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Update: Cash Shells and listing on the London Stock Exchange

12/02/2019

At a glance

Following several high profile cases of AIM cash shells running into difficulties, the rules on eligibility for admission of cash shell companies to AIM were tightened in 2016 (in particular, by the introduction of a minimum raise of £6 million for cash shells). At the time, the changes were seen as a sign that cash shell companies were increasingly less welcome on AIM. It was predicted that the changes, together with the reduced eligibility and ongoing requirements for Standard listed companies, would make the ‘Standard’ segment of the Main Market an increasingly viable destination for cash shell companies looking to list in London for relatively modest sums.

Update on cash shell listings since 2016

Since 1st January 2016, there have been 34 cash shell listings on the London Stock Exchange raising £1,963 million in new money. Of these, five were on AIM raising £62m in new money (Summerway Capital, Safe Harbour Holdings, Stirling Industries, Wilmcote Holdings and Dorcaster) and 29 were on the Standard segment of the Main Market raising £1,901m in new money. Of the cash shell listings on the Standard market, four raised in excess of the AIM minimum raise condition (Landscape Acquisitions, J2 Acquisition, PRS REIT and Ocelot Partners) and the other 25 raised less than the AIM minimum raise condition, supporting the view that the Standard Market has become a popular alternative to listing on AIM particularly for companies looking to raise relatively modest sums.

Standard

Since 1 January 2016, there have been a number of ‘marquee’ cash shell listings on the Main Market (Landscape Acquisitions, J2 Acquisition and Ocelot Partners) but there have also been a significant number of listings for relatively modest sums, all of which initially listed with a market capital less than the AIM minimum raise condition and which benefited from the Main Market’s reduced eligibility and ongoing requirements for standard listed companies.

While a company proposing to list on the Standard market must still:

  • prepare a prospectus which must be vetted and approved by the UKLA;
  • have a market capitalisation of at least £700,000; and
  • have a free-float of at least 25% in public hands,

It will otherwise benefit from the from the relaxation of a number of rules that are applicable to Premium listed and/or AIM companies.  A Standard listed cash shell is not:

  • required to have a minimum trading history;
  • required to appoint a sponsor on IPO or on a continuing basis;
  • required to comply with any corporate governance codes;
  • required to obtain shareholder approval for a reverse takeover (an AIM cash shell does);
  • required to offer new shares for cash on a pre-emptive basis to shareholders (subject to the statutory requirements); or
  • subject to the “Premium Listing Principles” set out in the UKLA Listing Rules; or
  • required to substantially implement its investment policy (i.e. deploy its capital) within 18 months of being admitted or seek further shareholder approval for its investment policy at its next annual general meeting and on an annual basis thereafter until such time as its investing policy has been substantially implemented (an AIM cash shell does).

Whilst there are a myriad of factors which need to be taken into account when determining the most suitable market to list on; given the changes to the regulatory environment of cash shell companies on AIM, it has become clear that the Standard segment is an increasingly popular alternative to listing on AIM.

Reverse Takeover

An alternative to listing a new company (established specifically for purpose of the listing) is to take control of an already listed cash shell. The cash shell is then used as the vehicle for subsequent acquisitions. The acquisition by a cash shell of a target will qualify as a ‘reverse takeover’ under both the AIM Rules and the Listing Rules. Upon the receipt of shareholder approval in respect of an AIM quotation, or the completion of the transaction in respect of a Main Market listing, the cash shell’s listing will be cancelled, and the enlarged entity will need to re-apply for admission to listing and trading on AIM or the Main Market. The process for re-admission will require the preparation of an AIM admission document or listing prospectus, as applicable.

Key Considerations

In addition to the points discussed above, the founders/management team thinking of listing a cash shell in London, should consider the following:

  • While the minimum required market capitalisation for a Standard listed company is only £700,000, the company will be required to illustrate to the UKLA that it can achieve its investment policy with such a limited working capital; however, even if a small shell listing is envisaged, this figure is likely to be less than the current and proposed requirement for AIM;
  • The Main Market admission process can take longer than for AIM. In the absence of a nominated adviser, the cash shell (or its legal adviser) will be solely responsible for liaising with the UKLA.  Whilst Standard listed companies are not prohibited from appointing a financial adviser to assist in the listing process, many choose not to, viewing the benefit of the attendant costs savings as outweighing the demands on management time etc.;
  • Standard listings allow shell companies the flexibility to appoint advisors as and when they are needed as opposed to a continuing obligation to retain an adviser (such as a nomad for an AIM company). This allows the shell company to limit its initial overheads until its acquisition programme is underway;
  • The Standard listing can be used as an interim step with a view to moving to a Premium listing after it completes its investment policy;
  • A Standard listed company will be required to prepare a prospectus if it wishes to issue more than 20% of its shares in any 20 month period. However, as any issue of new shares is likely to be in connection with an acquisition resulting in a reverse takeover (itself requiring a prospectus), this requirement is not likely to create extra work unless further acquisitions are planned (and which will require funding/paper) following listing.

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