The Red Tape Challenge is a website-based project aimed at identifying – and scrapping – unnecessary regulations. Over the past few months, the Government has been asking interested parties to submit a response on the website, suggesting which regulations across various sectors should be scrapped, merged with other regulations, simplified, or improved. The focus is now on company law regulations. Further details on the Red Tape Challenge are here.

The Department for Business, Innovation and Skills (BIS) has invited comments on how it might reduce the administrative burden placed on UK businesses, whilst continuing to provide adequate protection for creditors, customers and suppliers. It highlights approximately 120 pieces of company legislation for review, under four headings: The Workings of Companies and Partnerships; Accounts and Returns; Business Names; and Disclosing Information about your Business. Comments can be made here.

BIS has also published a Discussion Paper, Providing a flexible framework which allows companies to compete and grow, which seeks views on how the company law framework can be improved in all areas. The Discussion Paper poses a number of questions in relation to the possible improvement in the following further areas of company law. These include:

1. Company names. BIS asks for views on whether the law on company names causes problems and delay;

2. Company filings. BIS asks whether it would be beneficial to be able to file an annual return and accounts together and how the system should change to best accommodate that;

3. Rights to inspect company registers. BIS asks for suggestions to improve, in practice, how registers may be inspected;

4. Penalties and enforcement. BIS asks whether the existing UK system of setting of fines and penalties is the most appropriate method for achieving compliance with the law; and

5. Employee share schemes. BIS asks whether existing company law as regards the design and operation of company share ownership schemes requires amendment or simplification.

The Red Tape Challenge is focusing on company law until 16 February 2012, but comments on UK regulation can be made after this date (although it is not clear to what extent the Government will take account of comments it receives after 16 February.) The Discussion Paper does not specify a date by which the Government must receive responses to the specific questions posed.

The revised UK Corporate Governance Code, which came into effect in June 2010, included a new Principle B.2 which stated that “the search for board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board, including gender.” Later that year, Lord Davies was commissioned by the Government to review gender diversity on the boards of listed companies and recommend how the Government and businesses could increase the proportion of women on company boards.

Following the completion of his review in February 2011 – and the subsequent FRC consultation paper on his recommendations for revising the UK Corporate Governance Code to require listed companies to establish a policy on boardroom diversity in May 2011 – the following changes relating to listed companies were announced:

1. They will have to report annually on their boardroom diversity policy, including gender, and on any measurable objectives that the board has set for implementing the policy and the progress it has made in achieving the objectives; and

2. They will have to consider diversity of the board, including gender, when evaluating their board’s effectiveness.

These changes have been deferred and will apply to financial years beginning on or after 1 October 2012; however, the FRC has encouraged all companies to voluntarily apply and report on these changes with immediate effect.

China is an important growth market for the UK, with its worldwide food and drink imports having continued in a positive trend in July to just under £5bn, up from £4.4bn in June. With 2010 figures for UK food and drink exports to China up 28.5% on 2009 figures, manufacturers are increasingly looking at opportunities in this market.

In a joint initiative with the Food & Drink Exporters Association (FDEA) and UK Trade & Investment (UKTI), FDF’s support will ensure companies benefit from an enhanced and strongly branded UK presence at the show; a specially organised trade development visit for non-exhibiting companies to give them a taste of the market; and a meet the buyer initiative enabling companies to meet key customers from the retail and food service sectors.

Charlotte Lawson, Director of Member Services at FDF, said, “The UK manufactures many of the world’s best loved food and drink brands, and demand for our products abroad continues to grow. China, with its growing middle class, has turned from an export country to an import destination. As a growth market for the UK, China cannot be ignored.

“Working with FDEA and UKTI, FDF wants to help UK food and drink manufacturers take the Chinese market by storm by significantly enhancing the UK presence at the FHC exhibition in Shanghai. We aim to support Britain in her endeavour to double trade with China by 2015 to some 62 billion pounds, by supporting business building initiatives which enable UK food and drink manufacturers to gain access to this market.”

So, the message from the FDF seems clear – the Eastern markets are full of promise – maybe we have heard that said somewhere before? Let’s hope UK businesses can achieve something great in these troubled times.

The Companies Act 2006 sets out a director’s fiduciary duties in statute for the first time. These include duties:

- to promote the success of the company;

- to avoid conflicts of interest; and

- not to accept benefits from third parties.

Case details

A director acquired equipment for his personal use by way of a free, undisclosed and unapproved loan from one of the company’s customers. At the initial hearing, the judge held that the director had acted in breach of his fiduciary duties.

Decision

On appeal, the judge considered various defences put forward by the director such as the absence of evidence that the company had suffered any loss or that the director had any corrupt motive and the fact that the value of the benefit to the director was small. However, the judge dismissed such defences and upheld the initial decision.

Comment

This case shows that the courts take a strict view of any breach of directors’ duties and even a breach with a small financial value can lead to a director being found liable.

Philip Towers v Premier Waste Management Ltd [2011] EWCA Civ 923

Barclays disputed that it owed Nylon any money for expenses, and issued legal proceedings to obtain a declaration from the High Court that Barclays was under no obligation to pay Nylon those expenses. The High Court agreed with Barclays and ruled that it was under no obligation to pay the expenses that Nylon had claimed.

Barclays also asked the High Court to confirm that Barclays did not have to pay Nylon its profits on its original capital investment, which Nylon rejected, again arguing that Barclays was obliged to do so under the terms of the LLP agreement. Nylon applied for a stay to bring an end to the proceedings brought by Barclays, which was initially rejected but appealed to the Court of Appeal.

The Court of Appeal has now rejected that application for a stay, saying that a satisfactory outcome could only be obtained by a full trial with evidence, entitling Barclays to continue with proceedings. However, in giving its ruling, the Court of Appeal noted that the parties had reached a settlement and had asked the Court of Appeal not to actually give its judgment on Nylon’s appeal. The Court of Appeal decided, however, that there was no reason why the judgment should not be given, despite the settlement that had been agreed.

The main implication from this ruling is that, whilst the parties had reached a settlement, the Court of Appeal still issued the judgment. However, the case is also a useful reminder of the need for clarity and certainty in drafting commercial agreements, including those that define investment relationships.

When a buyer purchases a business, it usually wishes to ensure that the seller cannot compete with the business of the target post-sale. We therefore recommend that restrictive covenants are included in any sale and purchase agreement.

Facts of the case

In this case the restrictive covenants in the sale and purchase agreement included a non-solicitation clause which prohibited the defendant from soliciting, canvassing or enticing away the customers of the target business for three years following completion. Before that three year period ended, the claimant noticed that some of its clients were moving to the firm where the defendant now worked. Clients had never moved to that firm before and the claimant issued proceedings for breach of restrictive covenant by the defendant.

Decision

The High Court ruled that the restrictive covenant had been breached due to the defendant’s actions and intentions on the following ground that the evidence showed that:

- there was a secret intention between the defendant and his new employer of an intention to acquire the claimant’s client base and a clear intention of the defendant to solicit the claimant’s clients for his new employer; and

- there were a number of clear actions by the defendant which solicited the clients for his new employer, including calling and meeting clients and encouraging them to follow his move.

The High Court considered that no client could have been guaranteed to stay with the claimant firm for more than one year but ruled that damages should be payable to reflect that one year’s revenue, such that the defendant was liable to pay damages of £31,875.

Comment

This case shows the importance of putting restrictive covenants into a sale and purchase agreement. Restrictive covenants must be very carefully drafted so as to be reasonable when considering their length, geographical effect and scope, and are interpreted on a case-by-case basis by the court, but this case highlights that time spent drafting such provisions can be time well spent.

Baldwins (Ashby) Ltd v Maidstone

In this case, the High Court had to consider a scheme of arrangement involving financial assistance as part of a restructuring to resolve financial difficulties suffered within a group of companies, and ruled that, whilst some aspects of the scheme of arrangement could be defined as financial assistance under section 678(1) of the CA, they also fell within the principle purpose exception under section 678(2) of the CA. The principle purpose was considered by the High Court to be the attempt to release a subsidiary’s pension scheme liability, with any payments and loans made in good faith and in the interests of the companies involved. The High Court also ruled that the payment of costs and giving of indemnities as part of the scheme of arrangement, which would otherwise be construed as financial assistance, should be approved by the exercise of the High Court’s power under section 681(2)(e) of the CA, as such payments and indemnities were commercially necessary for the restructuring and in the interests of the companies’ creditors and members.

The High Court also ruled that an error in a figure contained in a special resolution, which was being voted on by the company’s members to approve changes in share capital under the scheme of arrangement, could be construed so as to correct that error. Under the CA, a resolution to be passed at a general meeting cannot be considered a special resolution unless the text of the resolution was contained in the notice of general meeting. The courts have previously held that a general meeting cannot amend a special resolution except to correct grammar or spelling, or where all members eligible to vote on the resolution waive their rights to notice. However, in this instance, it was clear that the special resolution, when read with accompanying documentation, contained an error, and the High Court ruled that common sense should prevail – that the special resolution could be read as a matter of construction as if the error had not been made. In addition, the meeting had been informed of the error prior to the vote, and the minutes of the meeting noted the error.

This ruling is important as it is a further insight into how the revamped financial assistance doctrine under the CA is interpreted by the courts. It is also a good to see that the courts are willing to be flexible when considering a special resolution containing an error, allowing that error to be considered corrected – however, it would be interesting to see the court’s ruling if an error contained in a special resolution was a mistaken word rather than a mistaken figure. In this case it was obvious to all that the figure was incorrect, but if mistaken wording was included in the special resolution the mistake might not be so clear-cut and the court not so generous in their ruling.

For advice on directors’ duties please contact Emma Cameron or any other member of our Corporate Team.

The Government announced in August 2010 that it had asked Lord Davies of Abersoch to develop a strategy to address concerns that there are too few women on the boards of UK listed companies. The “Women on Boards” report has now been published.

Recommendations

The report does not propose statutory quotas as a way to incease female board representation but instead makes several “business-led” recommendations such as:

- the target percentage representation of women on the boards of FTSE 100 companies should be 25%;

- a voluntary code of conduct should be drawn up by headhunting firms to address gender diversity for the boards of FTSE 350 companies;

- disclosure requirements for quoted companies should be introduced (so that a quoted company must disclose the proportion of women on its board, the number of women in senior executive positions and its total number of women employees);

- a deadline of September 2011 should apply to FTSE 350 companies to announce their targets for female board representation; and

- companies should advertise their non-executive positions from time to time to encourage a wider range of applications.

If these recommendations do not result in a significant increase in female board representation for UK listed companies, the Government may yet introduce statutory quotas.

How difficult is it to gift a share? This was the question asked by Lady Justice Arden in her judgment in Shah v Shah [2010] EWCA Civ 140. The case considered whether or not a letter accompanied by an incomplete stock transfer form manifested an intention to make a gift or an intention to create a trust.

Until a transfer of shares is registered in the statutory books of a company, the transferor remains the legal owner of the shares. Therefore, a gift of the legal interest in a share is not complete until registration has taken place. However, a transferor can transfer the beneficial interest in a share prior to the transfer of the legal interest by declaring that they are holding that share on trust for the transferee.

Facts of the case

After a family feud and successive litigation two brothers (D and R) executed and delivered identical letters and stock transfer forms each purporting to dispose of 4,000 shares in a company in favour of their brother (M). However, the stock transfer forms were left undated and the consideration (being the money or monies worth provided in exchange for the transfer) was left blank. The company subsequently completed the stock transfer forms and registered the shares in M’s name. The case went back to court because D challenged his disposition to M on the basis that the letter he signed constituted a gift and as the gift was not completely constituted, it was of no effect.

The letter stated:

“This letter is to confirm that out of my shareholding of current 12,500.00 in the above company I am as from today holding 4,000 shares in the above company for you subject to you being responsible for all tax consequences and liabilities [arising] from this declaration and letter.”

Decision

The Court considered the words used in the letter in the context of all of the relevant facts rather than the alleged subjective intentions of D. On that basis, the Court found that there was no question that the words demonstrated an intention to dispose of the shares immediately by the use of the words “as from today”. However, the effect of the words “as from today” in law was to dispose of the beneficial interest only at that point as legal title did not pass until registration. The use of words “I am holding” as opposed to “I am assigning” or “I am giving” and the concept that D held the shares for M until he lost that status on registration could only be given effect in law by the imposition of a trust. On that basis the court found that D must be taken in law to have intended a trust and not a gift. The Court went on to find that D had intended that registration of the transfer would take place in due course otherwise why would he have also executed and delivered a signed but undated stock transfer form?

Comment

Returning to the original question in her judgment, Lady Justice Arden concluded that it is not difficult to make a gift of shares but it may take time to complete the gift by registration of the shares in the name of the transferee. If you want to make an immediate gift, one way of doing so is to declare a trust.

Where, as in this case, the fundamental motivation for the transfer was a fear on the part of the director that he was going to be subject to a major claim against him arising out of his misappropriation of funds in a bank account in respect of which he had fiduciary obligations, the director could not of his own volition tranfer some of his shares in the company by way of a gift to his daughter and wife.  The company had not authorised the director to issue share certificates to his wife or daughter or to record them as shareholders in the company’s register of members. Accordingly, legal title had not been effectively transferred.  In effecting the gifts, the director had tried, without success, to realise an immediate and outright transfer of his beneficial interest. However, no amount of benevolent construction of those transactions could lead to a conclusion that the director was intending to declare himself a trustee in respect of  his shareholding. Moreover, the director had failed to take the necessary steps sufficient to enable his wife and daughter to obtain a transfer of the shareholding without further recourse to assistance from him. All they received were documents purporting to be new share certificates in their names which the director had created without the company’s authority. The result was that, without the director’s assistance in making available the duly completed stock transfer forms, neither his wife nor his daughter could perfect the intended gifts. Accordingly, no beneficial interest had been transferred.

This case highlights once again that people trying to put their personal assets (in this case shares) beyond the reach of creditors will come unstuck if their motivation is to defeat the interests of those creditors. Furthermore, the case also highlights the importance of company board meetings approving share transfers. A proper transfer of shares requires: (i) the transfer to be approved by the directors passing the requisite resolution (usually at a duly convened board meeting, but as an alternative, the resolution could be passed by directors’ unanimous written resolution); and (2) the directors also resolving to approve a person (normally another director or the company secretary) to deal with the mechanics of recording the transfer in the company’s statutory records, and to issue new share certificates. Furthermore, if a transferee only wishes to transfer the beneficial and not the legal title, then he or she should enter into an appropriate trust instrument, for example, a Declaration of Trust over the shares, clearly setting out who the beneficiaries are and the exact details of the shares which are the subject the trust. Otherwise, as this case highlights, going forward there could be be serious question marks over the validity of the share transfer as well as the the validity of any purported transfer of the legal and/or beneficial title to the shares.

Disclosure obligations

The Disclosure and Transparency Rules (DTR) apply to companies which are listed on a regulated market in the UK. The Listing Rules (LR) apply to companies which are listed on the FSA’s Official List. The DTR and LR impose certain obligations on such companies, including the way in which inside information should be controlled and disclosed. This is to ensure that all of the users of the markets receive the same information at the same time.

As JJB is a FTSE listed company it is subject to the DTR and LR.

Facts

JJB acquired OSC on 18 December 2007 for £5 million but did not disclose that it was also to purchase the in-store stock at a price of £10.038 million. On the later acquisition of Qube on 22 May 2008 for the nominal sum of £1, JJB failed to disclose the fact that it was in addition settling Qube’s overdraft facility at a cost of £6.47 million.

It was only later on 26 September 2008 when JJB published its interim results that it disclosed the true costs of the acquisitions for the first time, resulting in its share price falling by 49.5%.

FSA decision

The FSA considered that JJB’s failure to disclose the true costs of the acquisitions had created a false market in JJB’s shares for over nine months. The true costs constituted inside information and the information was that which a reasonable investor would use to reach investment decisions. JJB had therefore failed to comply with the DTR and LR.

The FSA originally imposed a penalty fine of £650,000 which was later reduced to £455,000 as a result of JJB’s cooperation in quickly reaching a settlement. This sum is the second largest fine the FSA has imposed for a breach of the DTR and LR.

So, in practical terms, what can be gleaned from this decision in relation to the drafting and effect of indemnity clauses in contracts? The following points should be noted.

1. Parties drafting indemnity clauses in contracts must use clear and unambiguous language.  If you mean to cover a specific type of loss or liability, then say so.  Likewise, if you want the indemnifying party to pay out whatever the Court award may be, then again, say so.  Leave nothing to chance.

2. Avoid use of the archaic phrase “insofar as“.  The judge commented that this does not mean the same as “to the extent that ” and effectively means the same as “if “. The phrase “to the extent that” is more specific in meaning, and could, for example, precede words such as “…those liabilities are specifically identified in…[then identify the relevant document in or under which the liabilities may arise]. Make use of specific definitions and include them in the indemnity clause, as appropriate. The use of defined terms will add clarity to the drafting and reduce the risk that the indemnity may not be be enforceable against the indemnifying party.    

3. Consider using associated clauses that make it more likely that the indemnifying party is bound to accept any settlement or court judgment.  Clauses dealing with notice of claims; claims control; and covering settlement of claims  are all useful tools to protect the indemnified party.

4. As an indemnified party, with either the benefit of insurance or an indemnity against third party claims, do not assume that any settlement with a third party will be covered under the appropriate insurance contract or indemnity clause.  Go and check first. Will the indemnifying party be obliged to accept the terms of the settlement and pay out? What steps should the indemnified party take to ensure it can enforce the indemnity?

Most of all, from the indemnified party’s point of view,  be  clear, careful and concise in what you draft – it could just be the difference between recovering your loss or sitting there reflecting ruefully on what might have been.

The EC’s decision shows that there were serious competition concerns in relation to the merger, in particular with regards to the potential bundling of CPUs from Intel with the security products produced by McAfee, if such bundling did not allow for interoperability of the McAfee security products with the CPUs manufactured by Intel’s competitors and vice versa.

As a result, the EC gave its conditional approval to the acquisition under the EC Merger Regulation, the conditions being that such interoperability be possible and all necessary information for interoperability be made available to Intel’s, and McAfee’s, competitors.

The Bribery Act is expected to have a huge impact on the way an organisation controls its internal affairs, as it will be responsible for any corrupt action by its employees unless it can show that it had in place adequate procedures and policies to prevent those actions.

The Bribery Act places the responsibility for compliance with the organisation rather than providing a tick-box system to ensure compliance. As part of the new law, the Government needed to produce guidance to help organisations to make the correct decisions.

The initial guidance was produced by the last government, but was widely criticised, by bodies such as the Law Society, for not being clear enough. Once the new guidance has been published, the MoJ have said that there will be a three month notice period before the Bribery Act comes into force.

The Government issued a review on this topic in December 2010. More than 2,600 responses to the review have been received. Meetings have also been held with a number of interested groups which have generated suggestions such as trial periods on company boards and widening the talent pool by allowing recruitment from the services sector. Lord Davies is heading the review and will make his recommendations to the Government this February.

The CBI has responded to the Government’s review by stating that the UK Corporate Governance Code should require listed companies to report on diversity on a “comply or explain” basis. This would force listed companies to set internal targets and, if such targets are not met, provide a report setting out the reasons why. Companies would be able to take their particular circumstances into account when setting the targets so that, for example, a media company with lots of female employees would set higher targets than an engineering company with few female employees. A similar scheme due to be introduced in Australia next year has reportedly already caused an increase in the number of female board appointments. It will be interesting to see if any changes introduced in the UK have a similar effect.

The Office of Fair Trading (OFT) launched an investigation in January 2005 into allegations of collusion between producers of dairy products and supermarkets in relation to retail pricing. In September 2007 the OFT informed a number of businesses, including Tesco, Sainsbury, Asda, Morrisons and Safeway (which was bought by Morrisons in 2004), that the OFT had found evidence of their involvement in collusion that infringed Chapter I of the Competition Act 1998. Chapter I of the Competition Act 1998 prohibits an agreement, decision or concerted practice between undertakings which may affect trade in the UK (or part of the UK) and has as its object or effect the restriction, prevention or distortion of competition within the UK.

The OFT reached early resolution agreements with many of those accused, under which those businesses admitted that they had been involved in collusion, accepted liability and any fine imposed by the OFT, and agreed to assist the OFT in the continued investigation. Under the early resolution agreement, Safeway agreed to pay a fine of more than £10 million, which had been reduced from £16 million under the terms of the agreement.

A number of companies within the Safeway ‘group’ filed proceedings in order to recover damages from former directors and other former employees, and hoped to obtain an indemnity against the costs of the OFT investigation and fine. Safeway argued that those former employees had breached their contracts of employment, had breached fiduciary duties they owed to Safeway, and had been negligent.

The defendants applied to the court for a summary judgment or to have the claim struck out on the grounds that, firstly, the claim went against the principle of ‘ex turpi causa – that a claimant cannot pursue an action if it arises in connection with the claimant’s own wrongdoing, and a court will not assist a claimant seeking to recover a benefit from that wrongdoing – and, secondly, that the claim went against the Competition Act 1998 and accompanying competition regime.

The High Court ruled that the case should proceed to trial on the grounds that Safeway had a real prospect of defeating any defence brought by the defendants based on the ‘ex turpi causa’ principle as Safeway’s liability was arguably not personal, primary or direct, and it was possible that the defendants had been the ‘directing mind and will’ of Safeway at the time of the breach. The High Court also ruled that moving the fine from Safeway to the former employees at fault was consistent with the competition law regime under the Competition Act 1998. The High Court therefore ruled that the case should proceed to trial for a more thorough consideration of the facts. The defendants appealed the ruling.

The Court of Appeal ruled in December 2010 that the appeal should be allowed, and that the defendants were entitled to summary judgment such that Safeway’s claims were struck out. In a unanimous verdict, the Court of Appeal ruled that the ‘ex turpi causa’ principle did apply, such that Safeway could not recover the amount of the fine due to the OFT from its former employees alleged to be at fault for the breach of competition law. The Court of Appeal ruled that Safeway’s liability was personal and could not be passed to its employees, and that the aim of the Competition Act 1998 is to protect consumers, and the general public, from distorting trade practices, which would be undermined if a company could then pass on any liability to individual employees.

The High Court had arguably put directors at risk of huge financial liabilities if their companies infringed competition law. However, the ruling of the Court of Appeal ensured that directors are no longer at personal risk under competition law, and clearly states that the competition law regime imposed by the Competition Act 1998 places liability on companies themselves, and that such liability must remain personal to those companies and not passed on to employees past or present, even if those employees were at fault for the infringement.

The full text of the ruling can be found here.

The articles of association of a company (articles) govern its constitution and often contain provisions relating to the transfer of shares. If a company has directors or employees who own shares, the share transfer provisions may contain “good leaver” and “bad leaver” provisions. Such provisions have the effect that, if a director or employee ceases to work for the company, his shares are automatically offered for sale to the other shareholders. If the director or employee leaves for a “good reason”, he receives “fair value” for his shares and if he leaves for a “bad reason”, he receives nominal value for his shares.

The case

A company removed a director (D) and invoked the automatic “good leaver” share transfer provisions in its articles. These provisions stated that D was entitled to the “fair value” of his shares, to be determined by a third party accountant. D nominated three potential accountancy firms and the company selected one of those firms. D then refused to sign the accountancy firm’s letter of engagement, demanding that the company first disclose various documents and taking issue with certain parts of the accountancy firm’s letter of engagement.

The Court of Appeal decided in D’s favour, stating that the agreement to appoint an accountancy firm under the articles had to be a tri-partite agreement between the company, D and the accountancy firm.

The company then brought further proceedings on various grounds, including that:

(a) it was necessary to imply a term into the articles that the accountancy firm’s terms of engagement would be binding on the parties unless otherwise unreasonable;

(b) it was necessary to imply a term into the articles that D was obliged to co-operate with the engagement of an accountancy firm by not unreasonably withholding his consent to an appointment; and

(c) the wording in the articles relating to the appointment of the accountancy firm had broken down and the court should substitute its own wording in order to determine the fair value of D’s shareholding.

Decision

It was decided that:

(1) generally, articles are to be construed in the context of their commercial purpose and in the light of their full text;

(2) the articles in question did not state that the accountancy firm could be appointed on the basis of a unilateral agreement with the company;

(3) having regard to the legal principle that “a contract should better function than perish”, it had to be implied into the articles that D could not unreasonably withhold his consent to the appointment of the accountancy firm. Consequently, D’s actions in withholding consent were unreasonable; and

(4) despite the wording in the articles relating to the appointment of an accountancy firm having broken down, it was not a case that would require the court to step in and take control of the valuation process.

Comment

This case highlights the importance for companies to put in place articles which contain carefully worded share transfer provisions.

Cream Holdings Ltd v Davenport [2010] EWHC 3096 (Ch)

Well, essentially, the BIS report says the following:

1. Broadly speaking, the report identifies that there has been a better than expected awareness of the key changes in the Act and a higher than anticipated take up of certain measures. 85% of those companies interviewed were aware of the changes under the Act.

2. Whilst there was an acknowledgement that there were costs savings and benefits from simplifying procedures for private companies on resolutions and meetings, over a third of companies interviewed disagreed that company law had been simplified. This is a rather telling statistic in itself given that simplification was one of the main objectives of the Act when the White Paper was issued a number of years back.

3. The report highlights that there is already a need to improve certain areas of the Act – in particular those provisions dealing with directors’ duties and the duty to promote the success of the company, business review and enfranchising indirect investors.

So what can directors glean from this report? Not a great deal really, and it can be argued that at a time of continuing economic uncertainty, the Government should be spending more time and resources on guiding and assisting directors through the maze of this complex piece of legislation, with a view to helping them run their companies more efficiently. No doubt directors will be thinking they would like a helping hand from the Government on the key provisions in the Act rather than have to face the prospect of having to implement further changes in the future. Is this really simplification? Probably not, but we live in an age of over reporting and no doubt there will be more reports to follow. Whatever happens, directors can be certain of one thing – Whitehall will be introducing changes to the Act – you have have been forewarned !

The lower rate of corporation tax has a threshold of £300,000.  If you have two associated companies the threshold for each is reduced to £150,000.  If you have three, then the threshold reduces to £100,000 for each.  The same will apply to the upper threshold (£1.5m).

The case below shows how this rule can apply in quite unexpected ways.

Executive Benefit Services (UK) Limited v HMRC [2010] UKFTT 550 (TC).

The taxpayer company and its associated company had completely distinct businesses.  However, a shareholder of one was found to control both companies since he had become a loan creditor of the associated company for purely commercial reasons.  Essentially by virtue of lending the other company money (combines with a minority shareholding) he became entitled to the “greater part” of the company’s assets “available for distribution to participators”.

The First-tier Tribunal held that the associated company test applied irrespective of any tax avoidance motive in structuring a company’s financing and shareholdings. 

Conclusion

This is a good reminder of some of the mischief which can be caused by the associated companies rules. 

The facts here are clear that there was no tax avoidance motive, in fact the shareholder in question was clearly trying to help out his son (who was the owner of the second company).  The loan was interest-free with no fixed repayment date and with no other entitlements, such as voting control or a share of a distribution of profits in the event of a winding-up.  Despite all this, the tribunal held that the companies were associated and reduced the rate of tax for both companies accordingly.

This case is going to be of particular interest in these times when (as happened here) lenders are holding back the flow of credit and children are turning to the bank of Mum and Dad.  When Mum and Dad are themselves in business, they need to look very carefully at the position of both companies.

For more information please contact James Odds or Shimon Shaw on 01923 20 20 20.

The guidance addresses matters such as: 

1. the constitutional role of shareholders;
2. the collective responsibility of the board and functionality of an advisory board;
3. the size, composition, efficiency, skills and duties of the board of directors;
4. equal treatment of members and effective communication between the board and shareholders;
5. the balance of family governance and corporate governance;
6. the division of responsibilities between board and management;
7. nomination, remuneration and audit committees;
8. appraisals of the board and individual directors; and
9. annual reports to shareholders and other stakeholders.

 The guidance can be viewed via the following link:

http://www.ecoda.org/docs/Corp%20Gov%20Guidance%20and%20Principles%20for%20Unlisted%20Companies%20in%20the%20UK_Final.pdf

John Zucker led the Matthew Arnold & Baldwin LLP corporate team in what is his first major deal since joining the firm from Roiter Zucker, a boutique pharma law firm, in June of this year. The complex deal involved numerous multi-jurisdictional elements, with Matthew Arnold & Baldwin LLP acting as the international hub from its London offices, working across the US, India and Cyprus.

Zenara is a leader in the nicotine replacement therapy market, producing both chewing gums and lozenges.

 Zenara is being renamed Cambrex Zenara and will see the integration of Cambrex’s active pharmaceutical ingredient and drug delivery capabilities with Zenara’s growing range of formulation and finished dosage products.

John Zucker was assisted by Matthew Arnold & Baldwin LLP corporate Partner Joss Alcraft with support from Samantha Lloyd, Emma Cameron, Hannah Radclyffe and Rhodri Preece. Cambrex was advised by Wragge & Co.

Commenting, Ashok Narasimhan, Zenara’s founder said:

“This deal comes at an exciting time for Zenara Pharmaceuticals as we take the business to the next stage in its development, which involves broadening our product base and its global reach.  I am pleased that our experienced advisers, John Zucker and his Matthew Arnold & Baldwin corporate team, ensured that the sale process went smoothly with a successful conclusion.”

Matthew Arnold & Baldwin LLP’s John Zucker added:

“This was a complex transaction which required a high degree of legal expertise in order to get the deal done in a challenging timeframe. I am very pleased we at Matthew Arnold & Baldwin were able to help Zenara to successfully complete this deal.”

• whether there is a problem with short-termism in the UK’s equity markets and if action is needed to encourage investors to take a long term view;
• should the shareholders of a company have a greater degree of control over directors’ remuneration; and
• do boards understand the long-term implications of takeovers and do they communicate such implications effectively?

The Treasury have just now issused the following press release, which we will consider in more detail and comment on in due course.

Financial Secretary to the Treasury announces changes to restricting pensions tax relief

Financial Secretary to the Treasury, Mark Hoban MP, announced today that the annual allowance for tax-privileged pension saving will be reduced from £255,000 to £50,000, and the lifetime allowance will be reduced from £1.8 million to £1.5 million. This will replace the complex proposal legislated for by the last Government in the Finance Act 2010.

This measure will raise £4 billion per annum in steady state and will help reduce the record Budget deficit that this Government inherited. It will be targeted at those who make the most significant pension savings. An annual allowance of £50,000 will affect 100,000 pension savers 80% of those will have incomes over £100,000.

The Government is committed to protecting individuals on low and moderate incomes as far as possible. To protect individuals who exceed the annual allowance due to one-off “spikes” in accrual, the Government will allow individuals to offset this against unused allowance from previous years.

We will also consult on options enabling people to meet tax charges out of their pensions in November.

In order to protect the public finances it is necessary to introduce the reduced annual allowance from April 2011. The Government plans to introduce the reduction in the lifetime allowance from April 2012.

Mark Hoban said:

We have abandoned the previous Government’s complex proposals and developed a solution that will help to tackle the deficit but not hit those on low and moderate incomes. We have taken a tough but fair decision.

The Coalition Government believes that our system is fair, will preserve incentives to save and – compared to the last Government’s approach – will help UK businesses to attract and retain talent.

The LSE is concerned that the FRC will not be able to deal with the real-time monitoring and response required by the UKLA’s functions and this will put London at a disadvantage compared to other markets.

The Association of Investment Companies (AIC) has recently published guidance for directors of investment companies to help investment company boards obtain the most appropriate D&O policy. Whilst aimed at investment companies, the guidance highlights principles that directors of other types of company may find useful.

Key points of the guidance worth noting include:

• The board of directors should always remain responsible for arranging their own D&O policies so that they are aware of what is and what is not covered. This is particularly important when subsidiary companies are involved under a group company structure.
• If the board is made responsible for putting in place the D&O cover this will help to ensure that all directors on the board are aware of what losses can and cannot be claimed against.
• Directors should receive advice on the D&O policy before making a claim as inaccurate reporting may lead to insufficient recoveries under the policy.
• Any new directors should be provided with a copy of the D&O policy.
• Consideration should be given as to what effect a merger or acquisition may have on the D&O policy.

If you would like further information on D&O policies, or to see the AIC’s guide in full, please do not hesitate to contact Emma Cameron, or another member of the corporate team at Matthew Arnold & Baldwin LLP.

The Financial Reporting Council (FRC) commissioned the ICSA to review and update the Good Practice Suggestions from the Higgs Report that relate to non-executive directors. A previous ICSA consultation, in March 2010, revealed that there was overwhelming support for new guidance to help boards to understand and implement the Combined Code (now called the UK Corporate Governance Code). Consequently, on 29 July 2010, the ICSA published a new consultation paper on improving board effectiveness, which includes draft guidance to assist boards in implementing the Principles in Sections A (Leadership) and B (Effectiveness) of the Code.

This draft guidance makes a number of amendments to Higgs’ guidance, most notably by placing a greater emphasis on the role of the chair in creating an effective board. However, it also contains sections on several areas/issues that were not covered by Higgs’ guidance, including:

1. Role of the board. The board is expected to set the company’s values and standards, and ensure that it meets its obligations to shareholders and others;

2. Role of the senior independent director. He or she should be more prominent when the board is undergoing a period of stress, in order to maintain board and company stability;

3. Role of executive directors. The CEO should improve the standards of discussion in the boardroom, whilst executive directors should represent the owners of the business and encourage non-executives to probe proposals as an essential part of good governance;

4. Role of the company secretary. The company secretary should add value, particularly in relation to induction and development, and advise the board of any changes which could be made to governance procedures in order to improve the governance of the company;

5. Decision-making. The Board should provide clear policies and look at how good decision-making can best be facilitated;

6. Board composition. Companies should consider internal appointments for executive director posts, and prospective directors should conduct sufficient due diligence to ensure that they fully understand the company before joining its board;

7. Establishing and maintaining directors’ skills. The chair, new director and company secretary should work together to devise an effective induction programme and directors’ development programme; and

8. Communicating with shareholders and other stakeholders. The annual report and accounts should be regarded as the most important communication between the company and its shareholders, and should be used to clearly set out the company’s governance arrangements.

The consultation closes on 14 October 2010, and the ICSA will then submit the completed draft guidance to the FRC in November 2010, so that the FRC can publish the final guidance by the end of 2010.  Although the UK Corporate Governance Code applies to companies with a premium listing of equity shares, the principles and ethics underlying the Code should be followed by a much wider class of company, given the duties and responsibilities to which all directors are subject. Take, for example, the fast growing private limited company which is attracting external funding and which is working towards a listing. Behaviour in line with the Code will make transformation smoother and its absence could even jeopardise pre-listing funding, as reputation is crucial to any legitimate funder associated with a company.

The terms of the sale of a company’s shares are usually documented in a share purchase agreement (SPA). An SPA will typically list various warranties given by the seller to the buyer. Warranties are effectively promises as to the state of affairs of the company. After completion, if the buyer discovers that a warranty was incorrect as at the date on which it was given, the buyer can use the breach of warranty as the basis for a claim against the seller.

Facts of the case

A recent Court of Appeal decision (Macquarie Internationale Investments Ltd v Glencore UK Ltd) considered whether there had been a breach of a warranty relating to the accounts of the target company. This warranty stated that the accounts:

“give a true and fair view of the assets and liabilities of the Group and/or the Company or the Subsidiary to which they relate as at the Accounts Date and the profits and losses of the Group and/or the Company or the Subsidiary to which they relate (as the case may be) for the Financial Year ended on the Accounts Date (including all related party transactions)”.

After completion, one of the target company’s suppliers produced an invoice relating to services rendered to the company, but which that supplier had mistakenly not produced prior to completion due to an error in loading billing information onto its new computer system.  The invoice came to £3,174,819.91, inclusive of VAT.

The buyer contended that, as a result of the invoice, the seller had breached the accounts warranty, with the effect that the true net asset value of the company was reduced by around 40%.

Decision

At first instance the High Court held that the seller did not have sufficient evidence of its liability to the supplier for the purpose of making a provision in the accounts. The accounts had therefore been prepared in accordance with the relevant accounting standards and there had been no breach of the accounts warranty.

The buyer appealed arguing that whilst it agreed that the accounts had been prepared in accordance with the relevant accounting standards, they did not necessarily give a true and fair view of the company’s assets and liabilities.

The Court of Appeal dismissed the appeal for various reasons including the fact that the seller did not know about, and could not have reasonably discovered, the outstanding invoice at the relevant time. For this reason it could not be said that there was an error in the accounts and it followed that the accounts gave a true and fair view.

Comment

If possible, buyers should request enhanced warranty protection to cover undisclosed liabilities irrespective of whether such liabilities are known to, or reasonably discoverable by, the seller at the relevant time. Whether or not such enhanced protection will be agreed depends upon the relative bargaining strengths of the parties.

Within the qualifying period, these employers will not have to pay the first £5,000 of Class 1 employer NICs due in the first twelve months of employment. This will apply for each of the first 10 employees hired in the first year of business and operate in selected countries and regions.

Subject to meeting the necessary legal requirements, the scheme is intended to start no later than September 2010. Any new business set up from 22 June which meets the criteria set out in the forthcoming announcement will benefit from the scheme.

The countries and regions which will benefit will be Scotland, Wales, Northern Ireland, the North East, Yorkshire and the Humber, the North West, the East Midlands, the West Midlands and the South West.

For more information HMRC have published questions and answers which can be found here.

The paper follows a report compiled by a committee of the Department for Business Innovation and Skills (BIS Committee) which partly criticised the UK takeover procedures.  However, the government command paper seemingly puts an end to the possibility of any legislative change, stating that it believes that the current legislation is sufficient in allowing intervention in mergers where the interests of the public could be affected.  This is despite admitting that its powers in overseeing Kraft’s delivery of its commitments under the Cadbury takeover would be limited.

The government command paper comes hot on the heels of another consultation paper which was published by the Code Committee of the Takeover Panel. That paper sought comments on possible reforms to the Takeover Code, setting a deadline of 27 July 2010 for the submission of any comments. The government has announced that it will publish a further paper on the regulation of takeovers once it has had a chance to consider the suggestions for reform put forward in response to that paper.

Those companies registered before 1 October 2008 were given a period of time in which to appoint a natural director. The length of the grace period depended on when the company was incorporated. Most companies were required to appoint or re-appoint a natural director by 1 October 2008. Only companies incorporated before 8 November 2006 (the date on which the Companies Act 2006 received Royal Assent), which had a least one corporate director on that date and had not appointed any natural directors, were given until 1 October 2010 to make the appointment.

A company found to be in default of this rule may be subject to penalties for failure to comply. As the final deadline looms, companies that have not yet complied with the legislation, should now urgent take steps to do so to avoid being in default.

Getting technical, there are nine consultation / discussion documents which invite views from the public and professions on:

• PAYE reform
• Furnished holiday lettings
• Pensions tax relief
• Associated company rules
• Disclosure of inheritance tax avoidance
• Foreign branch taxation
• Controlled foreign company interim improvements
• Modernisation of investment trust company rules
• National minimum wage regulations

This is supposed to be the start of a new era of openness and transparency.  It is hard, though, to escape the cynicism engendered by 13 years of Mr Brown at the tiller.  Under the last regime, consultations meant less and less as time went by.  It became increasingly clear that they were more of a statement of intent than a genuine request for views. Time will tell how the new Government will act.

Only the papers PAYE and national minimum wage have the potential to be of interest to the public at large (and even then, there is a limited audience).  The other consultations are of more interest to the professions and to business.

Many people will look carefully at the proposed changes to pensions tax, and associated companies which could have a genuine impact on owner managed businesses.  For tax planners, the outcome of the discussions on disclosure of inheritance tax avoidance and foreign branch taxation will be of particular interest.

If you would like to discuss the impact of any of these proposals please contact me on james.odds@mablaw.com or comment below.

The Hearings Committee concluded that shares had been acquired by a concert party acting on the direction of Mr Myerson in a deliberate attempt to circumvent certain requirements of the Code.  The Hearings Committee also found that key facts had been concealed from the Takeover Panel. 

Mr Myerson  is currently considering an appeal to the European courts.

After an extensive consultation process, the Financial Reporting Council (FRC) has published the new UK Corporate Governance Code (Code).  The Code applies to all companies with a premium listing of equity shares, whether incorporated in the UK or elsewhere. These companies should include a statement in their annual financial reports indicating how they apply the principles of the Code.

Directors’ remuneration

The changes in the Code relating to directors’ remuneration include:

• Non-executive directors were previously prohibited from receiving options in case such options risked their independence. This prohibition now covers “other performance-related elements” of remuneration.
• Companies now have to consider using provisions that allow them to clawback remuneration from directors in exceptional circumstances of misstatement or misconduct.
• The Code now specifically states that remuneration and incentives should be compatible with risk policies and systems.
• The performance-related elements of executive directors’ remuneration should promote the long-term success of the company. 

Directors’ re-election

The issue which was most fiercely debated during the consultation process related to the re-election of directors. The compromise is to introduce annual re-elections for directors but to apply this requirement only to FTSE 350 companies, meaning that smaller premium-listed companies need not hold annual elections. The concern remains that annual re-elections will lead to short-termism which seems at odds with the Code’s emphasis on long-term success.

Conclusion

The amended Code is not ground-breaking but introduces some interesting changes. It may therefore be an appropriate time for remuneration committees to review their remuneration policies and ensure they comply with the Code.

The Code, which replaces the engagement principles for institutional shareholders contained in the UK Corporate Governance Code and The Combined Code, is based on the Institutional Shareholders Committee’s Code on the Responsibilities of Institutional Investors. It is aimed at asset managers that manage assets for institutional shareholders, institutional investors, service providers and investors based outside the UK. UK-based companies that apply The Code should also try to apply its principles to their overseas holdings.

The Code is to be applied on a “comply or explain” basis and institutional investors can decide whether or not they wish to follow it. However, the FRC is encouraging all institutional investors to publish a statement of compliance, or otherwise, on their website by the end of September 2010 – and to notify the FRC when they have done so. From October 2010, the FRC will publish on its website a list of investors that have published a statement on their compliance.

The Code has seven principles that should be carried out by institutional investors:

Principle 1 (publicly disclose policy on how they will discharge their stewardship responsibilities);

Principle 2  (publicly disclose robust policy on managing conflicts of interest in relation to stewardship);

Principle 3 (monitor investee companies);

Principle 4 (establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value);

Principle 5 (be willing to act collectively with other investors where appropriate);

Principle 6 (clear policy on voting and disclosure of voting activity); and

Principle 7 (report periodically on stewardship and voting activities.)

The next steps

The FRC hopes that The Code will assist companies in gaining a better understanding of the approach and expectations of their major shareholders. To help achieve this, the FRC has said that, from the second half of 2011, it will annually monitor the take-up and application of The Code. The FRC will then decide when to conduct its first review of The Code, which will assess its content and impact, and consider some of the other issues raised during the consultation that were not incorporated into The Code.

Meanwhile, the FSA has launched a consultation on proposals to introduce a mandatory requirement for authorised asset managers to disclose on their website whether or not they comply with The Code. The consultation closes on 6 September 2010.

Wenta is the Enterprise Agency for Hertfordshire and Bedfordshire, and plays a significant role in supporting the local economy. It recently created two business incubation centres at Stevenage and Luton, which are designed to assist entrepreneurs, help create successful businesses and act as a source of support to new start-up companies across the two counties. Following the creation of these two centres, Wenta has been looking to strengthen its Board of Directors with accomplished professionals from the local business community.

Wenta’s Chief Executive, Chris Pichon, commented on Wenta’s website that the Agency is “constantly sourcing new ways to support, train and advise those involved in running start-ups and small businesses. Richard, [Steve and Julie] will be instrumental in steering the organisation forward as well as being our ambassadors in the community. We believe their experience, knowledge and skill set will help Wenta build on its successes and create new ones in the future.”

Richard commented: “I’m delighted to be involved, given the support Wenta offers to the local business community. As a stakeholder in local business (being a significant employer and given the wealth of businesses and owners of business that Matthew Arnold & Baldwin advises), the firm has always considered the support given to growing businesses at their early stage by Wenta and other like bodies as absolutely crucial. Matthew Arnold & Baldwin has been involved with Wenta since its inception and I am enthused to be able to play my part and help it continue to develop across the region.”

Background

The Partnership Act 1890 defines a partnership as the relationship which exists between persons carrying on a business in common with a view to profit.  It is a matter of fact whether a partnership exists and the parties cannot simply determine this for themselves.  Usually the relationship is governed by a partnership agreement and we would advise that a partnership agreement is always put in place so as to set out the rights and obligations of each of the partners.  However, the essence of a partnership is the continuing relationship between the partners, personal as well as commercial, with the partnership agreement being only an indication of the relationship.

When the courts have to consider whether a partnership exists, they look at the substance of the arrangements and not the stated intentions of the parties.  The partnership has to be carried “with a view to profit” but this does not require that profit should actually be made.

The case

The father claimed that a courier business had been run as a partnership between him and his son, with the son carrying out the work and the father providing business advice based on his years of commercial experience.

The court found that none of the documents submitted in evidence showed that the father had an interest in the business beyond the fact that he had helped his son to set up the business.  Such assistance was not sufficient to create a partnership between the father and the son.

Comment

This case highlights the importance for parties to consider the nature of their business relationship and, if the aim is to work in partnership, put a partnership agreement in place.

Roger Marsh v (1) Simon Cameron Marsh (2) Time Critical Ltd [2010] EWHC 1563 (Ch)

• Acceptance condition thresholds

The Committee considers that changing the threshold at which conditions can be accepted could better reflect the views of longer term shareholders which, in turn, should (theoretically) better reflect the best interests of the company. However, the Committee also notes several issues to be considered if such changes are made, including the imposition of buying restrictions during the offer period.

• The “disenfranchisement” of shares acquired during an offer period

The Committee suggests discounting votes made by those shareholders whose shares are acquired during the offer period. This could again be seen to reflect the interests of longer term shareholders, as well as reducing share trading during the offer period and thereby stabilising the share price.  The Committee also recognises the numerous potential difficulties with this proposal. For example, if an offer turns out to be unsuccessful, at which point should voting rights be reinstated?

• Disclosures in relation to shares and other securities

One of the Code’s aims is to provide as much transparency in the takeover process as possible.  To this end the Committee suggests reducing the threshold at which large shareholders must disclose their interests to small shareholders with less than a 1% shareholding, as well as introducing an obligation to disclose acceptances and voting decisions. However, the Committee notes that the 1% threshold is already well below requirements contained within other codes of practice, and that a substantial increase in disclosure may result in ‘over-disclosure’ which could ultimately cause confusion.

• Advice, advisers and advisory fees

In keeping with the principle of transparency, the Committee proposes that the Code should require public disclosure of advisers’ fees and costs although opponents argue that sensitive information may be disclosed as a result. 

• The “put up or shut up” regime, “virtual bids” and the offer timetable.

The concept of ‘Put up or Shut Up’ relates to an offeree company’s ability to request the Takeover Panel to impose an offer deadline on an offeror company.  It has been suggested that such a deadline be reduced to a standard period. Critics believe that this may not be in the interests of the offeree’s shareholders as the offeree’s board may not have sufficient time to fully consider an offer.

• Substantial acquisitions of shares

Following the abolition of the rules against speedy acquisitions of a company’s shares, there are arguments to reintroduce time limits under which a specified proportion of shares can be acquired. However, in response to this the Committee states that ‘market raids’ are relatively rare and it is not the role of the Takeover Panel to decide who can acquire shares.

The Committee has requested comments on the consultation by 27 July 2010 after which it will decide whether any reform of the Code is required.

Could the bank claim restitution?

The Court of Appeal concluded that although the swaps contracts were invalid and void there is no longer any general public policy rule of English law that either prevents or restricts the right to claim restitution.  If, however, such a claim is inconsistent with the express provision of a statute then English law will not permit the claim as a matter of public policy.  This is because a common law claim for restitution cannot be allowed to circumvent legislation whose object and effect is to bar such a recovery. Here there was no such legislation and so the bank could claim in restitution.

Could the local authorities rely on a change of position defence?

The Court of Appeal pointed out that at no stage did the local authorities think the transaction was a gift that would never have to be repaid.  If the contracts were void, then the cause of action for restitution arose at the moment the moneys were paid to the local authorities. The court concluded that justice required that the local authorities repay the money.  The local authorities received the money and took the risk (in good faith) that the investments may go up as well as down.  Accordingly a change of position defence did not succeed.

Comment

This case demonstrates the flexibility of the law of restitution and will provide comfort to lenders. 

• A lender is able to recover borrowed sums even where a contract has been held to have been void.
• Restitution cannot be used where legislation prevents recovery, but where a contract has been held to have been void, this is not a bar to a claim in restitution.
• Where money has been lent under a void contract and the borrower is aware that the money has to be repaid, the borrower takes the risk that an investment may go up as well as down and so justice requires that they repay the borrowed money. 

 Haugesund Kommune and Narvik Kommune v DEPFA ACS Bank and Wikborg Rein & Co [2010] EWCA Civ 579

The issue in question surrounded Cadbury Plc’s facility at Somerdale which, in 2007, Cadbury had announced would be the subject of a phased closure scheme during 2009 and 2010.  In several offer documents, Kraft stated its belief that the facility could remain open.

These statements fell foul of the two part test contained within rule 19.1 of the Takeover Code.  This rule relates to the bidder and target upholding standards of care during the takeover process, particularly in conjunction with rule 24 of the Takeover Code, which governs the information required in the bidder’s offer documents.  In this instance, the Takeover Panel found that when declaring that the facility could remain open, Kraft should not only have honestly and genuinely believed this to be true, but should also have had a reasonable basis for making such a declaration.  Kraft failed on the second part of the test.

Kraft’s leading financial advisers, Lazard & Co, can count themselves lucky to escape the public criticism levelled at Kraft.  Whilst the Takeover Panel deemed them to be partly responsible for failing to provide the information on which Kraft needed to rely when making the relevant statements, it did not consider it necessary to publicly criticise Lazard in the same manner as Kraft.

This decision by the Takeover Panel is a helpful reminder that financial advisers, as well as bidders, must at all times carefully follow the rules of the Takeover Code and should be alert to the repercussions of failing to do so.

“Tail-gunner” clauses are often used by corporate finance advisers in their terms of engagement so that if a transaction completes within a certain period after the termination of their engagement, a success fee is payable to the adviser despite the fact that they are no longer engaged at the date of completion.  The clause is so-called as it refers to the parting shot of a bomber finishing his sortie.  A recent case has upheld the use of such a clause.

Facts of the case

Grandtop International Holdings Limited (Grandtop) engaged Seymour Pierce Limited (Seymour Pierce) in June 2007 to advise on its acquisition of Birmingham City Football Club (club). It was initially envisaged that the transaction would proceed by way of a recommended takeover. The terms of engagement provided for a £2.2 million success fee and stated:

“In the event the engagement pursuant to this letter of engagement is terminated by the Company and an Offer for the Target is declared or becomes wholly unconditional as the result of any offer made by or in association with the Company within a period of 12 months after the effective date of termination the Company shall pay to Seymour Pierce the Success Fee in full.”

The transaction did not proceed in the manner which had been envisaged and Seymour Pierce’s involvement declined, resulting in their engagement being formally terminated in May 2009. Grandtop eventually completed (with input from another corporate finance adviser) its acquisition of the club in September 2009, 4 months into the “tail-gunner” period. Seymour Pierce sued for the success fee.

Decision

Grandtop argued that Seymour Pierce had not been the effective cause, or even one of the effective causes, of the final transaction and did not deserve the success fee. However, the court held that the terms of engagement clearly stated that the success fee was payable irrespective of whether Seymour Pierce had been responsible for completion of the transaction in its final form.

Comment

The case turned on the wording used in Seymour Pierce’s terms of engagement and therefore highlights the importance of careful drafting. In hindsight, Seymour Pierce’s terms seemed uncommercial and unreasonable as they resulted in Grandtop having to pay the fees of two sets of corporate finance advisers. Nonetheless, the court found in favour of Seymour Pierce. This is good news for corporate finance advisers but not for their clients who should, despite such a clause often being non-negotiable, try at least to limit its duration.

Seymour Pierce Limited v Grandtop International Holdings Limited [2010] EWHC 676 (QB)

1. Tackle ‘red tape’

Before the election, both the Conservatives and Liberal Democrats promised to tackle red tape, including imposing a “one-in-one-out rule” for new regulations. This rule will now be implemented. They have also agreed to scrap the culture of “tick-box regulation” enforcement and will introduce “sunset clauses” (a Liberal Democrat policy), so that rules will expire if they are not reviewed. Finally, the Government will scrap the “gold-plating” of European legislation (i.e the transposition of EU legislation, which goes beyond what is required by that legislation.)

2. Businesses

The Government aims to encourage new start-ups by reducing the number of forms needed to register a new business, so that Britain becomes the fastest place in the world to start a business (Conservative policy). It will also end the ban on social tenants starting businesses in their own homes (Conservative policy.)

3. Takeovers

The Government “will review the range of factors that can be considered by regulators when takeovers are proposed.” There are currently no further details. The Conservatives’ manifesto did not explicitly deal with takeovers, but the Liberal Democrats promised to ensure that the takeover rules restored a public interest test, so that a broader range of factors, other than competition, would be considered by regulators when takeovers are proposed.

4. Operating and Financial Reviews

The Government will reinstate Operating and Financial Reviews “to ensure that directors’ social and environmental duties have to be covered in company reporting, and investigate further ways of improving corporate accountability and transparency.” (Liberal Democrat policy). These Reviews were originally proposed, but then dropped, by the Labour Party in 2006.

It is currently early days for the Government, and their recently-published ‘Coalition Agreement’ will be implemented over the next five years. Many of the proposals lack sufficient detail at the moment, but this will surely become clearer over time. The emergency budget, which will be heard on 22 June, will be a starting point. From a small business perspective, look out for the capital gains tax changes.

A “de facto director” is a person who acts as if he is a director of a company and is treated as such by the company’s board but has not in fact been validly appointed. A de facto director is subject to the usual directors’ duties and can be the subject of actions against directors such as a “misfeasance” action under section 212 of the Insolvency Act 1986 (IA 1986) requiring the de facto director to repay, restore or account for any money or other property of the company which he has misapplied or retained or to contribute a sum to the company’s assets by way of compensation. 

Facts of the case

Person X was a human director of Company Y. Company Y was the corporate director of Company Z. Company Z allegedly underpaid tax to an extent which resulted in the unlawful distribution of dividends to its shareholders.

HMRC issued proceedings under section 212 of IA 1986 against Person X, claiming that because he was a human director of Company Y, he could also be regarded as a de facto director of Company Z and had therefore breached his directors’ duties and was guilty of misfeasance in respect of Company Z.

Decision

The Court of Appeal held that Person X was not a de facto director of Company Z as he had not done anything more than to act as a human director of Company Y. That was not, of itself, sufficient to make him a de facto director of Company Z. There was no evidence that Person X had himself acted as a director of Company Z.

The Court of Appeal stated that there is no basis in law or principle to hold that a human director, who causes a corporate director to exercise active control over a subject company, automatically becomes a de facto director of the subject company.

Comment

The case gives useful guidance on the circumstances in which a person will be found to be, or not to be, a de facto director. Such a finding can have important consequences, particularly as regards an insolvent company.

The case also reiterates the importance of a company properly appointing its directors so that there can be no doubt as to who is on its board.

Holland v HM Revenue & Customs; Re Paycheck Services 3 Ltd [2010] B.C.C. 104

1. Corporate governance

The main political parties’ proposals were made in the aftermath of the Walker Review, an independent review of corporate governance in the UK banking industry, in November 2009.

Labour

The Labour Government welcomed the Walker Review, with Lord Myners, the Financial Secretary to the Treasury, commenting that the Government had to address “the weaknesses in board practice, risk management, control of remuneration and exercise of ownership rights identified by the Review…” In its manifesto, the Labour Party states that it will:

• Strengthen the Companies Act 2006 “where necessary” in order to create strong businesses comprising of skilled managers, accountable boards, and committed shareholders with long-term commitment;
• Strengthen the UK’s Stewardship Code for Institutional Shareholders, requiring institutional shareholders to declare how they vote, and for bank remuneration policies to be approved by shareholders.

Conservatives

The Conservative Party also welcomed the Walker Review, but criticised it for not going far enough. The Party’s manifesto says that it will: 

• Abolish the current tripartite system of regulation – abolish the FSA and put the Bank of England in charge of prudential supervision.

Liberal Democrats

The Liberal Democrats also supported the Walker Review, but, like the Conservative Party, did not believe it went far enough. Vince Cable, the Party’s Treasury spokesman, commented at the time that the recommendations should be compulsory, not voluntary.  

2. Takeovers

The recent controversial Kraft/Cadbury takeover has brought the subject of takeovers back into the political sphere.

Labour

Although at the time, the Business Secretary, Lord Mandelson, said the takeover was something that had to be decided by Cadbury’s shareholders, he has now changed his position and in the last couple of months has called for a wide-ranging review of UK takeover law. The Party’s manifesto includes some proposed reforms which would have a huge impact on takeovers: 

• Raise the threshold of shareholder support for company takeovers to a two-thirds majority, rather than the existing 50 per cent plus one share majority;
• Examine the possibility of “limiting votes” to those on the voting register before the bid is announced;
• Ensure that bidding companies are “more transparent” about their long-term plans for the business they want to takeover and their advisers’ fees;
• Require bidding companies to set out how they will finance their bids;
• More disclosure of who owns shares in the companies;
• Extend the “public interest” test in UK merger control so that it is applied to potential takeovers of infrastructure and utility companies.

Conservatives

The Conservative Party’s manifesto does not explicitly deal with takeovers. However, Shadow Business Secretary, Kenneth Clarke, commented that the Cadbury takeover was a matter for its shareholders.

Liberal Democrats

At the time of the Cadbury takeover, the Liberal Democrats were critical of the Government’s willingness to allow a state-controlled bank, Royal Bank of Scotland, to finance Kraft’s bid. Its manifesto proposes to: 

• Ensure that “takeover rules serve the UK economy” by restoring a public interest test, so that a broader range of factors, other than competition, can be considered by regulators when takeovers are proposed;
• Ensure that the outcome of takeover bids are determined by the long-term shareholder base.

3. Small and medium-sized businesses

Labour 

• New UK Finance for Growth, which will use £4bn billion of public and private funds to help businesses looking to develop and grow, in exchange for an equity stake in the company;
• Growth Capital Fund, announced in the last Budget, will inject money into, small and medium-sized companies in businesses with turnovers of between £1m and £25m.

Conservatives

Although there are no direct manifesto commitments, the Conservative Party recently commissioned a report by the American entrepreneur Doug Richard (an ex-‘dragon’ on the BBC’s Dragon’s Den television programme). His report, Small Business and Government: the Richard Report, proposed, amongst other things, the extension of the Enterprise Investment Scheme, which helps smaller trading companies to raise money by offering tax reliefs to investors who purchase shares in the companies.

Liberal Democrats

Establish Local Enterprise Funds and Regional Stock Exchanges. Local Enterprise Funds will help local investors put money into growing businesses in their own locality. Regional Stock Exchanges will allow businesses to access equity without the heavy regulatory requirements of a London listing;

• Reintroduce the Operating and Financial Review to ensure that directors’ social and environmental duties will be covered in company reporting.

3. Regulatory burden

Labour 

• Seek to reduce the costs of regulation by more than £6bn by 2015.

Conservatives

The Conservative Party policy document Regulation in the Post-Bureaucratic Age, published in October 2009, criticises the rise in regulation since Labour came to power in 1997, and proposes to: 

• Reduce the burden of red tape on business with a ‘one in one out’ rule for new regulation;
• Force each government department to reduce the regulatory burden by 5 per cent each year by eradicating costly and inefficient regulation.

The Conservative manifesto reiterates the need to cut the regulatory burden, and also to: 

• Reduce the number of forms that need to be completed to register a new business. It aims to create a ‘one-click’ registration model, so that Britain becomes the fastest place in the world to start a business;
• End restrictions on tenants in social housing starting a business from their homes.

Liberal Democrats 

• Cut regulation by assessing the cost and effectiveness of regulations before and after they are introduced;
• Operate a ‘one in one out’ system so that for every regulation introduced, another one is scrapped;
• Change the ‘culture’ of regulators to help, not hinder, business.

Comment

The election manifestos and policy statements of the three main parties have revealed some common ground and one big difference between them.

All the parties have welcomed the recommendations of the Walker Review (even if they don’t all think it has gone far enough), put forward plans to financially help small and medium-sized businesses, and made commitments to cut regulatory burden.

However, differences emerge on the issue of takeovers – a sensitive subject in the wake of the Cadbury takeover by Kraft. Labour has promised to bring in a ‘Cadbury law’ to protect British companies from foreign takeovers, whilst the Liberal Democrats want to create a ‘public interest’ test to ensure that issues other than just competition are taken into account when deciding whether a takeover should be allowed. The Conservatives, on the other hand, have rejected calls to change the UK takeover rules at all.

The proposed changes by Labour and the Liberal Democrats, if brought in, would have a big impact on how takeovers are conducted and potentially make it more difficult for bidders to succeed. Consequently, business leaders, as well as lawyers, are awaiting the outcome of the election with even greater interest than usual.

• the size and composition of the board should reflect the scale and complexity of the company’s activities;
• the board should meet regularly to discharge its duties, and be supplied in a timely fashion with appropriate documentation;
• all directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge; and
• family-controlled companies should establish family governance mechanisms that promote coordination and mutual understanding amongst family members, as well as organise the relationship between family governance and corporate governance.

Adherence to the principles is entirely voluntary but ecoDa hopes that the principles will provide a foundation upon which individual member states can develop country-specific principles. As regards UK companies, any such voluntary principles would be in addition to the usual statutory duties which already automatically apply to all directors and are now contained in the new Companies Act 2006.

Facts

Mr Calvert was a partner and trader at the stockbroking firm Cazenove.  He passed inside information relating to shares in six different companies to Mr Hatcher who proceeded to invest in those companies, resulting in a net profit of over £100,000. Mr Calvert and Mr Hatcher then split the profit between them.

The FSA entered into an agreement with Mr Hatcher whereby in exchange for his cooperation with the FSA, including standing as a key witness, the FSA agreed to sanction Mr Hatcher using its regulatory powers rather than via a criminal prosecution. Mr Hatcher’s fine was also substantially reduced but nonetheless still amounted to £56,098.

Comment 

The convictions are interesting as the FSA’s director of enforcement and financial crime specifically stated that the FSA will continue to enter into similar agreements with defendants where it believes that such agreements will result in valuable evidence for convictions being produced.

The convictions are also examples of the continued efforts by the FSA to crack-down on illegal activity in the financial markets, perhaps increased by the wide media criticism of the perceived failure by the FSA to control such markets in the past.  It will be interesting to see if any reallocation of the roles of the FSA and the Bank of England following the general election this summer has any further effect on the prosecution of such crimes.

Peter Mandelson (the Business Secretary) has since proposed various reforms to takeover laws including:

• raising the voting threshold required to approve a hostile bid
• denying short-term shareholders such as hedge funds the right to vote during a bid period
• giving bidders less time to formally commit to their offer (“put up or shut up”) so as to reduce the length of time a takeover bid takes to complete
• requiring bidders to set out publicly how they intend to finance their bids over the long term and how they intend to make cost savings

The proposals have, however, received a mixed response. Some commentators are in favour of protecting companies from hostile bids but others would prefer takeover laws to remain the same so as to allow a company’s shareholders (rather than its board of directors) to determine the outcome of a takeover bid.

A recent Court of Appeal decision has the effect that in some circumstances a company which a holding company considers to be its subsidiary may not in fact be its subsidiary.

Statutory background

Section 736 of the Companies Act 1985 (1985 Act) states that a company is a “subsidiary” of another company (its “holding company”) if that other company:

• holds a majority of the voting rights in it
• is a member of it and has the right to appoint or remove a majority of its board of directors
• is a member of it and controls, alone, pursuant to an agreement with other members, a majority of the voting rights in it,

or if it is a subsidiary of a company which is itself a subsidiary of that other company.

A key clause in the relevant documentation considered in the case defined a company as being an “affiliate” of another company if both companies are subsidiaries of the same holding company. The clause referred to the definition of “subsidiary” in the 1985 Act. The substance of the relevant provisions of the 1985 Act is reproduced in the new Companies Act 2006 (2006 Act) so the decision applies equally to the definition of “subsidiary” in the 2006 Act.

Factual background

Enviroco Ltd (Enviroco) was an affiliate of Asco UK Ltd (Asco UK) by virtue of having the same holding company (Asco plc). Farstad Supply A/S (Farstad) chartered a ship to Asco UK. Enviroco was engaged to carry out maintenance work on the ship.

Asco plc “pledged” its shares in Enviroco to a bank by a Scottish law “deed of pledge”. Pursuant to this pledge, Asco plc’s shares in Enviroco were registered in the name of the bank’s nominee. The deed of pledge made it clear that the registration of the bank’s nominee as the holder of the shares was for the purpose of security only, and the voting rights remained with Asco plc.

A fire then occurred, causing damage and the death of an Enviroco employee. Farstad brought proceedings against Enviroco, who tried to protect itself against the claim by using an indemnity clause in the charter-party agreement. The indemnity clause only applied to Asco UK’s “affiliates” so the High Court had to decide as a preliminary issue whether, as a result of the share pledge and the registration of the bank’s nominee as the holder of the Enviroco shares, Asco plc had ceased to be a holding company of Enviroco (and therefore whether or not Asco UK and Enviroco had ceased to be affiliates of one another).

High Court decision

The High Court held that “as a matter of commercial common sense” the registration of the shares in the name of the bank’s nominee was only for the purpose of giving effect to the bank’s security. Asco plc had therefore retained control of Enviroco, meaning that Enviroco was a subsidiary of Asco Plc (and an affiliate of Asco UK) and could benefit from the indemnity.

Court of Appeal decision

Farstad appealed to the Court of Appeal, which overturned the decision of the High Court. Its rationale was that, although it did not necessarily make sense to decide that Enviroco had ceased to be a subsidiary of Asco plc, the Court was limited in the extent to which it could correct errors in the 1985 Act (or any other Act of Parliament).  In the circumstances of this case, section 736 of the 1985 Act had to be interpreted to mean that Enviroco had ceased to be a subsidiary of Asco plc (and an affiliate of Asco UK) and therefore Enviroco could not benefit from the indemnity.

Comment

Until such time as the law is clarified by the Supreme Court when it hears Enviroco’s appeal against the Court of Appeal decision, English companies should be wary of granting legal mortgages over shares and instead grant security over shares by way of equitable charge (as tends to be the usual practice anyway).

The definitions of “subsidiary” and “affiliate” in contracts and finance documents commonly cross-refer to the definitions in the 1985 Act (or the restated definitions in the 2006 Act). Group companies should therefore check their contracts and finance documents and, if the statutory definitions are referred to, seek advice as to whether or not the case impacts on their activities.

Enviroco Ltd v Farstad Supply A/S [2009] EWCA Civ 1399

The Companies Act 2006 (2006 Act) came fully into force on 1 October 2009. The Act aimed to simplify company law procedures, particularly for smaller companies. The 2006 Act does not require companies to amend their articles of association (Articles) but in order to take advantage of the simplified procedures, any company which was incorporated before 1 October 2009 (Existing Company) may wish to do so. For the purpose of this note we have focused on private limited companies, as it is this type of company which can benefit the most from the new deregulatory regime.

What amendments can be made?

Company secretary

• As from 1 October 2008, the requirement for private limited companies to have a company secretary has been abolished. In the past many smaller companies which were effectively a “one-man” business struggled to find someone to act as the company secretary and typically a wife or accountant would take up the role.  Such persons may now wish to resign as company secretary. However, an Existing Company should ensure that its Articles are amended so as to remove any references to a requirement for it to have a company secretary. Please note that the directors need to ensure that someone still performs the tasks previously performed by the company secretary (such as filing forms at Companies House).

 Objects

• Under the former Companies Acts, a company had to act within a specific list of powers (or “objects”) set out in its memorandum of association (Memorandum). These objects could limit, for example, a company’s ability to borrow money or grant security. Under the 2006 Act the objects are deemed to form part of a company’s articles but, as part of the adoption of new Articles, they can be removed. The benefit of doing this is that the company has unlimited objects and, for example, can enter into loan or security documents without the need for the directors or bank to scrutinise the Memorandum or Articles.

 Authorised share capital

• Before 1 October 2009, all companies had an “authorised share capital” which was effectively a limit on the total number of shares which could be issued without seeking further approval from the shareholders. Under the 2006 Act, companies do not need to have an authorised share capital but any references to this concept in an Existing Company’s Articles or Memorandum will need to be removed if the company is to benefit from this deregulatory measure.

 Allotment of shares

• The directors of private limited companies with only one class of shares can now allot shares of the same class without obtaining shareholder approval, subject to any restrictions in the Articles. Directors of an Existing Company should therefore check the Articles to ensure that there are no such restrictions.

Change of name

• Previously, a company could only change its name if the holders of 75% per cent or more of its issued shares passed a change of name resolution. Under the 2006 Act, a company is still able to change its name in this way but it can also set out in its Articles other methods for changing its name, for example, by way of a board meeting (thereby avoiding the need for shareholder approval).

What about companies incorporated after 1 October 2009?

Companies which are incorporated after 1 October 2009 should adopt articles of association upon incorporation which allow them to take full advantage of whichever aspects of the deregulatory regime are relevant.  For some companies this will simply mean using the new “Model Articles” which apply by default under the 2006 Act in the absence of the adoption of specific Articles.

Summary

Existing Companies should consider amending their Articles so as to streamline certain decision making and administrational procedures.  The extent to which such amendments are appropriate will vary from company to company and specific advice should be sought in each case.

It is probably quicker (and cheaper) for an Existing Company to make any amendments by adopting an entirely new set of Articles rather than making the changes piecemeal as and when a specific issue arises.

It is no secret that the M&A market has been in the doldrums of late, with acquisition plans being shelved whilst companies establish some stability in their own businesses. However, the recent activity would seem to signal increasing confidence amongst executives which may indicate a thaw in the market. There is still some uncertainty and in such times buyers, looking for a bargain, will be cautious about overpaying whilst sellers, looking for reasonable prices, will be wary of short-changing themselves. Reports in the media are that the recession is easing (or ended) and that things are stabilising. Potential buyers may be concerned that targets will become more expensive if they delay and if M&A really sparks again, this means there will be a premium placed on stocks.

What is clear from the examples above is that we are not presently seeing the return of the private equity firms that fuelled much of the merger mania prior to the credit crunch. The large deals announced recently are strategic, in that they involve one company buying another to make it an integral part of its business. In contrast, many of the pre-credit crunch takeovers involved the buyer taking on mountains of new borrowing to pay for the acquisition which left many companies struggling to make interest payments. The lack of access to loans following the seizure of the credit markets makes the early return of these transactions difficult to envisage.

So what about the BA/Iberia merger? The recession has eroded travel demand and punished airlines to the extent that the global airline industry is set to post total losses for 2009 exceeding $11 billion.  Mergers present the only option available to airlines to execute signifcant rationalisation to combat over capacity and governments (who have strict control or influence over airlines) are realising that, in the long term, access to foreign capital and a more rational use of airline assets through international alliances and mergers, is the way forward.

At present, for some sectors at least, confidence is returning and that big-ticket strategic (but not private equity-backed) mergers and acquisitions are back on the agenda. In other sectors (most notably the airline industry) the final repercussions of the recent disruptions in the world economy have yet to be felt and in those sectors we might see some more mergers of necessity to effect rationalisation. In both cases, increased M&A activity seems inevitable.