimum requirements set out in the AIM Rules. Shareholder approval of any policy changes should not be needed unless the changes amount to "a material change to the overall objective and risk profile of the existing strategy". The revised policy must be notified by RIS and also published in the company's next annual accounts.
Investment managers
Specific disclosure requirements have been introduced for companies with externally managed investment managers. For example, investment managers and their group companies and key employees will be considered as directors for the purposes of the related party, deals by directors and change of director rules. They will also be covered by the restrictions on dealing in a close period. In addition, there is a new requirement to consider whether the investment manager is independent of the company and the Nomad (which the Exchange would usually expect it to be) and disclose if it is not. Because of the new independence requirements and to ensure the company is able to comply with these disclosure requirements, it would be advisable to take advice on the contractual arrangements between the company and its investment manager.
Mishcon's 25-strong corporate group is currently advising on a range of transactions for AIM companies including scheme takeovers, secondary fundraisings, capital re-organisations, de-listings, re-financings, change of board requisitions and Rule 9 whitewashes.