The London Stock Exchange (LSE) does not have a monopoly on share trading in the UK, although it has been, since its inception, by far the largest stock exchange in the country.
In the past there were several stock exchanges in large cities around the UK. Since the millennium international banks made a concerted attempt to set up a serious rival and looked at one point as if they would succeed – but the venture failed for lack of liquidity. An attempt to provide an alternative UK stock market with less rigorous trading regulations that would cater for smaller and comparatively new companies has met with mixed success. Originally called Ofex (because trading was off the London Stock Exchange), it was resurrected as Plus Markets when Ofex ran into financial difficulties during the 2008 financial crisis. Plus put itself up for sale in 2012 after racking up heavy losses and was taken over by ICAP, a specialist in inter-broker dealing, and became known as ICAP Securities & Derivatives Exchange. The name changed again in 2017 to NEX Exchange. This alternative exchange has in its time attracted some well-known companies, including Arsenal football club and the brewer Shepherd Neame.
All companies whose shares are traded on the LSE market are known as quoted companies (alternatively it can be said that they have a stock market quotation).
There are two sections to the LSE: the main board and the Alternative Investment Market (AIM). Strictly speaking, only companies on the main board are ‘listed’ – that is, they appear on a list of companies that comply fully with LSE regulations and financial reporting requirements, although the term is now widely used to also describe AIM companies.
Full listing
Most of the biggest companies in the UK, and many foreign ones, have their shares traded on what is known as the main board (even if share prices are no longer stuck up on a board in a trading room in the exchange).
This is referred to as a full listing. Listed companies must abide by certain rules which are designed to protect investors, such as:
· Newly listed companies must have a record of trading successfully for the previous five years.
· Listed companies must issue financial results twice a year within a set time.(There is no longer a requirement to issue a trading statement every quarter but most listed companies still do so.)
· They must issue a warning if profits are likely to fall substantially short of expectations, or alert investors if they are doing considerably better than anyone thought likely.
· Directors are allowed to buy or sell shares in their own company only at specified times when all relevant news is known to everyone. They cannot, for example, trade just before results are announced – the close period – or when they know that any information that could influence the price of their shares is to be issued.
· Companies must hold an annual meeting which all shareholders are entitled to attend. They must also call an extraordinary general meeting if holders of more than 10% of the shares request one.
The LSE charges companies a fee for the right to have shares listed on the main board. While this is no problem to giants such as BP or Vodafone, the cost can be onerous for smaller companies. There may also be worthy companies that fall a little short of the requirements for a full listing. So the LSE runs a second trading board called the Alternative Investment Market (usually referred to by its initials AIM).
Alternative Investment Market
AIM has been an amazing success story since it was established in 1995 with just a handful of companies. At the end of 2017, a little under 1,000 companies – with a combined value of over £100 billion – had their shares quoted on AIM.
The fees are lower on AIM than for a full listing, so it is ideal for newer, growing businesses. The rules are laxer, and although they still offer some protection to shareholders you should be aware that investing in AIM companies carries a greater risk than for the main board.
In particular, there has been controversy over whether companies based in Eastern European countries with a different legal system to ours should be allowed in, and whether there are sufficient safeguards when a single shareholder or a few acting together own more than half the shares.
Some companies want their shares to be quoted on AIM in the hope that one day they will grow up and join the big boys on the main board – as Domino’s Pizza, for example, did (it joined AIM in 1999 and then transferred to the main market in 2008).
Others, such as clothing retailer ASOS, are happy to be quoted on AIM, although they have the size for a full listing if they so wished; while some companies such as Hornby, maker of model trains and racing cars, used to have a full listing but have moved to AIM for the looser regulation and/or to save money.
The following chart shows the performance of AIM stocks relative to stocks with a full listing – the greater volatility of the former can easily be seen.
We can also see that sometimes the main market did better, while towards the end of the period the AIM market outperformed.
Chart 2: AIM v FTSE All-Share Index
Source: London Stock Exchange
We will look at how indices are compiled and what they tell us in chapter 9.
Just as the main board is the premier stock market in Europe, AIM is the most prestigious market for smaller companies in Europe and it is rapidly gaining a worldwide reputation, attracting, among others, emerging Chinese companies anxious to raise Western capital to offset the lack of investment funds at home.
Regulation
The requirements for a quotation on AIM are minimal. There is no minimum size for companies joining; no minimum percentage of shares that must be in public hands; no trading record is needed; and there is no requirement for companies to be incorporated in the UK.
However, the AIM market is not lawless. The complete set of rules can be found on the London Stock Exchange website at: www.londonstockexchange.com/companies-and-advisors/aim/advisers/rules/aim-rules-for-companies.pdf
Approval of shareholders is not required for most transactions.
The one major requirement is that companies must have a nominated adviser (or nomad for short). The nomad must be approved by the LSE – the list of approved nomads runs to about 60 – and actually has to meet more requirements than the AIM-quoted company itself. The nomad is responsible to the exchange for assessing that the company is suitable for AIM, and for advising and guiding the company on its responsibilities.
If an AIM company falls out with its nomad and suddenly finds itself without one, the exchange will suspend trading in its shares. Failure to find a replacement nomad means expulsion from AIM.
AIM companies must also have a stockbroker to ensure that there is a market in the company’s shares. The nomad usually acts as broker.
Although joining AIM may look easy, quoted companies are required to play fair, for example:
· they must inform shareholders, through the LSE, of any changes in their financial condition such as increasing their bank loans or failing to pay them when due
· they must alert the market immediately if they realise that their business has taken a distinct turn for the better or for the worse, and if profits are likely to beat expectations or to fall short
· any change in the nature of the business must be disclosed, including plans to acquire another company or to sell part of the existing business.
In short, an AIM company must speak up if it knows of anything not yet in the public domain that would substantially affect the share price when it leaks out.
The LSE has powers to discipline AIM companies that get out of line. It can issue a warning, a fine or a censure and, in the last resort, can throw the company out. Nomads tend to take these disciplinary actions as seriously as the companies they advise, since it affects their reputation.
AIM companies must publish their interim and full-year results within four months of the period end.
Directors cannot buy or sell shares in their own company for up to two months before results are announced, or at any time when they are in possession of price-sensitive information that has not yet been published. For example, they cannot dump some of their shares on the market when they know they are about to issue a profit warning.
Inheritance tax
Any shares in a company not listed on a recognised stock exchange are exempt from inheritance tax. For this purpose, admission to AIM does not constitute a listing on a recognised stock exchange.
This exemption is, admittedly, a benefit for your heirs rather than for you but it is worth remembering in these days when avoiding inheritance tax has become a national sport and other obvious loopholes have been closed by chancellors of the exchequer in successive Budgets.
Note that Gordon Brown hinted at the possible removal of this benefit when he raised the inheritance tax threshold in his 2007 Budget. Although he is no longer around at No. 11 Downing Street to withdraw the perk, the door has been opened for one of his successors to do so.
The chancellor used to get his revenge by refusing to let you put AIM stocks into ISAs, the tax-free investment scheme.
However, since 2013 this has been allowed.
Suspension of share trading
Companies can have trading of their shares suspended or even cancelled for breaches of rules, though the LSE is reluctant to take such drastic steps unless necessary, as it punishes the innocent shareholders, who are then locked in to holding shares that cannot be sold, along with the errant directors.
The most likely reason for a suspension is a failure to produce interim or full-year results within the specified time of four months.
Most companies failing this requirement tend to comply within days but longer suspensions have been known.
Examples of shares being suspended include:
· Africa-focused oil and gas company Tower Resources asked for trading in its shares to be suspended on 12 May 2017 “pending clarification of its financial circumstances”. Advanced discussions with a potential partner for its Thali drilling operation offshore in Cameroon had failed, so an initial payment by the partner to Tower had not been made. Cash raised in a share placing a year earlier was not enough to keep the company going. The suspension was lifted after six months thanks to a further fundraising at just 1p a share, less than half their value before the suspension. They were over 60p in mid-2015.
· Toilet paper maker Accrol saw trading suspended in its shares on 5 October 2017, as it warned that earnings would be significantly below market forecasts – which meant net debt would be correspondingly higher. It had suffered from continued increases in input costs, which it had not been able to fully pass on in price rises for its products. The shares were trading at 132p at the time of the suspension, so although that was below the year’s best it is clear that shareholders were not expecting such bad news. The suspension was lifted six weeks later but the shares promptly fell 66% to 44.5p, as the company warned that it would break even at best in its current financial year.
· It was not just the shares that got suspended at BNN Technology, which provides equipment for lottery sales in China. In a boardroom bust-up in September 2017, the chief financial officer resigned and made accusations against the chief executive and the chief operating officer, leading to their suspensions from office. Trading in the shares was also suspended as there was now no senior leadership at the company. Business advisers PricewaterhouseCoopers produced a speedy report that led to the reinstatement of the two suspended directors, but not the immediate lifting of the suspension in share trading pending more board appointments.
We should note that companies can ask for trading in their shares to be suspended pending an important announcement. This may be a sizeable acquisition or possibly a takeover of the company.
Where the dreaded phrase ‘pending clarification of the company’s financial position’ is attached to the notice of suspension, investors should fear the worst. It usually means that the company has run out of cash and can’t persuade its bankers to put up any more.
Usually, but mercifully not always. Sometimes it really does mean that the financial position is being sorted out.
Companies delisting
Companies are also more inclined to quit AIM than they are to leave the main market. Examples are:
· Gemfields, owner of the famous Fabergé brand, quit AIM in July 2017 after its majority shareholder Pallinghurst, a South African private equity company, bought the rest of the shares it did not already own. There was a rival, higher offer from China’s Fosun Gold, but since Pallinghurst already had majority control of Gemfields, it was able to block the rival bid and pay only the prevailing stock market price of Gemstone shares.
· Vietnam Infrastructure was an investment vehicle established to target infrastructure and related investments within Vietnam and neighbouring countries. It was set up in 2007, when its shares were admitted to the AIM market, but the intention was to hold a meeting of investors ten years later to decide whether to sell up or extend the life of the fund. The assets were subsequently sold profitably in an orderly fashion, the cash was divided among shareholders, and the shares were delisted in October 2017.
· Events moved quickly in the last week of August 2017 at Cheshire-based home improvements firm Entu after less than three years of its shares being quoted on AIM. It held desperate talks to shore up its perilous finances on Wednesday, admitted defeat on Thursday and announced the intention to appoint administrators on Friday, when its shares were suspended. A week later it was bought by the Latium Group, whose brands include Weatherseal, Zenith and St Helens Glass.