The TR-1 is a rather obscure and bureaucratic looking form produced by the FCA, which came in use with the Disclosure Rules (the “DTRs”) over a decade ago, but it regularly makes guest appearances on Twitter, bulletin boards, blogs and anywhere else where shares are discussed. The TR-1 is used to disclose significant shareholdings and is compulsory for all companies on the Main Market. The TR-1 is created by the shareholder and sent to the quoted company. However on AIM (and the NEX Exchange Growth Market), the position is rather less clear and often causes a degree of confusion.
This confusion comes from an overlay of legislation and exchange rules, and who they can be enforced against. AIM is not a FCA Regulated Market, but rather an Exchange Regulated Market, the exchange being the London Stock Exchange (“LSE”), which is a Recognised Investment Exchange under the Financial Services and Markets Act 2000. In simple terms this means that the companies who have their shares admitted to trading on AIM and the Nominated Advisers (“Nomads”) approved by the LSE have entered into a contractual agreement with the LSE, however the LSE has no contractual relationship with the shareholders of the companies, or even the directors. Thus, the AIM Rules can only be enforced against AIM Companies and Nomads.
AIM Rule 17 states that the holding (legal or beneficial, direct or indirect) of any person with 3% or more of the shares admitted to AIM should be disclosed by a regulatory announcement (“RNS”) when it first occurs and any subsequent change where the holding goes through a percentage point. AIM Rule 17 does not specify the format of these announcements, but does specify the content. AIM Rule 26, also requires this information to be placed on the company’s website. However, if the AIM company is a UK incorporated public limited company (“PLC”), then it is required under the Companies Act 2006 (“CA2006”) to make equivalent disclosures to those required under AIM Rule 17, and to do so using the TR-1 form, as it is brought within the scope of the DTRs. Shareholders of AIM-quoted UK PLC’s are also required under the CA2006 to make such disclosures, and can be compelled under s793 of CA2006 to disclose the beneficial holders of the shares (although this is a rather bureaucratic process). So if you hold shares in an AIM-quoted UK PLC, it is all pretty straightforward and essentially identical to the rules of the LSE Main Market.
The key problem in relation to AIM-quoted UK PLCs and the disclosure of significant shareholdings come in relation to individual and overseas shareholders. While UK fund managers are generally well versed in their disclosure requirements, many individual and overseas shareholders are not, which frequently results in late or inaccurate information being disclosed. A broker is not required to make a disclosure on behalf of its client unless they are also acting as investment manager. It is also fair to say that it is hardly high on the FCA’s list of priorities to enforce DTR disclosure requirements against individual and overseas investors.
However, you do not have to be a UK PLC to get admitted to trading on AIM, and a significant number of AIM companies are incorporated in offshore financial centres like Jersey and the Cayman Islands. Here is where it gets rather foggier:
- These companies are required to use “reasonable endeavours” to disclose significant shareholders under AIM Rule 17; and
- UK fund managers generally provide the same level of disclosure even if the company is not covered by the DTRs; however,
- There is no requirement for shareholders to use the TR-1 form, which typically includes a greater degree of information than a narrative disclosure under AIM Rule 17;
- The shareholders can rarely be compelled by local law to make such disclosures;
- The bye-laws included in the company articles of association to enforce disclosure of shareholdings are generally paper tigers; and
- The use of nominees, derivatives and/or share lending arrangements makes it difficult if not impossible to identify the beneficial holders of such companies.
So, if you hold shares in a non-UK PLC quoted on AIM with significant shareholders who are not UK fund managers, how sure can you be that the shareholdings are accurate? The answer is you can’t. The company cannot make them disclose it, nor can the Nomad, nor can the LSE, and if the shareholder makes a disclosure, it is likely to be impossible to verify. While shareholdings obtained at the time of a placing are generally accurately reported, as the broker will produce a placing list for the company and the Nomad, this will not reflect any additional shares the investor may hold prior or subsequent to the placing, nor any short sales made by the shareholder to be settled later with the placing shares. Things may not therefore be as you think they are.
The Secret Nomad