London Stock Exchange consults on changes to the AIM Rules

The London Stock Exchange (“LSE”) on 15 October 2015 published AIM Notice 42¹ announcing a consultation in relation to certain proposed changes to the AIM Rules for Companies (“AIM Rules”) potentially affecting “investing companies” and AIM companies that undertake a “fundamental change of business”. 

Admission criteria for investing companies 

Rule 8 of the AIM Rules currently provides that where an applicant is an “investing company” (being any AIM company which has as its primary business or objective, the investing of funds in securities, businesses or assets of any description), a condition for its admission is that it raises £3 million in cash via an equity fundraising on, or immediately before, its admission to AIM. The £3 million level was set in 2005 and in the words of the LSE “was set at such a level to necessitate external, often institutional participation, ensuring an extra level of scrutiny over the investment policy, the experience of the applicant’s directors and the company’s valuation on admission”. Ten years on, the LSE is consulting on whether it is appropriate to increase the amount of cash required to be raised to £6 million to reflect today’s investment landscape. 

Fundamental change of business 

AIM Rule 15 currently provides that where the effect of a proposed disposal is to divest an AIM company of all, or substantially all, of its trading business, activities or assets, the AIM company will, upon completion of the disposal, be treated as an investing company. The fundamental disposal and the AIM company’s proposed investing policy must be approved by shareholders. The AIM company will then have 12 months to either (i) implement the investing policy; or (ii) make an acquisition or acquisitions which constitute a reverse takeover under AIM Rule 14. 

AIM Notice 42 explains that the purpose of the current rule is to allow AIM companies to continue to access the benefits of the market following a fundamental disposal. However, there is a concern that “some companies remain on the market with limited cash balances which may not be sufficient to enable meaningful investment(s) or facilitate the functioning of a fair and orderly market in the company’s securities”. 

The LSE is consulting on a proposal to change the rules to provide that an AIM company that becomes a cash shell following a fundamental disposal will be classified as an “AIM Rule 15 cash shell” instead of an investing company. Upon becoming an AIM Rule 15 cash shell, an AIM company will have six months to make an acquisition or acquisitions which constitute a reverse takeover under AIM Rule 14. For the purposes of the new Rule 15, becoming an investing company pursuant to AIM Rule 8, including the requirement to raise minimum funds (as discussed above), will be treated as a reverse takeover and the provisions of AIM Rule 14 will apply (including the requirement to publish an admission document).

Under the new rules, if adopted, if an AIM Rule 15 cash shell does not complete a reverse takeover within six months, trading in its securities will be suspended. If it does not wish to undertake a reverse takeover, it will be expected to get shareholder approval to cancel its admission to AIM and the proposed new guidance suggests that this consent should “usually” be obtained at the same time as the shareholder consent to the relevant disposal (if shareholder consent is required). In addition, the amended Guidance Notes require that the relevant AIM company should consider with its Nomad whether the proceeds of the disposal should be returned to shareholders at the same time. Where an AIM company became an investing company prior to the date of the new rules coming into effect, the 12 month time limit in Rule 15 in the current AIM Rules will continue to apply. 

The LSE’s proposed amendments to the Guidance Notes to amended AIM Rule 15 also place an obligation on Nomads to notify the LSE as soon as there is a “possibility” that the AIM company has become an AIM Rule 15 cash shell and/or consult with the LSE in circumstances where there is any doubt. Previously the guidance required Nomads to inform the LSE only where the relevant AIM company had become an investing company. 

Consequential changes are also proposed to paragraph 5.2 of the AIM Note for Investing Companies, including adding a confirmation that cash funds resulting from a fundamental disposal under AIM Rule 15 will usually be considered independent for the purposes of satisfying the equity fundraising requirements under AIM Rule 8. 

Practical impact 

The proposed changes represent a clear statement of intent on the part of the LSE that they are seeking to limit the number of cash shells which remain on AIM for extended periods. If adopted, they will undoubtedly make it more challenging for investing companies to obtain admission to AIM in the first place and it will put pressure on the boards of those investing companies and cash shells who wish to remain on AIM following a disposal. 

The deadline for responses to the consultation is 12 November 2015 and the LSE has committed to confirm the results of its consultation as soon as reasonably practical following the deadline.

Footnotes 

_{1) See AIM Notice 42}