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 change of policy aims to reduce the current level of rejections and to ensure that documents are entered onto the correct company record. Companies House will reject a document where a name has an abbreviation other than the following:

1. For public companies: public limited company; plc; p.l.c.; cwmmi cyfyngedig cyhoeddus; ccc; c.c.c.

2. For LLPs: Limited Liability Partnership; LLP; L.L.P.; Partneriaeth Atebolrwydd Cyfyngedig; PAC;  P.A.C.

3. For private limited companies: limited; ltd; ltd.; cyfyngedig; cyf; cyf.

4. For Community Interest Companies (private limited): Community Interest Company; CIC; C.I.C.; Cwmni Buddiant Cymunedol; CBC; C.B.C.

5. For Community Interest Companies (public limited): Community Interest Public Limited Company; Community Interest PLC; Community Interest P.L.C.; Cwmni Buddiant Cymunedol Cyhoeddus Cyfyngedig; Cwmni Buddiant Cymunedol CCC; Cwmni Buddiant Cymunedol C.C.C.

However, a few abbreviations will continue to be accepted:

1. The use of “Co” instead of “company”;

2. The use of “&” instead of “and”; and

3. The omission of the word ‘THE’, but only at the front of the name.

On a related matter, Companies House has also announced that it has dropped its requirement for the mandatory electronic filing of accounts by March 2013. This move is a direct result of the Government’s desire to reduce regulatory burden on small businesses. However, Companies House has maintained that it intends to eventually be a fully electronic registry, and mandating electronic services is an issue which they will revisit once the moratorium on new regulation for small businesses has ended in 2014.

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.

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.

These Regulations will implement in the UK the 2009 EU Directive on reporting and documentation requirements in the case of mergers and divisions, which must be done by 30 June 2011. This Directive makes various deregulatory amendments to several other EU directives, with the aim of simplifying some of the processes on public company mergers, the formation and capital of public companies, and cross-border mergers, by enabling companies to make use of new technology, removing over-regulation and protecting creditors.

The Regulations will amend Parts 17 (A company’s share capital) and 27 (Mergers and Divisions of public companies) of the Companies Act 2006, and also the Companies (Cross-Border Mergers) Regulations 2007.

It is hoped that the Regulations will reduce the administrative burden on companies. This includes, amongst other things:

1. Taking advantage of technology. Companies will be able to make use of electronic communications for the circulation of certain documents that would previously have had to be made available, or filed, in hard copy format. For example, documents will be able to be published on a company’s website or sent to shareholders electronically; and

2. Removing overregulation. A reduction in the need for companies to produce certain reports or statements (for example, expert’s reports, share valuation reports, directors’ reports, or other financial reports), where to do so might duplicate existing information.

BIS has not proposed changes in the area of strengthening creditor protection, as it considers the existing UK regime to already meet the 2009 Directive’s requirements.

BIS invites comments on the draft Regulations by 13 March 2011. Full details are here (Word doc) and 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)

In a recent decision the High Court emphasised that the articles of association of a company are to be construed in the same way as any other commercial contract.

Background

A company’s articles of association (“articles”) set out its basic management and administrative structure and regulates its internal affairs. They create a contract between the company and each of its members in their capacity as members. Companies have freedom in drafting their articles although they are subject to relevant provisions of the Companies Acts.

Facts of the case

Cream Holdings Ltd (“Cream”) brought a claim against a former director (“D”) in connection with a dispute over the appointment of an accountant to determine the fair value of D’s shares. D, also a shareholder of Cream, had been removed from his position on the board and consequently, pursuant to the terms of the articles, he was deemed to offer his shareholding for sale to the remaining shareholders. The articles specified that D was entitled to a “fair value” for his shareholding, being the:

“price per share as agreed by the board and the transferor or failing such agreement as determined by the third party accountant.”

Third party accountant was defined in the articles as:

“an independent firm of accountants chosen by the transferor and the board.”

At a previous hearing the Court of Appeal concluded that an independent firm of accountants would only be validly appointed if the firm agreed with both Cream and D to act in that capacity and the directors of Cream and D agreed to the terms of the firm’s appointment.

Subsequently D refused to sign the letter of engagement of the nominated accountants unless Cream disclosed various documents first. D also took issue with the nominated accountants’ terms of engagement.

Decision

The High Court was clear – a company’s articles of association should be treated in the same way as any other commercial contract. This meant that the articles had to be interpreted in the context of their commercial purpose and in light of their full text. Applying the legal principle that “a contract should better function than perish” the court decided that an implied term should be incorporated into the articles stating that a transferor could not unreasonably withhold his consent to the appointment of an independent firm of accountants.

The court went on to find that D’s actions, in withholding consent subject to the prior disclosure by Cream of various documents was unreasonable There was nothing in the articles that permitted D make such demands as a pre-requisite to consent. The court concluded that there was no reasonable grounds for the objections raised by D to the appointment of the nominated accountants.

Comment

The drafting of a company’s articles of association requires careful consideration. This case shows how the courts are willing to imply terms into articles to give them business efficacy. However, it is always preferable to ensure that articles expressly state the intentions of the company and its shareholders to avoid an expensive dispute at a later date.

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.

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.

Berkeley Wodehouse Associates, a partnership, operated through a network of independent financial advisors. Mr Shaw provided services to BWA under BWA’s standard form of contract for IFA’s (“IFA Contract”). Under the IFA Contract, Mr Shaw had agreed to indemnify BWA in respect of any costs, charges and expenses, including any excess, charged by BWA’s PI insurers in connection with his provision of services. Mr Shaw resigned and BWA subsequently sold its business to Lighthousexpress Ltd. One of the assets transferred under the sale by BWA to Lighthousexpress was the benefit of BWA’s current contracts. Lighthousexpress was later required to compensate a former client of the BWA business who had been advised by Mr Shaw. Lighthousexpress then sought to rely on the indemnity to recover this compensation (which fell within the excess) from Mr Shaw.

The general rule is that, in the absence of a prohibition on its assignment, an assignee may enforce the terms of a contract unless it is intended to be personal to the assignor. Notably the Court found, in this case, that there was no reason why, on its true construction, the right of the indemnity should be personal to BWA and so not be assignable. In particular, there was always the possibility that the partners of BWA would change or the BWA business would be transferred to a third party and so there was no reason for the indemnity to remain frozen in favour of the partners of BWA as at the date that the indemnity was given.

The Court also considered whether a provision in the business sale agreement between BWA and Lighthousexpress purporting to assign the benefit of the “current contracts” of BWA was effective to assign the benefit of the indemnity in an agreement which had already been terminated. The Court found that the indemnity in the IFA Contract continued in effect following its termination and therefore the IFA Contract remained alive so far as the indemnity clause was concerned. This being the case the Court construed the term “current contracts” used in the business sale agreement widely so as to include live contractual obligations owed to or by BWA.

Unfortunately for Lighthousexpress, its claim ultimately failed because the Court found that a limitation clause in the IFA Contract meant that its claim was out of time. However, the case raises two important points. Firstly, those providing an indemnity should decide whether or not they wish to expressly exclude the ability of the recipient to assign the benefit of that indemnity. Secondly, parties entering into a business sale agreement should make clear whether the assignment of the benefit of the contracts of the business includes those rights surviving under contracts which have already terminated.

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.

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)

The High Court agreed with her side of the story. It said that the threats and intimidation were the principal reason for her entering into the agreement, and that it was clear to all those present at the meeting at which she agreed to enter the agreement that she was reluctant to do so. Mr Antonio was unable to show that he had not forced her to enter into the agreement through threats and intimidation. The fact that two years had elapsed following the date on which she had entered into the agreement did not mean that she had affirmed (or accepted) the contract, as the duress had continued during that time.

“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 High Court ruled that account of profits could sometimes be claimed for breach of confidentiality, but not in this case. It all depended on the circumstances. Duties of confidentiality related to a big range of possible situations. As to whether an account of profits was available as a remedy depended on the particular type of situation and whether it would be just and equitable that the defendant should retain absolutely no profit from that particular type of situation. The nature of a duty of confidentiality could apply in the following big variety of situations:

• Akin to a fiduciary duty.
• Akin to an intellectual property right.
• Arising out of a contractual duty.
• In relation to use of private information obtained from a stranger, and therefore a situation similar to tort.

In this case, there was no fiduciary relationship or intellectual property right type situation and so an account of profits was not appropriate. The relationship was based on a contractual relationship. Therefore, damages was the appropriate remedy rather than V&P having the right to claim an account of profits.

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 policy principles

Competitiveness - The Government will ensure that the UK remains an attractive location in which and from which to do business.

Fairness - The Government will seek to ensure fairness within and across the tax system, so that businesses pay their fair share of tax.

Minimising distortions – The Government will seek to maintain a tax system that minimises distortions to commercial decisions, while recognising that the tax system can have a role in supporting the UK’s competitive strengths and addressing market failures.

Simplicity – When developing and reviewing business tax policy, the Government will consider simplicity alongside other policy objectives, and will seek to avoid unnecessary complexity when designing and developing new business tax legislation.

Stability and certainty – The Government will avoid unnecessary changes to tax legislation. Where the Government proposes to amend legislation, it will set out the policy reasons for doing so and explain how the amended legislation will deliver these policy objectives.

Tax administration / Compliance costs – The Government will maintain its commitment to lowering compliance costs for business, while balancing this with the need to operate a cost-effective tax administration. It will continue to improve tax administration by developing the approach set out in HMRC’s Review of Links with Large Business and, for small and medium sized enterprises, in Delivering a New Relationship with Business.

Comment

There is a clear case for creating certainty for businesses. Indeed, in my experience, businesses are more interested in a jurisdiction with stability and a good infrastructure, than on the actual rates of tax (not to say that these aren’t important too). Nobody wants to invest time, effort and money in creating a structure for their business, only to find that 2 years later it doesn’t work because rules have changed.

It does, however, seem incongruous that a policy which is intended to represent stability contains an explicit reference to anti-avoidance rules. “Minimising distortions” is an un-veiled reference to the standard justification for bringing in changes to prevent tax avoidance. Anti-avoidance rules invariably create complexity, confusion and unintended consequences.

So, this policy does have the potential to be really useful and to attract business to the UK. The UK remains a great place to operate from and is still a global leader in the world of finance. Anything that the Government can do to improve our reputation is welcome.

The justification of this is that the programme will raise awareness among small businesses that they need to keep good records. The show will aim to help Britain’s small businesses improve their all round business knowledge and direction, cash flow, marketing strategy and in some cases even their enthusiasm.

The show will start in March, but if you can’t wait until then the good news is that here at MAB we have a business health check product which might prove even more useful than a TV show….Click here for info on our Business Healthcheck

One way of protecting your business in the event of a shareholding director’s death or critical illness is for the shareholders to enter into cross option agreements supported by life insurance policies.

A cross option agreement gives surviving shareholders the right (but not the obligation) to require the deceased shareholder’s personal representatives to sell the shares to them (known as a “Call Option”). It also gives the personal representatives the right (but not the obligation) to require the surviving shareholders to buy the deceased shareholder’s shares (know as a “Put Option”). By combining a Call Option with a Put Option in a single agreement each side has the option of ‘forcing’ a sale of the shares.

Cross option agreements should also oblige each party to insure their lives under a life insurance policy for a value which reflects the value of their shares. The proceeds of the policy should be held on a trust for the other shareholders who will be the beneficiaries. These proceeds provide the remaining shareholders with the cash to buy the shares of the deceased shareholder.

The cross option agreement should provide a mechanism for determining the price payable for the shares on the exercise of the option. By providing the price and terms of payment in advance a significant area of dispute is minimised.

The structure of the cross option is vitally important for taxation planning purposes.  Important tax reliefs for both inheritance tax and capital gains tax can be lost if the documentation is not properly structured.

The arrangements described above create an instant market for the shares left by a deceased shareholding director and the linked life insurance policies held on trust for the remaining shareholders provide the funds to complete the purchase. The business of the company is left in the hands of those who are committed to the long-term success of the company whilst loved ones receive the value of the shares in cash assisting them to rebuild and move on with their lives.

The shareholders agreement gave certain shareholders the right to force one particular shareholder to buy their interest out at the greater of two valuation methods and the ambiguity concerned whether a price reduction mechanism applied to both valuation methods. On the face of the agreement the price reduction method only applied to one of the valuation methods. The price for the departing shareholders’ shares would be £2,673,940 instead of £5,142,195 if the price reduction mechanism applied.

The issues for the Court to consider were whether there was an error or absurdity produced by the ordinary meaning of the language used in the clause and, secondly, if there was, whether it was clear that reasonable people in the position of the parties at the time would have objectively intended, in effect, that the price reduction mechanism applied to both valuation methods.

There was no doubt about the natural meaning of the words chosen and no room for inferring an obvious mistake. There was no obviously wrong date or number. One valuation might appear favourable to the selling shareholders but it did not make the structure arbitrary and irrational, nor were there any obvious defects of omission. Whilst the particular provision appeared generous, the Court could not evaluate the commercial good sense or the economic consequences of the clause in the wider context of the overall merger.

This case reaffirms the position that Courts are unwilling to amend the wording of commercial agreements where there is a complex merger in which both parties are legally advised. Great care must be taken when preparing complicated and detailed provisions in shareholder and joint venture agreements.

Bishops Wholesale Newsagency Limited and others v Surridge Dawson Limited [2009] EWHC 2578 (Ch)

The bribery seeks to encourage self-reporting. However, one of the consequences of a corruption conviction would be that the convicted organisation would be automatically and perpetually prohibited from competing for public contracts under the Public Contracts Regulations 2006. Other consequences of breaching the new law would be large fines for individuals and the business concerned.

One grey area remains corporate hospitality. The Government does not intend that the new law should penalise legitimate and proportionate use of corporate hospitality to establish or maintain good corporate relations. But where should the line be drawn?