In this regular slot Ash Mehta provides an inside view of what’s happening in the City and how it affects you the private investor.

Cease and delist

When is a public company not a public company?

In this month’s article Ash Mehta discusses why companies are delisting from AIM and what you can do to protect your shareholding.

A topic of increasing importance in the City this month has been the delisting of AIM companies. With volumes of shares traded being very thin and share prices and company valuations having fallen dramatically, many companies have been considering whether an AIM valuation is still providing them with any benefit for the £200,000 or so per year that an AIM quote can cost in advisers fees, or whether it would be better to delist and save those fees. Surely that has to be in shareholders best interests?

At the annual AIM conference held at the London Stock Exchange’s building last November, Marcus Studdard, Deputy Head of AIM, was of the opinion that a reduction in the number of companies on AIM may be a good thing if it leaves a smaller number of companies which overall are larger, stronger and have better growth potential.

Clearly, the number of effectively moribund companies on AIM is a potential impediment to the market being taken seriously in future. With nearly three quarters of AIM companies having a market value of less than £25 million it also means that successful companies have to fight harder to get noticed amongst all the noise, so a smaller market comprised of healthy companies would probably be good for both companies and investors and may even tempt institutional investors back, many of whom have recoiled at the low quality of some companies quoted on AIM.

Before AIM Rules

During the last market down turn in 2001-2003 a number of AIM companies delisted and for many shareholders it left a nasty taste in the month. Before the advent of the AIM rules, companies were able to delist with a simple majority vote at a general meeting of the company. This meant that, as management teams of AIM companies often have a large percentage shareholding, they were able to delist them without too much difficulty.

One lawyer I spoke to this month told me of a case he fought for a minority shareholder group in 2003, where the executive directors with almost 60% support had tried to delist.  However, the non-executives maintained that the interests of minority shareholders and the company would be best served by continuing with the Aim listing. The lawyer felt that it was too easy to delist and in response to such incidents rules were introduced that required a 75% majority at a general meeting to delist. The LSE’s rationale for the rule change was that this was the level required by full listed companies and therefore a sensible level. It seems to overlook the fact though, that as AIM companies share registers are often dominated by their management teams and, as there is no minimum free float, achieving control over 75% of the voting shares is not actually too difficult. Perhaps management, who are effectively related parties, should be excluded from such votes.

But is this a problem? A nominated adviser I spoke to believes that as many AIM shares are so illiquid it really doesn’t matter if companies delist since shareholders might not be able to sell their shares if the companies were still quoted anyway. But if you wanted shares in a private company surely you would have bought shares in a private company? Underlying the adviser’s opinion though seems to be an irritation that many of these moribund companies are becoming a nuisance to Nominated advisers and other advisers. Nominated advisers take on that role for companies at a loss, with a view to making big fees on transactions and when there are no transactions around, as there aren’t currently, advisers tend to lose interest quickly.

if you wanted shares

in a private company

surely you would

have bought shares

in a private company

Should you be worried?

So should you be worried? In short, yes. If management teams feel that they can delist as a way to get control over “their” companies again, and on the cheap, many will, leaving you with minority shares in a private company. Normally if a management team wants to perform a buyout they’ll need to make an offer for all of the shares. This is an expensive process and it also means that they would need to pay a premium for the minorities’ shares. Why bother when you can just delist for a fraction of the cost?

 If this sounds too bizarre to be true, think again as there have already been examples. Metnor plc will cancel its AIM listing on 1 April 2009 after its Chief Executive built up a 76% stake and passed a resolution at an EGM on 20 March. Similarly, GSH plc will delist after its former Chairman and grandson of the founder built up an 83% stake. 

Will the London Stock Exchange do anything to stop this abuse of minorities? To be honest, that’s unlikely as they probably believe it’s good for the market in the long term. Also any proposed change to the rules would perhaps initiate a further flood of delistings. 

So what can you do to stop yourself being the subject of this type of abuse of minority shareholders? For starters, you should check the list of major shareholders. How much does the board own? Could they push through a delisting without having to make an offer to minorities? Secondly, the type of management who would contemplate such a move probably already has a few skeletons lurking about. Read the company accounts for the usual worrying signs such as related party transactions eg. is the CEO using his own private jet for business travel and charging the company for it? What is the quality of the non-executives? Has there been a high turnover of board members? Have there been some resignations “with immediate effect”? These are never a good sign especially amongst NEDs, Finance Directors and nominated advisers. Infact, look for anything which indicates that the ’public company’ is not actually being run like a public company.

If you have shareholdings which do end up going to an EGM vote for delisting, go to the EGM and ask some pertinent questions. What other options have been considered by the board? Why is an offer not being made for the minority shares? A pragmatic question to also ask is whether the board has considered other markets? PLUS Markets is still attracting new entrants (especially if no new funds are being raised) and is much cheaper to maintain a quote on. Also, there are a number of matched bargain facilities available, the most established one being that of JP Jenkins which means the company could save significant costs and you could still trade in its shares and probably with no more difficulty than trading in a moribund illiquid AIM stock.

ash@orchardgrowth.com

Ash Mehta is Chief Executive of Orchard Growth Partners which provides Finance Director consultancy services. He is also part-time Finance Director of Northbridge Industrial Services plc, an AIM-quoted hire company, and he sits on the Executive Committee of the Quoted Companies Alliance, the representative body for smaller quoted companies. The views expressed are his own and do not necessarily represent the views of those organisations or of Aimzine Ltd.

© Ash Mehta

RETURN TO AIMZINE NEWSLETTER HOME | April 2009

if management teams

feel that they can

delist as a way to get control over 'their' companies again,

and on the cheap,

many will, leaving

you with minority

shares in a private company