Bank Building

Regulatory enforcement actions and FCA changes

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Summary: This alert discusses (i) the first FCA fine against an AIM company for failing to disclose inside information (ii) the recent AIM Disciplinary Notice (iii) pending changes to the Listing Rules and (iv) the ban on the use of restrictive contractual clauses.

FCA fines AIM company for market abuse

Tejoori Limited (“Tejoori”) held a 10.1% shareholding in BEKON Holding AG (“BEKON”) originally valued at USD 3.35m, and was notified, on 12 July 2016, that it would probably be required to sell its stake under drag-along provisions.  There would be no initial consideration with the possibility of receiving deferred consideration, the value of which would be, at best, EUR 1.15m over five years.

The sale completed on 10 August 2016 and on the mistaken assumption that Tejoori would not be required to transfer its BEKON shares to the purchaser until it received the deferred consideration, it made no announcement.  However, BEKON and the purchaser issued appropriate press releases.  Subsequently, Tejoori’s share price rose (38%) amid speculation of the amount Tejoori had received from the sale of its stake and the London Stock Exchange contacted Tejoori’s nominated adviser.  On 24 August 2016 Tejoori issued a press release about the sale and its share price closed 13% down from the previous day.

The FCA fined Tejoori for breach of Article 17(1) of the Market Abuse Regulation for failing to inform the public of inside information as soon as possible after 12 July 2016. At that time it was in possession of information which was of a precise nature and which, if it were made public, would be likely to have a significant effect on Tejoori’s share price.

AIM Disciplinary Notice

The London Stock Exchange plc has recently concluded 3 disciplinary actions for breaches of the AIM Rules for Companies (“AIM Rules”) and AIM Rules for Nominated Advisers (“Nomad Rules”) as follows:

  • An AIM company was fined £110,000 (reduced to £75,000) for failing, in breach of AIM Rules 10 and 13, to provide sufficient information on a transaction and to provide a fair and reasonable opinion on the terms of a related party transaction.  Proper communication between an AIM company and its nomad is key and if the nomad had been properly informed about the terms of the transaction, it would have been able to advise the company on its responsibilities under the AIM Rules.
  • A nomad was fined £190,000 (reduced to £130,000) for failing to exercise due skill and care in guidance to an AIM company; failing to retain sufficient records (Nomad Rule 25); falling below expected standards in respect of its liaison with the Exchange; and failing to maintain proper procedures.
  • A nomad was fined £150,000 (reduced to £100,000) for failing to meet the standards required when assessing an applicants’ appropriateness for admission including not completing outstanding due diligence.  The nomad also breached Nomad Rule 19 in the quality of information initially provided to the Exchange in response to questions.

These fines and the recent changes being consulted upon reinforce the importance the Exchange attaches for AIM companies and nomads to meet the expected standards of conduct under the rules when considering a company for admission and in order to maintain the integrity and reputation of AIM on an ongoing basis.

Listing Rules changes – 1 January 2018

In October 2017 the FCA published Policy Statement (PS17/22) (Enhancements to the Listing Regime) with changes to the Listing Rules together with new or amended technical notes. Key changes which come into force on 1 January 2018 include:

  • reordering and amending certain provisions in chapter 6 of the Listing Rules for simplicity and clarity and providing two new technical notes on the requirements for (i) financial information and track record and (ii) an independent business;
  • removing the ability for the FCA to waive the requirements for a clean working capital statement at the point of listing and the financial track record since in practice, they do not waive these requirements;
  • introducing a new concessionary route to listing for certain property companies to reflect that, in assessing the applicant, investors focus on the property valuation report rather than the issuer’s historic financial information;
  • amending the profits test set out in chapter 10, Annex 1 to permit an issuer to disregard an anomalous profits test result of 25% or more when all other applicable class test results are below 5%; and
  • removing the rebuttable presumption of insufficient information in the market about the target upon a leak or announcement of a reverse takeover which may lead to a suspension and only retaining this for shell companies (issuers whose assets consist predominantly of cash).

Ban on restrictive contractual clauses – 3 January 2018

A reminder that under new rules in the Conduct of Business sourcebook (see PS17/13), a firm will be prohibited from entering into an agreement with a client with a ‘right of first refusal’ clause.  The agreement may, however, contain a ‘right to match’ clause where a firm is offered the ability to match an offer from a third-party but with the client ultimately having complete discretion in the decision process.

The ban applies to written contractual arrangements for future primary market services (eg. debt capital market, equity capital market and M&A services) entered into after 3 January 2018 and carried out from an establishment in the UK.

These provisions will not apply to:

  • existing agreements nor to specific pieces of future business that firms know they will undertake:  For example, so-called ‘tailgunner clauses’ which are designed to recompense a firm for work already undertaken by a financial institution if the client decides to use another firm for the same service or transaction; or
  • future service restrictions in bridging loans provided the commercial intent is to replace the loan with alternative, normally longer term, funding.

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