Directors of a public company in financial difficulties must carefully balance their reluctance to make a premature announcement to the market against the need to protect the holders of the company's shares and other traded securities, as well as potential investors.
Directors need to be mindful of a whole host of laws, regulations and guidance when running UK incorporated companies. These include the terms of the company’s constitutional documents (namely its articles of association), statute law, including the Companies Act 2006, and common law principles.
Companies listed on the Official List of the UK Listing Authority, or on AIM, are subject to yet more laws and regulations, including: the Listing Rules or the AIM Rules; the Disclosure and Transparency Rules; and the UK Corporate Governance Code.
Over and above the usual issues that are relevant to directors of UK incorporated companies, this article highlights the rules and regulations that directors of listed companies (and, in particular, AIM listed companies) must consider and comply with, when dealing with a company in financial difficulty.
1. Notifying the market
Under the AIM Rules, the company must notify the market, without delay, of any new developments which are not public knowledge and which, if made public, would be likely to lead to a substantial movement in the price of its securities.
Directors should be aware that this would include a change in the company’s financial condition, the performance of its business or its expectation of its performance.
2. Market abuse
Market abuse covers a number of behaviours relating to the company’s securities.
Directors should be aware that failing to keep the market informed of unpublished and price sensitive matters is a behaviour that could amount to market abuse.
3. Financial Services Legislation
Directors should be aware that the dishonest concealment of material facts such as the company's financial difficulties may also constitute an offence under financial services legislation and, in particular, under the Financial Services and Markets Act 2000.
4. The Role of the Nomad
The role of the Nomad is essential to the listing of a company on AIM. The company is required to appoint a Nomad (an organisation approved by the London Stock Exchange) to guide it through the AIM application procedure and to act as Nomad at all times and to advise it on the AIM Rules on a continuing basis after flotation.
Directors should keep the Nomad fully informed of the company’s current financial position and of material developments. If the financial position of the company deteriorates, the directors may need to increase the frequency of its updates to the Nomad. This will ensure that the Nomad is in a position to make the appropriate announcements to the market without undue delay.
4. Suspension of securities
Under the AIM Rules, the Stock Exchange may suspend the trading of AIM securities in certain circumstances including where the protection of investors so requires. The suspension of AIM securities is rare but it may be permitted if the company cannot make an immediate notification or it is concerned that such notification may be insufficient to properly inform the market.
The directors should discuss the suspension of the company’s securities with its Nomad.
5. Serious loss of capital
If a public company's net assets fall to half or less of its called-up share capital, the directors of the company are required, within 28 days of one of them becoming aware of the fact, to convene a general meeting to consider what steps should be taken. Under the Companies Act, the general meeting must be held no later than 56 days from the date on which such director became aware of the fall in share capital.
Directors should consider this in the context of the requirement to notify the market (as set out above).
Consequences of breaching the AIM rules
Breach of the AIM rules can result in the company receiving a warning notice or a fine, being publicly censured or its securities being suspended or cancelled from trading on AIM.
Advice for directors
Directors should maintain close and frequent contact with the company's financial and professional advisers, when dealing with a company in financial difficulties.
Prompt legal advice is essential in such cases. DWF can become involved in the management process, attend relevant meetings and drive a strategy to achieve the company’s objectives.
Author: Martyn KolankiewiczThis information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.