Moving from AIM to the Main Market

Two attorneys on the capital markets team of law firm Charles Russell LLP weigh the pros and cons of an AIM company considering a move to the Main Market of the London Stock Exchange and why this has been so popular for oil and gas companies.

Alexander Keepin and Ruth Morrow Charles Russell LLP London

Last year, 13 AIM-listed companies made the move up to the Main Market of the London Stock Exchange and an additional six made the move in the first half of this year. AIM companies that have made this switch in recent years include Yamana Gold, which at the time was AIM’s largest company by market capitalization with a market capitalization of approximately £ 2.4 billion (about US$4.5 billion), and Aricom plc.

Notable names from the oil and gas sector that have made this transition include Oilexco Inc., Hardy Oil and Gas plc, and Imperial Energy Corp. plc. This article looks at some of the reasons why an AIM company may chose to move to the Main Market and some of the potential drawbacks.

Key advantages to moving to the Main Market

The main advantages to a move from AIM to the Main Market predominantly center around the company’s ability to access capital and attract investors.

Companies admitted to the Main Market are subject to increased regulation by the FSA and UK Listing Authority (UKLA) and must comply with the rules laid down by the UKLA on an ongoing basis (i.e. the Listing Rules, the Prospectus Rules, and the Disclosure Rules and Transparency Rules (DTRs). AIM companies are typically only subject to certain parts of the DTRs and only need to produce a prospectus if they are making an offer to the public.

The increased level of regulation together with the increased levels of corporate governance required by the Listing Rules means that investors, both private and institutional, tend to have more confidence in companies whose securities are admitted to the Official List of the UKLA and to trading on the Main Market. Accordingly, companies on the Main Market can often find that they have a wider pool of investors willing to invest in the company than those on AIM.

In addition, when a company would be eligible for inclusion in the FTSE 250 or FTSE 100 indices, it should also increase passive investment in the company from FTSE tracker funds which can increase liquidity.

As an AIM company increases in size, it will also find that by moving to the Main Market there will usually be an increase in its profile and the research analyst coverage of the company, both of which can help lead to a demand in the company’s securities.

Key disadvantages in moving to the Main Market

Having highlighted some of the possible advantages, any move to the Main Market is not without some disadvantages, not least of which is the procedural aspect of obtaining admission.

Once a company has been accepted as eligible for the Official List by the UKLA, it can begin the process of applying for admission to the Official List and to trading on the Main Market. Whether or not a fundraising is carried out, an application for admission requires the production of a prospectus in compliance with the content requirements laid down in the Prospectus Rules. This entails a lot of work including an accountant’s short form report (or reproduction of accounts), working capital report, financial reporting procedures review, a capitalization and indebtedness statement, an operating and financial review, and all the associated comfort letters and reports.

An oil and gas company will also be likely to include an expert’s reports, and additional disclosures such as cash flow forecasts may also have to be prepared. The prospectus must also be pre-vetted and approved by the UKLA.

In addition, the company will usually be required to appoint a sponsor (except for secondary listings) and the sponsor may also require a due diligence exercise to be carried out on the company, although the extent of this exercise will depend on the relationship between the sponsor and the company (i.e. whether the sponsor was also the company’s nominated adviser on AIM) and the sector which the company operates.

In the case of oil and gas companies, the sponsor is likely to require the due diligence exercise to focus on the license blocks, the company’s title to the licenses and the chain of ownership of these within the group.

All in all, the processes, the application, and the preparation of the prospectus can be time consuming and a significant expense, particularly if the company is not seeking to raise additional funds at the time of its listing. This cost and expense needs to be weighed against the benefits of attracting additional investors and enhanced liquidity.

In addition, once a company has been admitted to the Official List of the UKLA and to trading on the Main Market, it is required to comply with the Listing Rules, which are significantly longer and more detailed than the AIM Rules for Companies. Of particular note are the class tests and rules surrounding acquisitions and disposals.

The most significant change for an AIM company is that the threshold at which shareholder approval is needed for a transaction is reduced from 100% (for acquisition) and 75% (for disposals) on AIM to 25% for any acquisition or disposal on the Main Market.

Corporate governance principles

When an AIM company moves to the Main Market it should also adhere more strictly to corporate governance principles. As part of maintaining investor confidence, a company that is admitted to the Official List and whose securities are admitted to trading on the Main Market is expected to adhere to the Combined Code on corporate governance. In practice, the approach is still largely that of “comply or explain.” However a company whose securities are admitted to trading on the Main Market of the London Stock Exchange would be expected to comply with all of the main principles.

Another significant change for the shareholders is that while AIM securities are treated as unquoted for certain tax purposes this is not the case once securities are admitted to trading on the Main Market of the London Stock Exchange. The move itself is not usually a taxable event, with the significant exception of shareholders who have been issued within the three-year period prior to the move or shares that benefited from Enterprise Investment Scheme reliefs.

Certain other tax reliefs will cease to be available to shareholders. Advice should be sought on how the move will affect shareholders, particularly private shareholders.

Eligibility

In order to consider a move to the Main Market, a company will need to meet the basic eligibility thresholds. The first of the eligibility thresholds is the requirement that the company has a minimum 25% free float (i.e. at least 25% of the relevant class of securities are held by people other than the directors and shareholders who hold more than 5% each). This contrasts with the position on AIM where there is no requirement for a minimum amount to be held in public hands.

The company will also need a three-year trading record, although there are exceptions to the trading record set out in the Listing Rules for some companies such as mineral companies, which can include oil and gas companies. Again, this directly contrasts with AIM where there is no requirement for a trading history.

An applicant for the Main Market is also expected to have an aggregate market capitalization of more than £ 700,000 (about US$1.3 million), although, in practice, this is rarely an issue. While there may be exceptions to some of these requirements for certain companies (e.g. mineral companies, including oil and gas companies), the first step in the process for any company considering a move to the Main Market is to ensure that it meets the eligibility criteria.

Oil and gas companies and the admission process

A move to the Main Market requires the company to produce a prospectus. A key consideration for a company in the oil and gas sector is the impact of the CESR (the Committee of European Securities Regulators) guidelines on the consistent implementation of the Prospectus Directive. These guidelines expand on the Prospectus Rules which set out the content requirements for a prospectus.

These guidelines state that any company whose principle activity is the extraction or planned extraction of mineral resources (including hydrocarbons) is required to fulfill certain content requirements in connection with the prospectus issued for the purpose of admission to the Main Market.

Furthermore, if such a company has not been a mineral company for at least three years, the CESR guidelines require a mineral experts report and at least two-year cashflow forecasts to be included in the prospectus. In order to qualify as a mineral company, the UKLA currently requires the company to have at least 50% of its assets (by value) already in production.

The requirement to include an experts report is not of great significance as many companies involved in the extraction of mineral resources will choose to include such a report in their prospectus in any event. However, when it is mandatory under CESR, the UKLA will have a greater level of involvement in the content of the experts report and the standard to which it is prepared.

The cashflow forecast tends to be a bigger issue for companies considering admission to the Main Market. This involves setting out the detailed cashflow forecast for the mineral company for the next two years following the publication of the prospectus or longer if production will not commence in that two-year period. The cashflow forecast includes details of mineral resources to be extracted, expected prices and grades of saleable resources, expected extraction costs, and the evidence and assumptions upon which this information is based.

These forecasts are then reported upon by the reporting accountants. This is therefore an additional complexity and cost for oil and gas companies that do not meet the production requirements to deal with in the process of seeking admission to the Main Market.

Conclusion

For larger or more established companies, the process of moving from AIM to the Main Market of the London Stock Exchange is a natural development as the company grows. However, the advantages of increasing the shareholder base and pool of investors should be carefully weighed against the one-off costs involved and the increased regulatory burden to which the company is subject in the future, particularly for companies that are still growing rapidly.

About the authors