Equity capital markets

Two AIM companies privately censured and fined for breaching Rules 10, 11 and 31 of the AIM Rules for Companies

On 13 August 2018, the London Stock Exchange (LSE) published an AIM Disciplinary Notice, AD19(Section C2.2 Notice) that is has privately censured and fined two AIM companies for breaching Rules 10 (Principles of disclosure), 11 (General disclosure of price sensitive information) and 31 (AIM company and directors' responsibility for compliance) of the AIM Rules for Companies (AIM Rules). The first AIM company was sanctioned for updating the progress of its business via social media when some of the information disclosed should have been first notified via a regulatory information service (RIS). The second AIM company was sanctioned for failing to keep its existing nominated adviser (Nomad) informed as to its progress in appointing a successor Nomad, despite frequent requests for updates during the notice period.

AIM Company 1—breach of Rules 10 and 31 of the AIM Rules

The first AIM company (AIM company 1) was privately censured and fined £75,000 (discounted to £50,000 for early settlement) for breaching AIM Rules 10 and 31.

Background

AIM company 1 gave an update regarding the progress of its business via social media. Some of the information disclosed in this update was information which should have been notified via an RIS before it was first disclosed through social media.

AIM company 1 did not have an adequate social media policy to monitor its social media output, including controls to check that information made public through social media was not released before it was notified in accordance with the AIM Rules.

When the social media update was identified, AIM company 1 made a regulatory notification.

Breach of AIM Rules

Where a company is required to make an announcement under the AIM Rules, AIM Rule 10 requires this to be made via an RIS no later than it is published elsewhere. The LSE concluded that AIM company 1 breached AIM Rule 10 by making public relevant information via social media before it was disclosed via an RIS. In addition, by failing to have sufficient procedures, resources and controls in place to monitor its disclosures made through social media, the LSE found that AIM company 1 also breached AIM Rule 31 (which provides that an AIM company must have in place sufficient procedures, resources and controls to enable it to comply with the AIM Rules).

This case highlights the importance of AIM companies ensuring they have sufficient procedures, resources and controls in place to manage their social media communications and to ensure that no information is disclosed that should have first been notified via an RIS.

AIM Company 2—breach of Rules 11 and 31 of the AIM Rules

The second AIM company (AIM company 2) was privately censured and fined £75,000 (discounted to £50,000 for early settlement) for breaching AIM Rules 11 and 31.

Background

The breaches relate to AIM company 2’s failure to keep its existing Nomad informed as to its progress in appointing a successor Nomad in circumstances where the relationship between AIM company 2 and its Nomad had become difficult.

Breach of AIM Rules

AIM Rule 31 requires an AIM company to provide its Nomad with any information it reasonably requests or requires in order for that Nomad to carry out its responsibilities under the AIM Rules and the AIM Rules for Nominated Advisers. The purpose of AIM Rule 31 is to ensure that the Nomad is fully aware of developments within the AIM company so it can fulfil its regulatory role to advise and guide the AIM company on AIM Rules compliance, as well as meet its own responsibilities to the LSE.

The LSE concluded AIM company 2 breached AIM Rule 31 by not keeping its existing Nomad informed as to its progress in appointing a successor Nomad, notwithstanding frequent requests for updates during the notice period. The Nomad required this information so that it could advise AIM company 2 on its AIM Rules disclosure obligations. As a consequence, AIM company 2 delayed notifying the market when (i) the impending departure of its existing Nomad and its failure to appoint a replacement Nomad had become price sensitive and (ii) it could no longer withhold this information under the guidance to AIM Rule 11.

This case highlights that, even where there is a deterioration in the relationship between an AIM company and its Nomad, it remains incumbent on the AIM company to meet reasonable requests for information from its Nomad and to seek its advice regarding compliance with the AIM Rules whenever appropriate and to take that advice into account—even during the period in which a Nomad is serving notice.

For further information, see LNB News 15/08/2018 56.

Company publicly censured and fined for breaching Rules 10, 11 and 31 of the AIM Rules for Companies

The LSE’s AIM Disciplinary Committee (ADC) has publicly censured and fined MBL Group plc (MBL) for breaching AIM Rules 10 (principles of disclosure), 11 (general disclosure of price sensitive information) and 31 (AIM company and directors' responsibility for compliance). On 13 August 2018, the LSE published (in AIM Disciplinary Notice, AD18) details of the disciplinary action for the purpose of emphasising to AIM companies the importance of keeping the Nomad informed of developments, as well as the need to seek advice and guidance on its AIM Rules disclosure obligations.

Background

MBL is a UK distributor and wholesaler of home entertainment and garden products.

Between November 2016 and January 2017, MBL provided a number of updates to the market regarding the progress of a strategic review, central to which was an exploration of a potential sale of both of MBL’s trading subsidiaries (the subsidiaries). These events took place around the time of a number of board changes involving the departure of two non-executive directors (NEDs) and MBL’s acting CEO (who was also the finance director), This left MBL’s non-executive Chairman to take up the executive role on an interim basis, and to progress the sale process, supported by one newly appointed NED.

On 14 August 2017, MBL provided an update to the market that the sale process of its subsidiaries had been ‘significantly hampered’ by the actions of certain former managers and shareholders. MBL noted that a recent shareholder requisition was a further ‘distraction’ which ‘brought into question the authority of MBL’s directors, which in turn creates transactional risk’.

On 21 August 2017, MBL notified its full year results to 31 March 2017 which included a ‘current trading’ update that did not indicate any material change to its financial performance.

By 14 September 2017, consolidated management accounts covering the full trading period between 31 March 2017 and 30 August 2017 became available to MBL’s board. These indicated a significant deterioration in the financial performance of the subsidiaries. MBL did not take steps, at this time, to consider the disclosure implications of these developments or consult its Nomad.

At the same time as the consolidated management accounts became available, MBL was focused on preparing the business for its AGM and was dealing with shareholder requisitions and other events which, ultimately, led to a determination to suspend the sale process. On 25 September 2017, MBL notified that the sale process had been ‘frustrated’ by a number of factors, including the setting up of a competing business by former management and shareholders, as well as challenges in agreeing non-compete covenants, which led to the withdrawal and/or price reduction of existing offers for the subsidiaries.

The notification of 25 September 2017 also contained a trading update which stated that the subsidiaries remained ‘profitable and cash generative’, without making any reference to the overall deterioration in financial performance. This was notwithstanding the fact MBL was aware of the position by no later than 14 September 2017 and that the deterioration was a change from the indication given in the trading update on the 21 August 2017.

While MBL had liaised with its Nomad regarding its plans to suspend the sale process and to provide an update to shareholders, MBL did not inform its Nomad about the change in the financial performance of the subsidiaries or seek advice and guidance on the AIM Rules.

On 27 and 28 September 2017, MBL reconsidered the available management accounts ahead of its AGM and spoke with its Nomad, following which a further trading update was notified on 28 September 2017. As a result of the delayed disclosure, and of the omission of relevant information, the information available to the market was materially incomplete during the relevant period.

Following the above events, MBL appointed a completely new board.

Breach of AIM Rules

AIM Rule 11 requires an AIM company to announce any new developments which are not public knowledge which, if made public, would be likely to lead to a significant movement in the price of its securities. When making such an announcement, AIM Rule 10 requires the AIM company to take reasonable care to ensure that any information it notifies is not misleading, false or deceptive and does not omit anything likely to affect the import of such information.

AIM Rule 31 imposes various obligations on AIM companies to facilitate compliance with the AIM Rules.

The LSE concluded that MBL was in breach of the following AIM rules:

1. Rule 11 by failing to notify, without delay, the information it became aware of on 14 September 2017, which was price sensitive and was also in contrast with information previously disclosed to the market. The information was not disclosed until 28 September 2017
2. Rule 10 by omitting to include information in its notification of 25 September 2017 regarding the deterioration of the financial performance of the subsidiaries
3. Rule 31 by failing to seek advice from its Nomad, when it was appropriate to do so, regarding the AIM Rules disclosure implications of relevant information
4. Rule 31 by failing to ensure that it had sufficient procedures, resources and controls to enable it to comply with the AIM Rules

The disciplinary action was settled by way of consent order agreed between the LSE and MBL. A fine of £125,000 was imposed on MBL for the above breaches of the AIM rules, which was discounted to £75,000 for early settlement of the proceedings.

For further information, see LNB News 15/08/2018 57.

Tax for corporate lawyers; Private equity

Finance Act 2018, Section 14 and Schedules 4 and 5 (Commencement) Regulations 2018

On 9 August 2018, the government published the Finance Act 2018, Section 14 and Schedules 4 and 5(Commencement) Regulations 2018, SI 2018/931 (the Regulations). The Regulations specify the dates that certain amendments relating to the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust (VCT) reliefs made by section 14(1)–(3) of, and Schedules 4and 5 to, the Finance Act 2018 (FA 2018) come into force in the UK. These provisions of the FA 2018 and the Regulations amend certain provisions of the Income Tax Act 2007 (ITA 2007).

The amendments made by the FA 2018 and the Regulations are aimed at encouraging long term investment in higher risk and knowledge intensive companies. Most of the amendments apply from 6 April 2018, with the new risk-to-capital condition and anti-abuse rule for loans having retrospective effect from 15 March 2018. The increase in the VCT qualifying holdings condition to 80% has effect from 6 April 2018.

The FA 2018 provides that the Regulations may provide for the amendments to come into force with retrospective effect but only to a day not earlier that the day on which the FA 2018 is passed. Most of the amendments have retrospective effect.

Commencement of FA 2018, s 14(1)–(3) (EIS,SEIS and VCT reliefs: risk to capital)

1. the amendments made by FA 2018, s 14(1)–(2) have effect for shares issued on or after 15 March 2018—the amendments provide that (in relation to EIS and SEIS) the risk-to-capital condition is met if, having regard to all the circumstances existing at the time of the issue of the shares, it would be reasonable to conclude that the issuing company has objectives to grow and develop its trade in the long-term, and there is a significant risk that there will be a loss of capital of an amount greater than the net investment return
2. the amendments made by FA 2018, s 14(3) have effect for shares or securities issued on or after 15 March 2018—the amendments provide that (in relation to VCT), the risk-to-capital requirement is met if, having regard to all the circumstances existing at the time of the issue of the relevant holding, it would be reasonable to conclude that the relevant company has objectives to grow and develop its trade in the long-term, and there is a significant risk that, for the investing company, there will be a loss of capital of an amount greater than its net investment return

Commencement of FA 2018, Sch 4, paras 1–9 (EIS and VCT reliefs: knowledge-intensive companies)

1. the amendments made by FA 2018, Sch 4, paras 1, 2, 5, 6 have effect for shares issued on or after 6 April 2018—among other things, the amendments provide that the limit on the amount a person can invest under the EIS in a tax year is doubled to £2m provided that any amount over £1m is invested in one or more knowledge-intensive companies and that the annual maximum investment limit for knowledge-intensive companies receiving investments under EIS has been doubled to £10m
2. the amendments made by FA 2018, Sch 4, paras 3, 4, 7–9 have effect for investments made on or after 6 April 2018—among other things, the amendments provide that the annual maximum investment limit for knowledge-intensive companies receiving investments from VCTs has been doubled to £10m

Commencement of FA 2018, Sch 5, paras 2–11 (venture capital trusts: further amendments)

1. the amendments made by FA 2018, Sch 5, paras 2, 3 have effect in relation to accounting periods beginning on or after 6 April 2019—amendments include the increase from 70% to 80% in relation to the holding of qualifying funds in VCTs
2. the amendments made by FA 2018, Sch 5, para 4 have effect in relation to disposals made on or after 6 April 2019—amendments provide that, in relation to disposals of shares or securities by a company that is a VCT, for the purposes of determining whether the qualifying holdings condition is or will be met, the company is to be treated as if it continued to hold the holding for the period of 12 months (ie, increased from 6 months) beginning with the disposal and the value of the company's investments in that period is to be treated as reduced by the amount of any monetary consideration for the disposal
3. the amendments made by FA 2018, Sch 5, paras 5, 6 have effect in relation to money raised by a further issue which is made in an accounting period beginning on or after 6 April 2018—the amendments add a new ‘minimum investment on further issue condition’ to the conditions for VCT approval listed in ITA 2007, s 274
4. the amendments made by FA 2018, Sch 5, para 7 have effect for loans made on or after 15 March 2018. A loan is made on the day on which the amount lent, or (as the case may be) the first day on which any part of the amount lent, is paid or made available to the company
5. the amendments made by FA 2018, Sch 5, paras 8–11 have effect from 6 April 2018

For further information, see LNB News 09/08/2018 51.

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New and updated content

We have published the following new Practice Note in our Company Incorporation topic (produced in partnership with Deborah Clark of Mills and Reeve LLP): Family investment companies. The Practice Note introduces and explains the concept and various potential functions of a family investment company. It will help practitioners advising entrepreneurs, family business founders and trust settlors to consider the option of setting up a family investment company, with practical guidance on the corporate and tax aspects, as well as planning considerations.

Dates for your diary

Trackers

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1. Brexit legislation tracker
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4. Market Abuse—timeline
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Latest Q&As

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1. How are shares that are being purchased by a majority shareholder valued in the context of an unfair prejudice petition?
2. Can a company capitalise profits to pay up new shares to be allotted to people who are not shareholders?

Useful information

To view analysis of the latest deals in the market and the underlying transaction documents, use our Market Tracker deal analysis tool.

To read about the latest corporate announcements, see our Market Tracker weekly round-up: Market Tracker weekly round-up—10 August 2018.