Developments in previously announced matters: LSE nomad censure a reminder of the need to update the market

The London Stock Exchange recently announced that a nominated adviser had been privately censured and fined £90,000 for breaching Rules 16 (due skill and care), 17 (advising and guiding an AIM company) and 19 (liaison with the Exchange) of the AIM Rules for Nominated Advisers (the Nomad Rules).

The case is a useful reminder of the need to update the market of developments in previously announced matters, in order to avoid a false market arising in the company’s shares. A copy of the disciplinary notice can be found here.

The facts: a delay in a material payment previously announced to the market

The circumstances related to an AIM company’s notification of a transaction under Rule 11 (general disclosure of price sensitive information) of the AIM Rules for Companies (the Companies Rules). The AIM company notified the market that it was due to receive certain material payments on a specified future date, but failed to notify the market when the payment was not made on the due date.

The nomad was aware the payment had not been made and, although it had discussed this with the company, it did not advise the company to update the market (in breach of Nomad Rules 16 and 17) – relying in part upon the company’s expectation that “there were indications that payment would be forthcoming in due course”.

Developments in previously announced matters: the Exchange’s view

The Exchange did not consider the expectation of future receipt obviated the company’s obligations to update the market that payment had not been made in line with the timetable originally notified. The Exchange commented that “the nomad should have appreciated that failure to update the market when receipt did not occur was likely to have left investors with a misleading impression that payment had been received”.

The Exchange noted that Rule 10 of the Companies Rules requires an AIM company to take reasonable care to ensure that any information it notifies is not misleading, false or deceptive and does not omit anything likely to affect the import of such information. If an AIM company announces a matter which is to occur at a future date and there are subsequent changes which would make the original notification misleading, the company must consider if an update is required.

The Exchange gave the following (non-exhaustive) examples of situations in which a market update may be required:

• a company notifies that a loan is to be drawdown or repaid on a future date and that does not happen;
• a fundraising is notified with proceeds due on a certain date and payment is not received; and
• a timetable of events is notified and the timetable is delayed.

Application to Main Market companies

Companies on the Main Market of the London Stock Exchange are subject to Disclosure and Transparency Rule (DTR) 2 (Disclosure and control of inside information by issuers), which is broadly analogous to Rule 11 of the Companies Rules and sets out the principal disclosure obligation for Main Market companies.

If the relevant company had been a Main Market company, the company would have had to consider whether or not the delay in payment would constitute “inside information”, being information that a reasonable investor would use as part of the basis for his investment decision, therefore requiring disclosure to the market under DTR 2.

Under the guidance to the “reasonable investor” test set out in DTR 2.2.6, the FCA considers that information which is likely to be considered relevant to a reasonable investor’s decision includes information which affects (with emphasis added):

• the assets and liabilities of the issuer;
• the performance, or the expectation of the performance, of the issuer’s business;
• the financial condition of the issuer;
• the course of the issuer’s business;
• major new developments in the business of the issuer; or
• information previously disclosed to the market.

Accordingly, it is likely that a Main Market company, if faced with the same situation, would equally be well advised to announce the delay in payment.

Osborne Clarke comment

In addition to serving as a reminder of the general principles around proper disclosure of price sensitive/inside information and avoiding a false market in a company’s securities, the case also illustrates the relationship between AIM companies, their nominated advisers and the Exchange. Whilst underlying breaches of the Companies Rules led to the imposition of a fine on the nomad for breaches of the Nomad Rules, there is no suggestion in the disciplinary notice that the AIM company or its directors were subject to sanction by the Exchange for breach of the Companies Rules.

The Exchange noted that the company had relied “in good faith” on the advice and guidance received from its nomad, which, unfortunately, in this instance “fell below the standard expected”.  Had the company not demonstrably been in close contact with its nomad throughout the relevant period (as was made clear in the disciplinary notice), it is likely that the company and its directors would have been in line for censure.

Source: London Stock Exchange, AIM Disciplinary Notice AD13, 19 March 2015