Small, but listed

Suzy Bender looks at the 154 law firms that advise companies on the Alternative Investment Market and finds that to reap any dividends, Lawyers need to take on a variety of work

The Alternative Investment Market (AIM) was set up specifically to enable companies too small to go for a full stock market listing, or at an early stage in their existence, to raise capital and develop their business.

With the main London Stock Exchange, the requirements are more involved and companies must issue a greater amount of stock.

AIM offers a defined market for smaller companies so they attract more attention, whereas a small company on the main market might hardly be noticed.

And it is not all IT companies, although many have raised funding through AIM.

Domino's Pizza, Chepstow racecourse and a slew of football clubs are among the better-known names to find a place on AIM.

What AIM has also meant is an opportunity for a range of law firms to get involved in this kind of work.

While the big listed companies often retain the big law firms, the very nature of AIM means that smaller practices can have a look in.

Gazette research based on the 2002 AIM guide from Growth Company Investor showed that the market is one favoured by mid-sized and smaller practices (see [2002] Gazette, 7 June, 6).

Some 154 law firms are retained by the 637 AIM-listed companies, and top ten City firms DLA and Eversheds are named by 30 each as their external lawyers, perhaps reflecting those firms' smaller, regional roots.

Next comes Berwin Leighton Paisner and smaller London firm Memery Crystal with 23 clients each, followed by Taylor Joynson Garrett (21), Pinsent Curtis Biddle and Field Fisher Waterhouse (both 19), SJ Berwin (16), Bristol firm Osborne Clarke (14), and Stringer Saul (13).

David Collins, head of corporate finance at City firm Berwin Leighton Paisner, explains the different aspects of AIM: 'In one sense, the AIM market is less regulated than the official list.

However, the legal liabilities and responsibilities of the directors are effectively identical, particularly when they are coming to the market in relation to a fundraising and may have to produce a full prospectus.'

He says that junior directors on an AIM float are often experiencing life in a quoted public company for the first time.

'As such they often need more guidance as to their responsibilities and duties, and may need a longer teach-in period regarding the flotation process than senior directors [on the main market].'

However, he says that this is a generalisation: 'You do get serial entrepreneurs who keep bringing companies to the junior market.

Whether they join the junior market first will depend on the sector in which they operate, and the kind of institutional shareholder base that traditionally invests in these types of companies.

Under the tax regulations there are certain tax breaks available by going to AIM rather than the full list.'

Memery Crystal has helped either the company or the broker in about 15 admissions to AIM this year.

Corporate partner Lesley Gregory says: 'On the whole, companies coming to AIM don't have a long track record and experience, and therefore you have to guide them through their responsibilities as directors of public companies and shareholder protection issues.'

As to the flotation process, Mr Collins says there is not a huge difference between going to the full market or the AIM market.

'You possibly get a few more stock exchange letters and declarations on the full list than on AIM, and the continuing obligations once you get to AIM are a little lighter than they are for fully listed companies.'

A fully listed company produces a prospectus; an AIM company will produce an AIM admission document, which may also be a prospectus.

But the content requirements are quite similar, according to Mr Collins.

'A company coming to AIM will have a financial adviser known as a nomad (nominated adviser) and a broker, and a fully listed company will have a sponsor, but essentially they perform very similar roles.

They ensure the directors have had their obligations as directors of a quoted company explained to them, and that the company is appropriate to be listed on the market.'

David Collins says the flotation process for AIM is then a team effort.

The lawyers advising the company and the lawyers advising its nomad and broker work together to negotiate the necessary documentation.

Jon Harris is a corporate partner in the London office of Pinsent Curtis Biddle.

He describes the advantages of a company being AIM listed: 'Its profile is raised through press coverage on flotation, new shares can be issued to fund expansion and make acquisitions, and existing shareholders can realise the value of some of their shares on flotation and later.'

But listing on AIM is not necessarily a cheap business.

A survey conducted recently by City law firm Hobson Audley and accountants Baker Tilly of potential and recent AIM entrants found that the average costs of admission in 2001 was 580,000, with 30% exceeding 600,000 (see [2002] Gazette, 30 May, 10).

Almost one-third said the actual costs were greater than expected, and cited legal, advisory and broker fees as the overruns.

One might think that it would make life easier for the legal teams if the nature of the business was easily understood.

For example, a chain of six restaurants with a plan to expand to 12 is a concept instantly understood by all involved.

But what if it is a technology company?

Andrew Sherratt, head of DLA's City corporate practice, says the nature of the business does not really make any difference to the legal team, because its members are used to a variety of companies.

However, Mr Sherratt admits: 'It may be instinctively more interesting if it is a football club [DLA has acted for West Bromwich Albion] rather than a bio-tech company - but we are perfectly comfortable with both.'

DLA's AIM team is organised with a number of specialists who focus on, for instance, technology, media and communications companies, or property developers.

Berwin Leighton Paisner has several lawyers within its technology group who, before entering law, worked in the IT industry.

But David Collins says you also need people who do not fully understand the product so that they read the prospectus as a layman and the language can be adjusted accordingly.

There has been some change in recent AIM flotations away from the pure technology sector, perhaps not surprising given the burst dot-com bubble.

But Mr Sherratt says it is important to differentiate between dot-com and technology companies.

'Dot-com was a phenomenon where essentially people were saying: "Float this business, which is something to do with e-business Internet trading." They were getting wide and fabulous prospective valuations on these companies based on a perception that we, and indeed the Americans, would suddenly become nations which traded more and more on the Internet.'

This has not happened.

But although many companies based around the Internet fell away because they just could not exploit what they thought was their potential market, Mr Sherratt says: 'That is very different from companies in more established technologies, an important distinction to be made.'

Laurence Marsh, AIM researcher at brokers Winterflood Securities, agrees.

'Many of the dot-com companies failed because although the appetite was there from the public, the companies could not possibly produce what was expected of them.

It was a bit like supermarkets selling crisps.

The public wants them in large quantities but we all know they are not good for us.

Yet it doesn't stop the public buying crisps, does it?'

However, Mr Marsh says that while some technology companies may be out of favour now, there are successful companies producing, for example, animal feeds or products for the veterinary market.

Ms Gregory says mining companies are very popular now, particularly gold mining.

But Mr Sherratt says it is now very difficult to raise money, which is less to do with the market sector and more to do with investors' sentiment.

It may not have occurred to the document shredders in Texas that they would precipitate the kind of economic dip that might affect a first division football club or your local pizza delivery, but that is exactly what has happened.

Suzy Bender is a freelance journalist