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aim detractors should think again, says corporate lawyer

30/01/2007

The Alternative Investment Market (Aim) has not had the best start to 2007. Criticisms that its regulation is too light have combined with an outbreak of profit warnings to test Aim, which until now has been widely regarded as a model for fast growing companies from around the world.

John Thain, chief executive of the New York Stock Exchange, recently alleged that Aim lacks the stringent corporate governance that is appropriate for listed companies and that ‘anyone’ could list on the market.

The market has not performed well since a downturn early last summer and there have also been a number of profit warnings from companies listed on Aim and a high profile arrest of senior managers at an Aim-listed retail software company.

This company, Torex plc, issued a profit warning and asked for the suspension of its shares, just days after it told the world about a number of lucrative new contract wins.

To add to the concerns at this company, the Serious Fraud Office raided the addresses of three people connected with the company, which has 2,000 employees around the world.

But Richard Wrigley, head of corporate law at Birmingham and London law firm Martineau Johnson, is still positive about Aim, which is the home to a listing for 1,600 companies.

“The attack by the head of the New York Stock Exchange was, in my view, mostly down to sour grapes brought about by envy at the huge success of Aim.

“As far as Torex is concerned, it could be said that the regulation worked because the investigations and actions that were taken stemmed from whistle-blowing by the CEO.

“As regards profit warnings, such shortfalls on expectations arise for all companies, including those quoted on the main market.

“Aim still successfully serves the growth ambitions of a vast number of companies and many successful businesses listed there are providing excellent returns to investors.

“No-one should lose sight of the fact that there are higher risks with Aim listed companies. A flourishing economy depends on encouraging dynamic companies through providing finance and for the investor, risk and reward will go together.

“In my view, the critics of Aim and its detractors should think again and reflect on the overall success of the market.”

Mr Wrigley explains that the requirements for an Aim listing are less rigorous in terms of track record, and in other areas, but the legal work in connection with an Aim initial public offering (IPO) is conducted with similar diligence and there is a similar demand for accuracy of the prospectus to that for a main market listing.

The role of the legal adviser includes such matters as pre IPO reorganisations, key contracts with customers and suppliers, the verification of intellectual property ownership and licensing and the service contracts of key people. The lawyer will also play a key role in relation to any acquisitions that are linked to the IPO.

There are important differences between Aim and main market, as Mr Wrigley explains:

“Aim prospects do not have to have a three year track record of trading as do those headed for the main market, for example.

“One major difference is that on Aim, it is the broker who takes on the role of nominated adviser (NOMAD) and undertakes most of the regulatory activities in place of UKLA or the Stock Exchange.

“The role of NOMADs has become more demanding in some respects as the market has grown and as more international companies have headed for the Aim.

“There is a new rule book which will have the effect of creating more stringent regulation by NOMADs and I welcome these changes.”

The international aspect of the Aim has attracted attention, as companies from all around the world, including those in China and Russia, have chosen this market.

Mr Wrigley points out that some extra steps are needed by NOMADs, lawyers and other advisers where the company going for the IPO is based overseas.

He cites an example: “If we were dealing with a Bulgarian company’s IPO for example, we would insist on working with local law firms and other professional advisers to ensure that all the national legal requirements had been met and there were no skeletons in the cupboard for the future.

“But the requirement to take such advice is effectively already in place.”

One possible criticism of Aim is that it has been the subject interest from many new and usually risk-averse investors drawn by the fact that investment in many Aim-listed companies can attract business property relief meaning exemption from inheritance tax.

While welcoming the fact that such investors have backed Aim listed companies, Mr Wrigley urges a degree of caution.

“Tax is certainly a factor for many people in such circumstances but no-one should invest solely on the grounds of tax benefits.

“Investors should look at the companies or investment trusts concerned on their business merits as well as any tax cushioning.

“There are some fund managers who specialise in the emerging company and Aim-listed sectors and their funds provide opportunities to spread the risks of investing in Aim-listed companies” said Mr Wrigley.

For further information please contact Richard Wrigley on richard.wrigley@martjohn.com