Many companies have been tempted to ease their financial woes by delisting from AIM. But this is not a decision to be taken lightly, say Claire Clarke and Stephen Hamilton
There has been significant comment about the extent to which companies that fought to get admitted to AIM in the recent boom years are now, somewhat like lemmings, seeking to cancel their admission and free themselves from the shackles of the public markets.
On the face of it, the process to cancel a company’s admission is straightforward. You only need a special resolution of shareholders, which could be obtained as part of a company’s AGM process to keep costs down further. But the story is never that simple and it is the extra complexities that increase the time, energy and advisers fees.
AIM’s success is now its failure
The AIM success story is unquestionable. Since its creation in 1995, more than £60bn has been raised on AIM and between the start of 2005 and the end of 2008 there were more than 1,250 new admissions. At its height in 2005 and 2006, more than £15bn was raised on the market each year.
However, that success has now hit a brick wall. Since the start of 2009 there have been only five new admissions and these have raised a total of just £3m in new money. The story is now not how fast AIM is growing but how fast it is contracting, and arguably the rapid unsustainable growth earlier in the decade has exacerbated the departure rate. Since the end of 2007 there are now 200 less companies admitted to AIM and more than a third of these left the market in the first three months of 2009.
There is no doubt that there is a cost to maintaining an AIM listing. There is a significant expense in maintaining compliance with the AIM rules and other law and regulation that applies due to being publicly quoted. Similarly, each AIM company is obliged to retain the services of a nominated adviser (nomad).
iven the rapid growth of AIM in recent years there has been considerable demand for the services of nomads and, in accordance with the rules of market economics, the price has risen due to relatively inelastic supply. Nomad fees can therefore be something of a burden to small and mid-cap companies.
But when considering whether or not to cancel an admission, it would be wrong for an AIM company to focus solely on the day-to-day cost of maintaining their admission. Any company considering cancelling should consider first what they will lose and second what restructuring will need to be done so as to achieve the cancellation.
It is not just the costs that are lost
Some of the benefits of being publicly quoted remain, notwithstanding the current economic climate. The attractions of a listing on AIM include: access to equity capital for growth; a readily identifiable market value for a company’s shares; a raised profile within the company’s industry and increased liquidity for the company’s shares.
It is true that a company’s share price may currently be significantly lower than management would like it to be and similarly there may be little or no current liquidity in the company’s shares, but there is little doubt that the company’s public quote will raise its profile with customers and suppliers. Similarly, banks, when they are open for business, often find it easier to lend to publicly listed companies. From a reputational perspective therefore, a company should not dismiss the value of its admission to AIM lightly.
If the company has outstanding banking facilities, the cancellation of admission is likely to be an event of default under such arrangements and therefore the company will need to renegotiate such facilities with its bank. It goes without saying that now is not the ideal time to have to renegotiate with your bank.
It is also likely that the company’s shareholder base will be far more diverse then when it was first admitted to AIM. The company will have a number of shareholders who simply do not wish to be an investor in a company that is not publicly traded. Certain institutional shareholders may also be restricted from holding shares in unquoted companies by their internal investment controls.
These shareholders should not be overlooked and depending on the percentage of the share capital that they represent, a strategy may need to be developed so as to allow such shareholders to dispose of their shares prior to the cancellation.
One structure we have used recently involved the implementation of a tender offer prior to cancellation so as to give shareholders an opportunity to “cash-out” before cancellation takes place, but the success of this strategy does depend on a company having sufficient distributable reserves (or at least a capital structure that allows distributable reserves to be created). There is also likely to be merit in seeking to slim down the shareholder base so as to make dealing with shareholders once off the market less unwieldy.
What will cancellation achieve?
While it would be nice to think a company can cancel its admission to AIM and immediately lose all the shackles of a public company, that is not actually the case. Clearly a company will no longer need to comply with the AIM rules but, for example, the City Code will continue to apply to the company for a period of at least ten years and the company is also likely to need to comply with a higher level of accounting standards, at least in the short term.
It is all to easy to react to the current economic climate and take significant corporate actions that are difficult, if not impossible, to reverse in the future. The downturn in the economic cycle will not continue indefinitely and companies should focus on positioning themselves for the opportunities that will inevitably arise when the markets turn. In general, short-term cost savings should not be taken at the expense of a successful long-term strategy.
Claire Clarke is a partner and Stephen Hamilton an associate at Mills & Reeve