LSE takes steps towards lighter regulation for AIM companies

The London Stock Exchange (LSE) is proposing wide-ranging changes to the AIM rules designed to lighten the burden of regulation for AIM companies AIM Notice 62.

This is a clear attempt by the LSE to reduce the burden of compliance for AIM companies and to make AIM a more attractive market for IPO and capital raising. Proposals likely to help achieve those goals include abolishing:

• requirements for a working capital statement in Admission Documents and for NOMADs to opine on non-standard remuneration arrangements; and
• the automatic suspension and classification of corporate transactions as reverse takeovers.

But key questions include:

• will the changes increase or diminish certainty and trust between issuers and regulators? and
• will they genuinely lighten the load and make AIM a more attractive forum for growth companies?

Companies are likely to be particularly interested in the proposals for AIM Rule 26. Currently, among other things, AIM Rule 26 requires companies to choose a corporate governance code and report on how they have complied with it. 93% of AIM companies have adopted the QCA Code.

Feedback received by the LSE indicates comply or explain is not providing flexibility for companies to make disclosures consistent with their specific circumstances. The LSE’s proposed response is to require companies neither to adopt nor comply or explain against a particular corporate governance code. Instead, companies shall be required to make disclosures having considered the provisions of a recognised corporate governance code for the purpose of guidance and informing their approach. The LSE guidance provides a list of subject headings under which companies should make their disclosures. There appears to be no opportunity to comply or explain regarding those mandatory disclosures.

Why AIM companies should take note of these proposals

First, considering a corporate governance code is not the same as adopting one. Adopting a recognised corporate governance code (as required by the current Rule 26) provides a common reference point for both issuers and investors, creating a consistent environment in which disclosures can be formulated and assessed.

Secondly, a requirement to adopt a code and the ability to comply or explain regarding adherence to its provisions whilst imposing a mandatory requirement to disclose an approach to a range of corporate governance matters is contradictory.

The absence of guidance about what might amount to acceptable and unacceptable approaches to corporate governance is likely to create uncertainty for issuers, their investors and other interested stakeholders – thus potentially making it more difficult for the LSE to achieve its goals.

Comply or explain is a core principle underpinning UK corporate governance, which should enable companies to make disclosures that are consistent with their specific circumstances. To work effectively, the principle requires constructive engagement for companies to demonstrate to investors that they are well-managed and worthy of investment.

The use of “or” indicates that explaining is alternative to and, therefore, not the same as complying. That interpretation is inconsistent with a principles-based corporate governance framework based on codes that are not rules.

It is not clear how the proposed amendments to Rule 26 will necessarily encourage more engagement and an acceptance by investors (and proxy advisers) that proposals not directly aligned to code provisions might be in a company’s best interests.

Takeaways

The LSE’s proposals to the AIM Rules include changes that are likely to be well-received and reduce compliance. The proposed changes to Rule 26, however, risk creating uncertainty and diminishing trust potentially.

Rule 26 is clear about adopting and disclosing against a recognised corporate governance code. A recognised code is a common reference point creating a consistent environment in which disclosures can be formulated and assessed.

The problems companies have regarding proposals that are not aligned with the letter of code provisions are unlikely to disappear because companies will not have to adopt or comply or explain against a particular code.

We would urge regulators to focus on changing a culture in which explaining is regarded automatically as non-compliance.

Please contact paul.norris@mmk.com if you would like to discuss this article.

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