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The importance of engaging with your nomad

Introduction

On 30 November 2021, London Stock Exchange plc (Exchange) announced that it had agreed settlement terms with Sensyne Health plc (Sensyne) for a public censure and fine of £580,000 for breaches of Rules 13 and 31 of the AIM Rules for Companies (AIM Rules). The Exchange agreed with Sensyne to discount its fine of £580,000 to £406,000 for early settlement.

The announcement is a reminder to AIM companies of the importance of engaging properly with its nominated adviser (nomad).

The relevant rules in the AIM Rules

AIM Rule 13 sets out the requirement for a transaction between an AIM company and its “related parties” (which includes directors of the AIM company). A key requirement of Rule 13 is that the company makes an RNS announcement that includes a statement that, with the exception of any director who is involved in the transaction as a related party, its directors consider, having consulted with its nomad, that the terms of the transaction are fair and reasonable insofar as its shareholders are concerned.

AIM Rule 31 relates to an AIM company and directors’ responsibility for compliance. Rule 31 includes a requirement that the AIM company: has in place sufficient procedures, resources and controls to enable it to comply with the AIM Rules; seeks advice from its nomad regarding its compliance with the AIM Rules whenever appropriate and takes that advice into account; and provides its nomad with any information the nomad reasonably requests or requires in order for that nomad to carry out its responsibilities under these rules and the AIM Rules for Nominated Advisers.

The Exchange’s view

The facts in the Sensyne case are summarised below. They involve Sensyne failing to keep the nomad fully informed about proposed related party transactions.

Sensyne submitted that it did not recognise the AIM Rule 13 disclosure obligations arising in respect of the Bonuses. The Exchange commented that this is indicative of an inherent failure in Sensyne’s approach to ensuring that all members of its Board properly understood and took responsibility for Sensyne’s compliance with the AIM Rules. Further, in this instance, Sensyne did recognise there might be AIM Rules implications (albeit not specifically AIM Rule 13). However, it did not then properly engage with the nomad to ensure compliance with its AIM Rules obligations.

The Exchange commented that Sensyne’s approach “in not taking appropriate care and responsibility for compliance with its AIM Rules obligations had the effect of undermining important protections afforded by the role of the nomad within the AIM regulatory model”.

The Exchange added that “an AIM company is required to engage openly and transparently with its nomad so that the nomad is in a position to advise and guide on the AIM Rules on a fully informed basis. An AIM company’s obligations in this regard are not discharged by merely mentioning a matter or providing incomplete and/or misleading information. Failing to engage properly with the nomad creates a higher risk of non-compliance with the AIM Rules and is not an acceptable approach for an AIM company”.

In the case of Sensyne, the direct and reasonably foreseeable consequence of Sensyne’s failure to engage properly with its nomad, was “to prevent transparency and scrutiny of the payment of the directors’ bonuses by the nominated adviser and by its shareholders, thereby undermining the protections afforded by AIM Rule 13”.

The Exchange considered that Sensyne’s conduct “fell below the expected standards required by the AIM Rules for an AIM public company”.

What can we learn from the Sensyne case?

This case is a further indication (if one were needed) that it is imperative that an AIM company engages properly with its nomad and does not keep important information from its nomad. Although a nomad plays the role of regulator (having delegated authority from the Exchange) it is also an adviser and can help an AIM company (especially a company which has only recently been admitted to the market) stay within the AIM Rules. Clearly a nomad can only provide proper advice and guidance if it is told all relevant facts.

The case further underlines the importance of directors understanding the requirements of the AIM Rules and the extracts above from the Exchange’s announcement are particularly instructive. On an AIM IPO directors are typically given guidance by the AIM company’s nomad and lawyers about the requirements of the AIM Rules and their ongoing obligations as directors of a quoted company. The Sensyne case reinforces the need for directors to understand fully their obligations and to ask questions if they have any uncertainty.

If you have any questions in the light of the Sensyne case about your ongoing obligations under the AIM Rules, please contact Nigel Gordon on ngordon@fladgate.com or +44 20 3036 7389, or your usual contact at Fladgate.

The facts in the Sensyne case

On 20 November 2018, three months after admission, Sensyne resolved to award one-off cash bonuses to its CEO and CFO (Sensyne’s two executive directors). The quantum of the bonuses was subsequently agreed by Sensyne’s Interim Non-Executive Chairman, in the sums of £200,000 for the CFO and £850,000 for the CEO (Bonuses), which were paid on 21 December 2018. The Bonuses were characterised by Sensyne as “post IPO bonuses” in relation to work of the CEO and CFO on the successful admission of Sensyne to AIM. The possibility of IPO related bonuses for the CEO and CFO was not referred to in Sensyne’s admission document.

The nomad was not properly consulted in respect of the Bonuses, which were related party transactions and subject to the protections afforded by AIM Rule 13. Sensyne’s approach was to provide the nomad with limited information in two text messages from the CFO that described the Bonuses in such a way as to give the impression, on any reasonable interpretation, that the award of the Bonuses was a proposal that was not yet finalised, whereas, in fact, the terms of the Bonuses were agreed and about to be paid.

The nomad’s initial reaction to the limited information in the text messages was to advise unequivocally, by email, against proceeding with such proposed Bonuses and to set out a series of reasons why Sensyne should not proceed including (amongst other matters): that such Bonuses had not been referred to in the admission document; and to express concern over both the quantum and form (a cash award) and the likely adverse shareholder reaction. The nomad emphasised that Sensyne’s Remuneration Committee should think very seriously about its views and offered to speak with the Chair of the Remuneration Committee directly as to why Sensyne should not proceed with the proposed Bonuses.

Notwithstanding the nomad’s reaction, a subsequent communication between the executive directors recorded that, having raised the subject of the Bonuses with the nomad (solely via text message): Sensyne would not pursue further discussion regarding the Bonuses with the nominated adviser; and that disclosure of the Bonuses would be made with the publication of Sensyne’s next Annual Report (which was over 10 months away), by which time it was hoped that Sensyne would have made commercial progress, shareholder sentiment towards Sensyne would have improved, and so the Bonuses would be of little interest to shareholders. Following this, Sensyne proceeded with payment of the Bonuses on 21 December 2018.

Sensyne gave the nomad the impression that it would not pursue further discussion regarding the Bonuses. It was not until the end of August 2019, when the nomad was sent a draft Remuneration Committee report to be incorporated in the 2019 Annual Report, that the nomad became aware of the fact that Sensyne maintained its intention to award the Bonuses (despite the nomad’s views in 2018) although the nomad believed that the Bonuses remained proposals and it advised Sensyne that the Bonuses would likely be treated as related party transactions, pursuant to AIM Rule 13 and that the nomad was unlikely to be able to support a fair and reasonable statement in respect of the proposed Bonuses. At this stage the nomad had not been informed by Sensyne that the Bonuses had in fact already been paid.

The true status of the Bonuses only became clear to the nomad one month into the discussions, following which the details were notified to the market on 4 October 2019. The nomad was unable to support a fair and reasonable statement in respect of the Bonuses.

Following notification of the Bonuses, Sensyne undertook remedial action to appoint additional members to its Board to enhance the Board’s public company experience, appoint additional members to its Senior Management Team, review its corporate governance structure and enhance its procedures, resources and controls. Although the Exchange considered that in light of the events, remedial action was urgently required, it also observed that the breaches extended beyond failures in procedures and controls.

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