Corporate Law Update

This week we look at a couple of items we mentioned last week: the Private Equity Reporting Group’s 10th annual report on compliance with the Walker Guidelines and feedback from the London Stock Exchange on its discussion paper relating to proposed changes to the AIM Rules.

We also briefly look at a fine levied by the FCA on an AIM company for failing to disclose inside information and a summary of private AIM censures issued by the London Stock Exchange.

This will be our last update of 2017. The next update will be in the first week of the new year.

Quick links:

PERG publishes 10th annual report

As we mentioned last week, the Private Equity Reporting Group (PERG) has published its 10th annual report on compliance with the Walker Guidelines. The Guidelines set out good standards of disclosure by private equity firms and portfolio companies. The report takes a sample set of one third of private equity portfolio companies that fall within the scope of the Guidelines.

Compliance has fallen again this year, but the percentage of sample firms achieving “good” or “excellent” ratings has increased. The key points to note are:

  • Compliance overall fell from 86% of portfolio companies in 2016 to 79% of companies in 2017. PERG says that neither firms nor portfolio companies have kept up with the improved quality of reporting by FTSE 350 companies.
  • All BVCA member firms and their portfolio companies complied with the Guidelines. Non-compliance is being driven by non-BVCA members.
  • The number of firms demonstrating good or excellent compliance rose from 57% in 2016 to 63% in 2017. Excluding non-compliant companies, the level of good (rather than basic) quality disclosures rose from 67% in 2016 to 80% in 2017.
  • Areas of particularly good disclosure in 2017 included financial and non-financial KPIs, strategy, financial risks, and development and performance analysis.
  • Areas of poor disclosure in 2017 included human rights, gender diversity, employee matters, the identity of the company’s private equity firm, and trends and factors affecting future developments, performance or position.
  • 78% of portfolio companies published their annual report in a timely manner on their website. 72% did so for their mid-year update. For the first time, PERG has publicly named companies that did not comply with these requirements.

AIM consults on amendments to AIM Rules

As we mentioned last week, the London Stock Exchange (the “Exchange”) has published AIM Notice 49, announcing the feedback and outcome from its July 2017 discussion paper on potential changes to the AIM Rules. For more details on the original discussion paper, please see here.

The Exchange is now consulting formally on three key proposed changes to the AIM Rules for Companies and the AIM Rules for Nominated Advisers.

  • Most importantly for AIM companies, the Exchange is proposing to require AIM companies to report against a specified corporate governance code on a “comply or explain” basis.

    AIM Rule 26 already requires an AIM company to state whether it has adopted a corporate governance code and, if so, how it has applied it. However, it does not require a company to formally adopt a recognised code, nor to explain any areas of divergence from that code.

    Under the proposed change, a company would need to choose a corporate governance code and explain any area in which it does not comply with that code. This mirrors the “comply or explain” approach under the Listing Rules for Main Market companies.

    However, unlike under the Listing Rules, the Exchange is proposing not to specify a particular code, but rather to refer to “a recognised corporate governance code”. It is common for AIM companies to refer to either the UK Corporate Governance Code or the QCA Corporate Governance Code for Small and Mid-sized Quoted Companies. It may well be that the majority of AIM companies will continue to report against one of these codes.

    The Exchange is proposing to apply this change from 30 June 2018.

  • If a company is applying for admission, its nominated adviser (“nomad”) would be required to submit an early notification to the Exchange containing certain information. (At the moment, this is expected only if the application involves atypical features or potential issues.)
  • Finally, the Exchange is proposing to include a new list of non-exhaustive criteria for nomads for deciding whether and when to engage with the Exchange before making an admission application. These are designed to help assess the applicant’s appropriateness for admission.

The Exchange has decided not to proceed with the following changes:

  • Imposing a minimum free float requirement on AIM companies (similar to the free float requirement for Main Market companies).
  • Extending the minimum fundraising requirement (which currently applies only to “investing companies”) to all companies seeking admission to AIM.

The Exchange has requested comments on its proposals by 29 January 2018.

Other items

  • Investment Association launches public register. The IA has announced that it has launched its public register of FTSE listed companies that have received “significant” shareholder dissent to proposed shareholder resolutions or have withdrawn a resolution before a vote during 2017. The IA defines “significant” as a vote of more than 20% against a resolution.

    The IA reports that 22% of FTSE All Share companies feature on the register, and that 38% of entries in the register related to votes on remuneration reports or policies or other pay-related resolutions. 32% of entries related to votes on director re-elections. 
  • FCA fines AIM company for breaching Market Abuse Regulation. The Financial Conduct Authority has fined an AIM company for breaching Article 17(1) of the Market Abuse Regulation. Article 17(1) requires an issuer to inform the public as soon as possible of inside information that directly concerns it. The final notice can be found here.

    In this case, the company sold its 10.1% shareholding in another company under a drag-along mechanism. No price was payable on the transfer, and there was only the possibility of a deferred price being paid in the future. The company failed to announce the sale based on the mistaken belief that the transfer would not take place until the deferred price was paid.

    However, the other transaction parties did announce the transaction, and the AIM company’s share price rose 38% based on speculation about profits from the sale. When the company finally announced the details of the sale, its share price closed 13% down.
    The FCA took the view that the information about the sale was precise and would, if made public, have had a significant effect on the company’s shares, and that the failure to notify that information created a false market in the company’s shares. It fined the company £70,000 which reflects a 30% discount for early settlement.

    It is worth noting that the company had acted on a mistaken belief and did not behave deliberately or recklessly. The mere fact of failing to disclose information was enough to attract a fine.
  • LSE publishes summary of private censures. The London Stock Exchange has published AIM Disciplinary Notice 17, in which it summarises private censures and fines levied during 2017. These include:

    • a private censure and a £75,000 discounted fine for a company for breaching AIM Rules 10 and 13 by failing to provide sufficient information or a fair and reasonableness opinion in connection with a related party transaction; and
    • a private censure and £100,000 discounted fine for a nominated adviser for failing to meet the required standards in relation to its admission responsibilities.