Law firms are resorting to all kinds of cut-throat methods as they battle for a slice of lucrative Alternative Investment Market work. Lucy Trevelyan explains why this flexible forum is so attractive to lawyers and clients alike

While interest in a full listing on the London Stock Exchange continues to slump, with only around 20 companies getting themselves listed in the past two years, by comparison the Alternative Investment Market (AIM) is positively booming, with 300 companies joining its ranks in the same period.


Mark Halliwell, a corporate partner at Manchester-based law firm Halliwells, says: ‘AIM has come a long way since the mid-1990s when it was often looked down on as the poor relation of the Official List. With its combination of tax breaks, flexible regulations and institutional acceptability, AIM has now matured into a credible market that, in the right economic climate, can be an essential business tool for companies hungry for expansion.’


Richard Sheen, a partner at City firm Norton Rose, explains that AIM is attractive to companies because – unlike companies on the Official List – they do not need a proven record to get listed.


He adds: ‘Benefits include access to capital markets for fundraising, increased profile and a number of tax and other advantages. The continuing obligations regime is less onerous and acquisitions can be made without shareholder approval unless the size of the deal is a reverse takeover.’


Hugh Maule, a partner at London law firm Lawrence Graham, says some companies that may have previously considered joining the Official List would now go to AIM instead. ‘The threshold seems to be going up. A company worth less than £200 million wouldn’t consider going to the full list. Some say some investors won’t invest in it but I don’t believe that.’


Law firms are desperate to get in on this burgeoning action and are resorting to cut-throat methods – including slashing fees, entering into contingency fee agreements and mounting aggressive marketing campaigns – to win what they see as highly attractive work.


Mr Maule says: ‘I’ve heard of extraordinary deals where law firms are effectively “buying space” with contingency arrangements and lower fees. You have to be competitive, but some of these firms must be doing the work at a loss. I haven’t heard of any firms failing because of it, but you have to question their business plan.’


He says most firms are usually willing to charge a lower ‘abort’ fee if, for example, a planned float does not go ahead. ‘This is fairly usual for most corporate transactions – clients aren’t prepared to pay the full amount if the deal doesn’t happen. Law firms are moving in a more commercial direction.’


Jonathan King, corporate partner at Bristol-based Osborne Clarke – which has advised on more than 150 AIM floats since AIM’s creation in 1995, including Regal Petroleum, Majestic Wine, Torex Retail and Clearspeed Technology – says competition for AIM work is ‘very fierce’, with most mid-tier corporate firms operating credible AIM teams.


‘This competitiveness between law firms manifests itself through extensive pitches, cost comparisons and so on. Most deals tend to have an element of success/abort fee arrangements. There has been undercutting of fees to get the work at some levels but brokers tend to get worried if the company’s lawyers are not seen to be charging an appropriate rate, as the quality of work often tends to bear this out.’


Clive Hopewell, a partner at City firm Charles Russell, says: ‘There has been quite a bit of low-balling going on, and we have seen one or two contingency fee arrangements – but we don’t do that. We want a long-term relationship with our clients, so we look at the whole picture effectively in terms of fees.’


Maule: firms often undercut each otherMr Sheen says: ‘Fees have to be competitive and flexibly structured, but not they are not the sole criteria for appointment of lawyers – track record, personal characteristics of legal advisers involved and recommendations by nomads (nominated advisers) are just as important.

‘There is always pressure on fees in this market, but while fees may have dropped or stood still on vanilla transactions [where a company sells shares of its own stock or takes out long-term loans], bigger AIM deals attract better fees. Firms usually have to be flexible and appreciate that some client companies may not be able to pay full fees if a transaction does not proceed.’


He adds: ‘Value for money is very important, but [it is only] one of a number of objectives the client is after, including quality of work, thoroughness, ability to execute deals on time, and access to specialist teams – for example, tax and employee incentivisation.’


His views appear to be backed by the recent Taking Aim survey 2004, sponsored by US/UK law firm Faegre Benson Hobson Audley, which reveals that 83% of the 100 UK and ten overseas AIM-quoted companies polled put the quality of their legal team ahead of fees. The next most important attributes were lawyers’ speed of response (73%) and value for money (65%). Half said that experience of mergers and acquisitions work was also key (see [2004] Gazette, 16 September, 8).

Mr Hopewell says: ‘When we’re pitching to clients, most of the questions are about the experience we have, who is on the team, are they going to get looked after and if a partner is going to be involved. Fees don’t tend to come up until the end of the conversation.’


However, Mr Maule says that with so many law firms – all boasting similar expertise and experience – eager to win new work, AIM clients often choose the firm with the lowest fees, even if the difference is small.


‘We have seen undercutting going on. We’re often invited to tender for AIM-related business and when we don’t get it, it’s usually down to price.’


Mr King explains why law firms are so keen to secure AIM clients. He says: ‘They tend to be relatively active in terms of mergers and acquisitions deals and need regular counselling on ongoing compliance matters which generate fee income.’


He says the work includes initial public offerings, secondary fundraisings, acquisitions and takeovers, and regulatory advice plus specialist work such as employment and share options.


Mr Sheen, whose firm acts for around 20 AIM-listed firms including Healthcare Enterprise Group, Peter Hambro Mining, Tmt Potential Finance Group, InTechnology, Profile Media Group and Oakdene Homes, says: ‘Many AIM companies are at a relatively early stage and on the acquisition trail – this provides annuity work for advisers.’


He says there are no perceivable drawbacks over other clients, except that AIM clients are often ‘very busy and personnel thinly spread’.


AIM-related work, it seems, comes from a variety of sources. Mr King says: ‘Some were historical clients which we’ve listed, others were gained through pitches and referrals from our corporate finance intermediary contacts – we have particularly strong relationships with a number of mid-tier investment banks and accountants – and others have come to us through our reputation.’


Mr Sheen says: ‘We do a lot of marketing, mail shots, offers of talks and so on, but principally we target nomads – a close relationship with nomads/financial advisers is seen as an effective way of approaching AIM companies and securing a new deal, even if there are incumbent advisers.’


Mr Hopewell says a law firm’s relationship with the brokers can be important in winning work – but it is not one-way traffic.


‘There’s a community of brokers and lawyers who work together. It’s pretty wide and a lot of brokers use a variety of lawyers on their panel. But lawyers refer work to brokers too.’


Mr Halliwell, whose firm has more than 40 AIM clients and hosts an annual conference for AIM companies and businesses with aspirations to float, says: ‘We get most of our business through recommendation, rarely in beauty parades.’


AIM is also attractive to international companies – particularly since the introduction of the fast-track procedure that allows companies to become listed with minimum documentation, as long as they are listed on an approved equivalent market overseas. Foreign mining companies, for example, seem keen on listing on AIM.


Mr King adds that AIM is generally highly attractive to foreign investors. ‘It provides a straightforward manner in which to obtain a London presence. It is also often more liquid and provides better access to capital.’


Although the European Prospectus Directive, which sets out disclosure obligations, is providing a slight blot on the landscape – particularly if it affects the attractive flexibility of AIM – the lawyers questioned maintain most AIM transactions will be exempt and that the market’s future generally looks encouraging.


As Mr Sheen says. ‘Brokers and law firms will continue to devise new structures that piggyback off the relatively light touch regulation and entrance criteria to the market.’


Lucy Trevelyan is a freelance journalist