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Aim companies delist to save cash

http://www.moneyobserver.com/content/aim-companies-delist-save-cash

Thursday January 21, 2010

The bear market has reduced the worth - and investment attraction - of many companies listed on the Alternative Investment Market. Now corporate lawyers are also persuading hard-pressed companies to delist. James Moore investigates

City lawyers are circling hard-pressed AIM-listed companies with offers to delist them for as little as £5,000, an investigation by Interactive Investor has revealed.

It comes amid a rising tide of businesses opting to walk away from the public markets to go private as a result of a dramatic fall in share prices and the flight of capital from the AIM markets in favour of investments seen as less risky.

There are concerns that advertising cut-price delistings could lead to investors being disadvantaged if companies fail to set up a facility to allow shareholders to exit at a fair price. Brokers say this has happened on a number of occasions in recent months.

By April, the number of UK listed companies on AIM had fallen to 1,167 from a high of 1,347 in 2007. Part of the reason for the fall has been that new flotations have all but dried up while the number of companies quitting the market has increased significantly.

This year 99 companies quit the market by the end of April compared to just 59 in the first four months of 2008. The trend picked up sharply at the end of last year - 40 companies left in December. Prior to that, de-listings had been running at around 19 a month. The figures for this year so far show de-listings running at around 25 a month.

Legal fees
Interactive Investor's investigations have discovered that commercial law firm Hammonds has sought to capitalise on the trend by sending a flier around telling companies they could save £125,000 by taking their shares off the market for an outlay of just £5,000 in legal fees.

Other law firms have approached brokers to try and enlist their support in marketing campaigns designed to persuade companies to exit the public markets, interactive investor has learned.

One, who asked not to be named, said: "We were approached but to be honest we sent them away. We couldn't see why they wanted us involved. It's not in our interest to see companies delisting."

Brokers argue that delisting is not a step that companies should take without serious thought and without putting in place a mechanism to enable shareholders to exit.

Richard Feigen, the chief executive of Seymour Pierce, said: "We accept delistings will happen. It's inevitable but when they do we would always try to convince clients that they have a duty to go through the right mechanism and give shareholders the opportunity to make an exit at a fair price. If you raise money on the public markets you do have a duty to ensure you treat the people you raise money from fairly."

Anthony Scott, director of private clients at Charles Stanley, was of the same mindset. He said: "This is really not doing anyone any favours and to delist and walk away from your shareholders without looking after them properly is quite wrong. It is a nightmare at the moment."

AIMless
Charlotte Black, director of corporate affairs at Brewin Dolphin, added that it is becoming increasingly difficult to design a portfolio of qualifying AIM companies for private investors because of dwindling liquidity and the increasing possibility of companies delisting.

We are great supporters of the AIM market and we would really like to see AIM flourishing again. From a corporate finance perspective it should get back to what it was - a nursery for smaller companies that gets them started off on the road to a full listing in the future, " she said.

But Giles Distin, a partner at Hammonds, defended the firm's flyer: "If you look at the LSE's figures from September last year onwards the number of companies with a market capitalistion of less than £20 million has been growing the whole time. That is not just on AIM, we could see companies with a full listing in that position. We thought there was a service we could offer.

"Companies might want to delist because of costs - on AIM you have regulation costs, disclosure costs, listing fees. The £5,000 caught people's eye but when you look at it, delisting is not rocket science. Some figures suggest you could save £250,000 by leaving AIM although we didn't use that figure given that we are dealing with smaller companies which have lower costs," he added.

Disclosure
Mr Distin argues that for many companies there are perfectly legitimate reasons for wanting to quit the markets - and they are not all down to costs.

Companies, for example, have much greater disclosure requirements on AIM than they do if they are taken private. Some of the information they have to publish can be useful to competitors.

Mr Distin also points out that many companies set up a tender process whereby shareholders that want out can be bought out - often by other, larger shareholders who wish to continue their investment in the company - before delisting. This can even lead to small shareholders being able to exit at a premium.

But this does not always happen.
Mr Distin continues: "For a company, they would always have to think carefully before delisting if they have large numbers of shareholders, or shareholders who are not part of a group who could lose out. You need to get 75% approval from your shareholders before delisting."

He adds: "This trend could actually restore confidence in the market if investors know that companies that remain are of a higher standard. We expect AIM to come back and we know a number of companies who want to float on it."

Of course, Mr Distin is right that there can be legitimate reasons for companies to delist, not least if liquidity dries up and there is no chance of using the market to raise fresh money.

Stephen Austin, partner of Hybridan, a Nomad, said: "On an IPO there's an implicit promise the shares will stay quoted through thick and thin. This promise is now being broken all too often and is driving away investors created a depressing downward spiral for the remaining stocks.

"If companies do have to quit the market a tender offer to buy out the minorities should be made mandatory. And this should be at the preceding 12 month average share price. It would be all too easy to let a share price drift down to rock bottom only then to buy the company back on the cheap."

Shareholders
A London Stock Exchange spokesman points out that there is little point in having a listing if you are not going to use it, for example, to raise money. However, he says that if companies use the public markets, they do have a duty to treat their shareholders fairly. The brokers agree. They also say that companies failing to look after shareholders may find it difficult to find supporters if they seek to return to the public markets in future.

The Exchange has already called on the Government to alter the tax legislation to ease the liquidity crunch many companies find themselves in, with becalmed share prices and no ability to raise new money, which is helping the spark the rush of de-listings.

It says ministers need to take "swift action to help smaller companies benefit from easier access to public equity finance, complementing and reinforcing the steps that the Government is already taking to improve access to bank finance for small to medium-sized enterprises."

In the exchange's view the Government should reform the tax rules to allow Venture Capital Trusts to participate in secondary trading on the AIM and allow them to invest in businesses employing up to 200 people and with assets of up to £25 million.

The AIM could clearly do with a boost, and quickly. It is an important part of Britain's economy employing more than 155,000 people. It is not only investors who could lose out were it to be allowed to ossify.

http://www.moneyobserver.com/content/aim-companies-delist-save-cash