Public Companies Update September 2005

1 TIMING OF ANNOUNCEMENT OF TRADING UPDATES

There have been a number of disciplinary actions taken over the past few months which indicate a toughening from both the London Stock Exchange (in respect of AIM) and the Financial Services Authority (in respect of the Official List) on the timing of the announcement of trading updates.


1.1 AIM

In August 2005, the LSE issued a public censure of a nominated adviser for breaching its obligations under the AIM Rules.

Prestbury Holdings plc ("PH") had been negotiating a private fundraising that it believed would be completed and announced before 20 May 2004. On 17 May PH concluded that the performance of its business for the half year ended 30 April and its expectation of performance for the year ending 31 October would fall significantly short of market expectations. On 18 May PH gave Durlacher Limited ("Durlacher") a draft announcement for comment. Durlacher advised PH that it could delay making a negative trading announcement pending the fundraising completion. The fundraising was not completed until 25 May, and it was announced, together with the trading update, on 26 May. On 25 May PH's share price fell from 54p to 39.5p and following the announcement it fell to 14p before stabilising at 18p on 27 May.

Under rule 39 of the AIM Rules, a nominated adviser's obligations to an AIM company for which it acts, include being available to advise and guide the directors about their obligations to ensure compliance by the company with the Rules, and acting with due skill and care at all times.

In this case, the LSE found that the trading announcement and fundraising were separately notifiable, and that, although Durlacher had acted in good faith, it had breached its obligations under Rule 37 (now Rule 39) of the AIM Rules. In particular, Durlacher failed to: (1) advise PH on 18 May of its obligations under Rule 10 of the AIM Rules (Principles of Disclosure) to release an announcement to the public without delay; (2) advise PH on 25 May of its obligations under Rule 10 (Principles of Disclosure) to release an announcement to the public without delay being aware that the company's share price was falling sharply; and (3) act with due skill and care at all times. Durlacher accepted that PH's breaches of the Rules in failing to disclose price sensitive information to the market without delay was due to its incorrect advice, so the LSE limited the censure to Durlacher.

The LSE also announced in August 2005 that it had privately censured three AIM companies for breaches of the AIM Rules, specifically relating to failure to make timely announcements of trading updates and price sensitive information.

Additional disciplinary action taken by the LSE in August included:

Under the AIM Rules, the LSE has power to fine or censure a company, publish the fact that it has been fined or censured and/or cancel the admission of the company's securities, if it considers the company has contravened the AIM Rules. Furthermore, if the LSE believes that a NOMAD is in breach of its responsibilities under the Rule 39 or that the integrity and reputation of AIM may be impaired as a result of the NOMAD's conduct or judgement, it may fine or censure the NOMAD, remove it from the register and/or publish the action it has taken and the reasons why.


1.2 Official List

In July 2005, the FSA published a final notice imposing a fine of £240,000 on MyTravel Group plc ("MyTravel") for a breach of Listing Rule 9.2(c), in failing to announce a change in its expectation as to its performance for the financial year ended 30 September 2002.

At the end of July 2002, MyTravel identified certain balance sheet exposures totalling £24.3 million which had not been accounted for in its accounts for the year ending 2001. The Group FD and CEO decided that no announcement was necessary, because, in their opinion (based on expectations that there would be other non-recurring gains which would off-set these non-recurring losses), the overall profit forecast remained unaffected. The FSA found that, although MyTravel believed the exposures had been reflected in its profit forecasts to date, it had nevertheless changed its expectation as to the source, composition and timing of its profits and should have considered whether the change would, if made public, have been likely to lead to substantial movement in its share price. The FSA found that a company's belief that a decision to write off a large amount can be compensated by offsetting balances in its forecast is not a sufficient basis to conclude that no announcement is necessary; it must consider whether the market should be given the opportunity to assess the reasonableness of that belief for itself, through an announcement by the company. The FSA considered that, in the context of investor nervousness concerning the travel sector and market sensitivity to accounting issues, an announcement should have been made promptly. By failing to notify the market until full year results were announced in November 2002, MyTravel had caused a serious delay in announcing price sensitive information.

In determining the penalty, factors the FSA took into account included the length of the delay, the size of the exposures compared to the forecast profit, that advice had not been taken until after the year end, that MyTravel is a sophisticated issuer, that the breach concerned a one-off item not related to MyTravel's fundamental business and that there was no intention deliberately to mislead or withhold information from the market.

Meanwhile, the Financial Services Authority ("FSA") has also been taking disciplinary action against companies (or their directors) on the Official List in respect of trading updates. Such action highlights the FSA's intention to maintain both an orderly market and investor confidence.

In August 2005, the FSA announced that it had secured convictions against the former chairman and chief executive and former CFO of AIT Group plc ("AIT") for recklessly making a statement to the market which was misleading, false or deceptive in a material particular, contrary to s397(1)(c) of the Financial Services and Markets Act 2000 ("FSMA"). A third employee (not a board member) was acquitted on both counts.

According to the press release, on 2 May 2002 the directors of AIT (then listed on the Official List) issued a trading update stating both turnover and profit were in line with expectations. However the forecast profit of £6.7m depended on the inclusion of £4.8m in revenue from three contracts in the 31 March 2002 year end results. It transpired that these contracts did not exist. On 31 May 2002 an update stated that the 2 May 2002 statement was no longer accurate because one of the contracts had not been confirmed, leading to a £1.1m shortfall in revenue and profit. It also noted that short term cash requirements were unlikely to be covered by AIT's available borrowing facilities and other cash resources. Following the statement the share price fell from 492.5p to 96.5p. Then on 13 June 2002, AIT further announced that it would not publish preliminary results that day, as expected, because of issues that had arisen in the company's audit, and that there would be a further shortfall in revenue and profit, partly because AIT had failed to satisfy itself that the value of another of the contracts, worth £2.5m, could be recognised in the year end results. The share price then fell from 105p to 38.5p.

This is the first criminal action taken by the FSA under s.397 of FSMA. Sentencing will take place on 7 October 2005. Following the convictions, the FSA's Director of Enforcement said the case demonstrates the FSA's willingness and capability to take all necessary action in pursuit of its objective of maintaining market confidence.


1.3 Conclusion

It is clear that trading updates on both AIM and the Official List are coming under increasing scrutiny and companies and their advisers need to make sure that all trading updates are notified in accordance with the market rules. In particular, NOMADs must be careful to advise companies that AIM trading updates must be announced when they arise and not delayed.

If you require further information on any matter covered in this note, please contact your principal contact at Charles Russell or Simon Gilbert, Clive Hopewell or Alexander Keepin (London), Francis Rundall , Richard Norton, or Adrian Mayer (Cheltenham), Catherine Drew or Geoff Sparks (Guildford) or Peter Elliott (Oxford) on 0207 203 5000.

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